FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-9494
TIFFANY & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3228013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
727 FIFTH AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: (212) 755-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of July 30, 2004 the aggregate market value of the registrant's voting and non-voting stock held by non-affiliates of the registrant was approximately $5,179,334,839 using the closing sales price on this day of $35.75. See Item 5. Market for Registrant's Common Equity and Related Stockholder Matters below.
As of March 24, 2005, the registrant had outstanding 144,480,629 shares of its common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including information incorporated herein by reference, contains certain "forward-looking statements" concerning the Registrant's objectives and expectations with respect to store openings, retail prices, gross profit, expenses, inventory performance, capital expenditures and cash flow. In addition, management makes other forward-looking statements from time to time concerning objectives and expectations. Statements beginning with such words as "believes", "intends", "plans", and "expects" include forward-looking statements that are based on management's expectations given facts as currently known by management on the date this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission. All forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. As a jeweler and specialty retailer, the Registrant's success in achieving its objectives and expectations is partially dependent upon economic conditions, competitive developments and consumer attitudes, including changes in consumer preferences for certain jewelry styles and materials. However, certain assumptions are specific to the Registrant and/or the markets in which it operates. The following assumptions, among others, are "risk factors" which could affect the likelihood that the Registrant will achieve the objectives and expectations communicated by management: (i) that low or negative growth in the economy or in the financial markets, particularly in the U.S. and Japan, will not occur and reduce discretionary spending on goods that are, or are perceived to be, "luxuries"; (ii) that consumer spending does not decline substantially during the fourth quarter of any year; (iii) that unsettled regional and/or global conflicts or crises do not result in military, terrorist or other conditions creating disruptions or disincentives to, or changes in the pattern, practice or frequency of tourist travel to the various regions where the Registrant operates retail stores nor to the Registrant's continuing ability to operate in those regions; (iv) that sales in Japan will not decline substantially; (v) that there will not be a substantial adverse change in the exchange relationship between the Japanese yen and the U.S. dollar; (vi) that Mitsukoshi and other department store operators in Japan, in the face of declining or stagnant department store sales, will not close or consolidate stores which have TIFFANY & CO. retail locations; (vii) that Mitsukoshi will continue as a leading department store operator in Japan; (viii) that existing product supply arrangements, including license arrangements with third-party designers Elsa Peretti and Paloma Picasso, will continue; (ix) that the wholesale and retail market for high-quality rough and cut diamonds will provide continuity of supply and pricing; (x) that the Registrant's diamond initiatives achieve their financial and strategic objectives; (xi) that the Registrant's gross margins in Japan and for diamond products can be maintained in the face of increased competition from traditional and e-commerce retailers; (xii) that the Registrant is able to pass on higher costs of raw materials to consumer through price increases; (xiii) that the sale of counterfeit products does not significantly undermine the value of the Registrant's trademarks and demand for the Registrant's products; (xiv) that new and existing stores and other sales locations can be leased, re-leased or otherwise obtained on suitable terms in desired markets and that construction can be completed on a timely basis; (xv) that the Registrant can achieve satisfactory results from any current and future businesses into which it enters that are operated under non-TIFFANY & CO. trademarks or trade names; and (xvi) that the Registrant's expansion plans for retail and direct selling operations and merchandise development, production and management can continue to be executed without meaningfully diminishing the distinctive appeal of the TIFFANY & CO. brand.
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The statements in this Annual Report on Form 10-K are made as of the date this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission and the Registrant undertakes no obligation to update any of the forward-looking information included in this document, whether as a result of new information, future events, changes in expectations or otherwise.
WEBSITE ACCESS TO INFORMATION
The Registrant provides access free of charge, through its website at www.tiffany.com (go to "About Tiffany" and "Shareholder Information"), to the Registrant's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
(a) General history of business.
Registrant (also referred to as the "Company") is the parent corporation of Tiffany and Company ("Tiffany"). Charles Lewis Tiffany founded Tiffany's business in 1837. He incorporated Tiffany in New York in 1868. Registrant acquired Tiffany in 1984 and completed the initial public offering of Registrant's Common Stock in 1987.
(b) Financial information about industry segments.
Registrant's segment information for the fiscal years ended January 31, 2003, 2004 and 2005 is incorporated by reference from Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005 (Note T. "Segment Information"). The Executive Officers of the Company do not evaluate the performance of the Company's assets on a segment basis for internal management reporting and, therefore, such asset information is not presented.
(c) Narrative description of business.
As used below, the terms "Fiscal 2002", "Fiscal 2003" and "Fiscal 2004" refer to the fiscal years ended on January 31, 2003, 2004 and 2005, respectively. Registrant is a holding company, and conducts all business through its subsidiary corporations.
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Products
Registrant's principal product categories are jewelry, timepieces, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances and personal accessories.
Tiffany offers an extensive selection of TIFFANY & CO. brand jewelry at a wide range of prices. In Fiscal 2002, 2003 and 2004, approximately 80%, 81% and 82%, respectively, of Registrant's net sales, in all channels of distribution, were attributable to TIFFANY & CO. brand jewelry. Designs are developed by employees, suppliers, independent designers and independent "name" designers. See Designer Licenses below.
Retail Sales of TIFFANY & CO. Jewelry by Category*
Category % to total U.S % to total % to total U.S % to total % to total % to total
Retail U.S. Retail Retail Japan Retail Japan Retail Japan Retail
Sales Sales Sales Sales Sales Sales
2002 2003 2004 2002 2003 2004
-------- -------------- ----------- -------------- ------------ ------------ ------------
A 21% 23% 24% 16% 18% 18%
B 16% 18% 19% 30% 33% 35%
C 10% 9% 10% 13% 12% 13%
D 30% 31% 30% 28% 25% 23%
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(A) This category includes most gem jewelry other than engagement
jewelry. Most jewelry in this category is constructed of platinum,
although gold was used in approximately 18% of pieces in 2004. Most
items in this category contain diamonds, other gems or both. The
average U.S. price-point for goods sold in 2004 for merchandise in
this category was $3,801 in the U.S. and $2,062 in Japan.
(B) This category includes diamond rings, band rings and wedding bands
marketed to brides and grooms. Most jewelry in this category is
constructed of platinum, although gold was used in approximately 7%
of pieces in 2004. Most sales in this category are of items
containing diamonds. The average U.S. price-point for goods sold in
2004 for merchandise in this category was $3,549 in the U.S. and
$1,827 in Japan.
(C) This category generally consists of non-gemstone, gold or platinum
jewelry, although small gems are used as accents in some pieces. The
average U.S. price-point for goods sold in 2004 for merchandise in
this category was $927 in the U.S. and $1,004 in Japan.
(D) This category generally consists of non-gemstone, sterling silver
jewelry, although small gems are used as accents in some pieces. The
average U.S. price-point for goods sold in 2004 for merchandise in
this category was $188 in the U.S. and $235 in Japan.
* Sales include only sales made in TIFFANY & CO. retail stores or boutiques in the United States and Japan. Jewelry marketed to men is not included in any category discussed above.
In addition to jewelry, the Company sells TIFFANY & CO. brand merchandise in the following categories: timepieces and clocks; sterling silver merchandise, including flatware, hollowware (tea and coffee services, bowls, cups and trays), trophies, key holders, picture frames and desk accessories; stainless steel flatware; crystal, glassware, china and other tableware; custom engraved stationery; writing instruments; and fashion accessories. Fragrance products are sold under the trademarks TIFFANY, PURE TIFFANY and TIFFANY FOR MEN. Tiffany also sells other brands of timepieces and tableware in its U.S. stores.
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Products sold by Registrant in the "Other" channel of distribution include jewelry, timepieces and clocks and decorative items sold under non-Tiffany trademarks and tradenames, although a small amount of TIFFANY & CO. brand merchandise is sold through Little Switzerland in the "Other" channel of distribution.
Distribution and Marketing
Channels of Distribution
For financial reporting purposes, Registrant categorizes its sales as follows:
U.S. Retail consists of retail sales transacted in Tiffany-operated stores in the United States (see U.S. Retail below);
Direct Marketing consists of U.S. business-to-business, direct mail catalog and Internet sales transacted by Tiffany (see Direct Marketing below);
International Retail consists of both retail and wholesale sales of TIFFANY & CO. merchandise to customers located outside the United States, as well as a limited amount of business-to-business sales and Internet sales (see International Retail below); and
Other consists of retail and wholesale sales transacted under non-TIFFANY trademarks and trade names (i.e., LITTLE SWITZERLAND, TEMPLE ST CLAIR and IRIDESSE). Other also includes sales of rough and polished diamonds that were found unsuitable for Tiffany's needs.
U.S. Retail
New York Flagship
Tiffany's New York flagship store on Fifth Avenue accounts for a significant portion of the Company's sales and is the focal point for marketing and public relations efforts. Approximately 10%, 9% and 10% of total Company net sales for Fiscal 2002, 2003 and 2004, respectively, were attributable to the New York store's retail sales. In Fiscal 2000, Tiffany commenced a multiyear renovation and reconfiguration project to increase the store's selling space and provide additional floor space for customer service and special exhibitions. Tiffany opened the additional selling floor in Fiscal 2001, and renovations of three other floors were completed by the end of Fiscal 2004. Tiffany anticipates completion of its renovation plans within the next two years.
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U.S. Branch Stores
At January 31, 2005, in addition to its New York flagship store, Tiffany had 54 branch stores in the United States. The following table identifies the location and year of opening of each U.S. branch store:
U.S. BRANCH STORE OPENINGS
FISCAL FISCAL
YEAR YEAR
STORE LOCATION OPENED STORE LOCATION OPENED
-------------- ------ -------------- ------
San Francisco, California 1963 Las Vegas, Nevada 1998
Houston, Texas 1963 Manhasset, New York 1998
Beverly Hills, California 1964 Seattle, Washington 1998
Chicago, Illinois 1966 Scottsdale, Arizona 1998
Atlanta, Georgia 1969 Century City, California 1999
Dallas, Texas 1982 Dallas (NorthPark), Texas 1999
Boston, Massachusetts 1984 Boca Raton, Florida 1999
Costa Mesa, California 1988 Tamuning, Guam 1999
Philadelphia, Pennsylvania 1990 Old Orchard, (Skokie) Illinois 2000
Vienna, Virginia 1990 Maui, Hawaii (Wailea) 2000
Palm Beach, Florida 1991 Greenwich, Connecticut 2000
Honolulu, Hawaii (Ala Moana) 1992 Portland, Oregon 2000
San Diego, California 1992 Tampa, Florida 2001
Troy, Michigan 1992 Santa Clara (San Jose), California 2001
Bal Harbour, Florida 1993 Honolulu, Hawaii (Waikiki) + 2002
Maui, Hawaii 1994 Bellevue, Washington 2002
Oak Brook, Illinois 1994 East Hampton, New York 2002
King of Prussia, Pennsylvania 1995 St. Louis, Missouri 2002
Short Hills, New Jersey 1995 Orlando, Florida 2002
White Plains, New York 1995 Coral Gables, Florida 2003
Hackensack, New Jersey 1996 Tumon Bay (DFS), Guam ++ 2003
Chevy Chase, Maryland 1996 Palm Desert, California 2003
Charlotte, North Carolina 1997 Walnut Creek, California 2003
Chestnut Hill, Massachusetts 1997 Edina, Minnesota 2004
Cincinnati, Ohio 1997 Kansas City, Missouri 2004
Palo Alto, California 1997 Palm Beach Gardens, Florida 2004
Denver, Colorado 1998 Westport, Connecticut 2004
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+Replaced two previously existing Honolulu locations.
++Conversion from DFS trade location to U.S. Retail.
Most of Tiffany's U.S. branch stores display a representative selection of merchandise, but none of them maintains the extensive selection carried by the New York store. Management currently contemplates the opening of new TIFFANY & CO. branch stores in the United States at the rate of approximately three to five per year. Management regularly evaluates potential markets for new TIFFANY & CO. stores with a view to the demographics of the area to be served, consumer demand and the proximity of other luxury brands and existing TIFFANY & CO. locations, recognizing that over-saturation of any market could diminish the distinctive appeal of the
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TIFFANY & CO. brand. However, management believes that there are a significant number of locations remaining in the United States that meet the requirements of a TIFFANY & CO. location, particularly when the current 5,000 square foot format stores are considered. Tiffany has entered into lease agreements to open additional branches in Fiscal 2005 in Carmel, California; Naples, Florida; Pasadena, California and San Antonio, Texas. See Item 2. Properties below for further information concerning U.S. Retail store leases. U.S. TIFFANY & CO. branch stores range in size from approximately 1,500 to 17,000 gross square feet and total approximately 406,000 gross square feet. Prior to Fiscal 1993, an average of approximately 45% of the floor space in each branch store was devoted to retail selling. Stores opened between Fiscal 1993 and Fiscal 2001 generally range from approximately 4,000 to 7,000 gross square feet and are designed to devote approximately 60-70% of total floor space to retail selling. Branch stores opened after Fiscal 2001 feature a store design format of approximately 5,000 gross square feet in size and display primarily jewelry and timepieces, with a select assortment of china and crystal giftware. The East Hampton and Palm Desert locations, both approximately 3,000 gross square feet in size, represent the first two "resort" stores, with the upcoming Carmel, California location to become the third such store.
Direct Marketing
Business Sales Division
Tiffany's Business Sales Division sales executives call on business clients throughout the United States, selling products drawn from the retail product line and items specially developed or sourced for the business market, including trophies and items designed for the particular customer. Price allowances are given to business account holders for certain purchases. Business Sales Division customers have typically purchased for business gift giving, employee service and achievement recognition awards, customer incentives and other purposes. Products and services are marketed through an organization of approximately 120 persons, through advertising in newspapers and business periodicals and through the publication of special catalogs. Business account holders may also make gift purchases through the Company's Website at www.tiffanyforbusiness.com. During Fiscal 2003, Tiffany discontinued selling service award programs.(1)
Catalogs
Tiffany also distributes catalogs of selected merchandise to its proprietary list of customers and to mailing lists rented from third parties. SELECTIONS(R) catalogs are published, supplemented by COLLECTIONS and other catalogs.
Internet
Tiffany distributes a selection of more than 2,800 products through its Website at www.tiffany.com for purchase in the United States. In Fiscal 2001, the Company launched its U.K. Website at www.tiffany.com/uk to allow for purchases of TIFFANY & CO. merchandise in England, Wales, Northern Ireland and Scotland. In Fiscal 2005, the Company expects to extend e-commerce purchase capabilities for such merchandise to Japan and Canada through Websites at www.tiffany.co.jp and www.tiffany.ca.
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The following table sets forth certain data with respect to mail, telephone and Internet order operations for the periods indicated:
Fiscal Year
2002 2003 2004
--------- ----------- ---------
Number of names on catalog mailing and Internet
lists at fiscal year-end (consists of customers who
purchased by mail, telephone or Internet prior to
the applicable date):
1,788,008 2,237,349 2,440,622
Total catalog mailings during fiscal year (in
millions): 24.0 24.9 26.3
Total mail, telephone or Internet orders received
during fiscal year: 614,610 728,525 672,325
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International Retail
Stores and boutiques included in the International Retail channel of distribution are listed on the following page.
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International Locations
LOCATIONS OPERATED BY REGISTRANT'S SUBSIDIARIES
------------------------------------------------------ ----------------------------------------------------
JAPAN ASIA-PACIFIC EXCLUDING JAPAN
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Abeno, Kintetsu Department Store Australia: Brisbane, Queens Plaza (open 5/05)
Chiba, Mitsukoshi Department Store * Australia: Melbourne, Collins Street
Fukuoka, Mitsukoshi * (closed 2/05) Australia: Sydney, Castlereagh Street
Fukuoka, Mitsukoshi Department Store * China, Beijing, The Peninsula Palace Hotel
Ginza, Mitsukoshi Department Store * China, Shanghai, City Plaza
Hiroshima, Mitsukoshi Department Store * Hong Kong: Hong Kong Airport
Ikebukuro, Mitsukoshi Department Store * Hong Kong: International Finance Center
Ikebukuro, Tobu Department Store Hong Kong: Landmark Center
Kagoshima, Mitsukoshi Department Store * Hong Kong: Pacific Place
Kanazawa, Mitsukoshi * Hong Kong: Peninsula Hotel
Kashiwa, Takashimaya Department Store Hong Kong: Sogo Department Store
Kawasaki, Saikaya Department Store Korea: Pusan, Paradise Hotel
Kobe, Daimaru Department Store Korea: Seoul, Galleria Department Store
Kochi, Daimaru Department Store Korea: Seoul, Hyundai Department Store
Kokura, Izutsuya Department Store Korea: Seoul, Hyundai Coex Department Store
Koriyama, Usui Department Store Korea: Seoul, Lotte Downtown Department Store
Kumamoto, Tsuruya Department Store Korea: Seoul, Lotte World
Kurashiki, Mitsukoshi Department Store * (closed 2/05) Malaysia: Suria KLCC
Kyoto, Daimaru Department Store Singapore: Ngee Ann City
Kyoto, Takashimaya Department Store Singapore: Raffles Hotel
Matsuyama, Mitsukoshi Department Store * Taiwan: Kaohsiung, Hanshin Department Store
Nagoya Hoshigaoka, Mitsukoshi Dept. Store * Taiwan: Taipei, Regent Hotel
Nagoya, Mitsukoshi * Taiwan: Taipei, Sogo Department Store
Nagoya, Takashimaya Department Store Taiwan: Taichung, Sogo Department Store
Nihonbashi, Mitsukoshi Department Store * Taiwan: Taipei, Taipei Financial Center
Niigata, Mitsukoshi Department Store * -------------------------------------------------
Oita, Tokiwa Department Store EUROPE
Okayama, Tenmaya Department Store -------------------------------------------------
Okinawa, Mitsukoshi Department Store * England: London, Old Bond Street
Osaka, Mitsukoshi Department Store * (closed 2/05) England: London, The Royal Exchange
Osaka, Takashimaya Department Store England: London, Harrods Department Store
Osaka, Umeda England: London, Sloane Street
Sagamihara, Isetan Department Store France: Paris, Rue de la Paix
Sapporo, Mitsukoshi Department Store * France: Paris, LePrintemps Department Store
Sapporo, Daimaru Dept. Store Germany: Frankfurt
Sendai, Mitsukoshi Department Store * Germany: Munich
Shinjuku, Isetan Department Store Italy: Florence
Shinjuku, Mitsukoshi Department Store * Italy: Milan
Shinsaibashi, Daimaru Department Store Italy: Rome
Shizuoka, Matsuzakaya Department Store Switzerland: Zurich
Tachikawa, Isetan Department Store
Takamatsu, Mitsukoshi Department Store *
Takasaki, Takashimaya Department Store
Continued on Next Page
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*Operated by Registrant's Subsidiaries with Mitsukoshi Ltd.
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JAPAN (Cont'd) CANADA AND CENTRAL/SOUTH AMERICA
----------------------------------------------------------- ------------------------------------------------------
Tamagawa, Takashimaya Department Store Canada: Toronto
Tokyo Bay, Ikspiari * Mexico: Mexico City, Palacio Store, Polanco
Tokyo, Ginza Flagship Store * Mexico: Mexico City, Palacio Store, Perisur
Tokyo, Marunouchi Mexico: Mexico City, Masaryk
Tottori, Daimaru Department Store Mexico: Puebla, Palacio Store
Umeda, Daimaru Department Store Brazil: Sao Paulo, Iguatemi Shopping Center
Utsunomiya, Tobu Department Store Brazil: Sao Paulo, Jardins
Wakayama, Kintetsu Department Store
Yokohama, Landmark Plaza, Mitsukoshi *
Yokohama, Mitsukoshi Department Store * (closed 3/05)
Yokohama, Takashimaya Department Store (open 4/05)
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*Operated by Registrant's Subsidiaries with Mitsukoshi Ltd.
Business with Mitsukoshi
On August 1, 2001, Registrant's wholly-owned subsidiary, Tiffany & Co. Japan Inc. ("Tiffany-Japan"), entered into agreements with Mitsukoshi Ltd. of Japan ("Mitsukoshi"). These agreements continued long-standing commercial relationships that Registrant and its affiliated companies had with Mitsukoshi. These agreements will expire on January 31, 2007.
In Fiscal 2002, 2003 and 2004, respectively, total Japan sales of TIFFANY & CO. merchandise represented 26%, 24% and 22% of Registrant's net sales. Sales recorded in retail locations operated in connection with Mitsukoshi accounted for 16%, 14% and 12% of Registrant's net sales in those years.
Tiffany-Japan has merchandising and marketing responsibilities in the operation of TIFFANY & CO. Boutiques in Mitsukoshi's stores and other locations throughout Japan. Mitsukoshi acts for Tiffany-Japan in the sale of merchandise owned by Tiffany-Japan. Tiffany recognizes as revenues the retail price charged to the ultimate consumer in Japan. Tiffany-Japan holds inventories for sale, establishes retail prices, bears the risk of currency fluctuations, provides one or more brand managers in each boutique, controls merchandising and displays within the boutiques, manages inventory and controls and funds all advertising and publicity programs with respect to TIFFANY & CO. merchandise. Mitsukoshi provides and maintains boutique facilities and assumes retail credit and certain other risks.
Mitsukoshi provides retail staff in "Standard Boutiques" and Tiffany-Japan provides retail staff in "Concession Boutiques." At present, there are 10 Standard Boutiques and 10 Concession Boutiques. Risk of inventory loss varies depending on whether the boutique is a Standard Boutique or a Concession Boutique. Mitsukoshi bears responsibility for loss or damage to the merchandise in Standard Boutiques and Tiffany-Japan bears the risk in Concession Boutiques.
Mitsukoshi retains a portion (the "basic portion") of the net retail sales made in TIFFANY & CO. Boutiques. The basic portion varies depending on the type of Boutique and the retail price of the merchandise involved. Through January 31, 2003, Mitsukoshi's basic portion was 27% in Standard Boutiques and 20% in Concession Boutiques for most merchandise. From February 1, 2003 through the expiration of the 2001 Agreement, the highest
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basic portion available to Mitsukoshi will be 26% in any Standard Boutique and not less than 17% for any Concession Boutique.
Tiffany-Japan also pays Mitsukoshi an incentive fee of 5% of the amount by which boutique sales increase above "Target Sales" calculated on a per-boutique basis. Target Sales means a year-to-year increase that is greater than the lesser of (i) 10% or (ii) a sales goal set by Tiffany-Japan.
In June 2003, through its purchase of a trust beneficiary interest, Registrant's Japanese affiliate acquired the land and building housing the 12,000 gross square foot TIFFANY & CO. store located in Tokyo's Ginza shopping district (the "Tokyo Flagship Store"). The Tokyo Flagship Store is leased by Tiffany-Japan to Mitsukoshi. Tiffany-Japan bears all costs of operating the Premises. Tiffany-Japan selects and furnishes merchandise for display in the Flagship Store, prices the merchandise for retail sale, bears all risk of loss until the merchandise is sold to a customer and determines all issues of display, packaging, signage and advertising. Mitsukoshi acts for Tiffany-Japan in the sale of the merchandise, collects and holds the sales proceeds, makes credit available to customers, bears all credit losses and provides its point-of-sale transaction processing system (the "POS System"). Tiffany-Japan provides all necessary staff other than employees provided by Mitsukoshi in connection with the POS System. Management of the Tokyo Flagship Store, other than with respect to the POS System, is the responsibility of Tiffany-Japan. After compensating Tiffany-Japan on a percentage-of-sales basis for rent and staffing, Mitsukoshi is allocated 3% of net sales made in the Tokyo Flagship store.
International Wholesale Distribution
Selected TIFFANY & CO. merchandise is sold to independent distributors for resale in markets in Central/Latin/South American, Caribbean, Canadian, Asia-Pacific, Russian and Middle Eastern regions. Such sales represented 1.5% of net sales in Fiscal 2004.
Management anticipates continued expansion of international wholesale distribution in Central/Latin/South American, Caribbean and Asia-Pacific regions as markets are developed.
Expansion of Worldwide Retail Operations
Registrant expects to continue to open TIFFANY & CO. stores in locations outside the United States. However, the timing and success of this program will depend upon many factors, including Registrant's ability to obtain suitable retail space on satisfactory economic terms and the extent of consumer demand for TIFFANY & CO. products in overseas markets. Such demand varies from market to market.
The Company's commercial relationship with Mitsukoshi and Mitsukoshi's ability to continue as a leading department store operator have been and will continue to be substantial factors in the Company's continued success in Japan. Presently, TIFFANY & CO. boutiques are located in 20 Mitsukoshi department stores and other retail locations operated with Mitsukoshi in Japan. The Company also operates 30 boutiques primarily in department stores other than Mitsukoshi, in locations within Japan.
The arrangements with other Japanese department stores are substantially similar to the Company's relationship with Mitsukoshi, with varying fees from store to store. In recent years, the
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Japanese department store industry has, in general, suffered declining sales. There is a risk that such financial difficulties will force consolidations or store closings. Should one or more Japanese department store operators elect or be required to close one or more stores now housing a TIFFANY & CO. boutique, the Company's sales and earnings would be reduced while alternate premises were being obtained.
Tiffany began its ongoing program of international expansion through proprietary retail stores in 1986 with the establishment of the London flagship store. Company-operated international TIFFANY & CO. stores and boutiques range in size from approximately 700 to 15,000 gross square feet and total approximately 279,000 gross square feet devoted to retail purposes. The following chart details the growth in TIFFANY & CO. stores and boutiques since Fiscal 1987 on a worldwide basis:
Worldwide TIFFANY & CO. Retail Locations Operated by Registrant's Subsidiary Companies
Americas and Europe Asia-Pacific
----------------------------------- ------------------------------
Canada,
Central/Latin
End of /South
Fiscal: U.S. Americas Europe Japan Elsewhere Total
------- ---- ------------- ------ ----- --------- -----
1987 8 0 2 0 0 10
1988 9 0 3 0 1 13
1989 9 0 5 0 2 16
1990 12 0 5 0 3 20
1991 13 1 7 0 4 25
1992 16 1 7 7 4 35
1993 16 1 6 37** 5 65
1994 18 1 6 37 7 69
1995 21 1 6 38 9 75
1996 23 1 6 39 12 81
1997 28 2 7 42 17 96
1998 34 2 7 44 17 104
1999 38 3 8 44 17 110
2000 42 4 8 44 21 119
2001 44 5 10 47 20 126
2002 47 5 11 48 20 131
2003 51 7 11 50 22 141
2004 55 7 12 53 24 151
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**Prior to July 1993, many TIFFANY & CO. boutiques in Japan were operated by Mitsukoshi (ranging from 21 in 1987 to 29 in 1993). See Business with Mitsukoshi above.
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Other (previously called Specialty Retail)
In Fiscal 2002, the Company established this channel of distribution to include the consolidated results of existing or future businesses that sell or will sell merchandise under non-TIFFANY trademarks and trade names. In Fiscal 2004, the Company also initiated, through this channel of distribution, wholesale sales of rough and unpolished diamonds that were found to be unsuitable for Tiffany's needs.
Registrant believes that the sale of merchandise under non-Tiffany trademarks and tradenames offers an opportunity to achieve incremental growth in sales and earnings without diminishing the distinctive appeal of the TIFFANY & CO. brand. Businesses to be developed or acquired for this channel have been and will be chosen with a view to more fully exploit Registrant's established infrastructure for distribution and manufacturing of luxury products, store development and brand management.
Little Switzerland, Inc.
In October 2002, the Company, through a subsidiary, completed the acquisition of all the shares of Little Switzerland, Inc., a specialty retailer of brand name watches, jewelry, china, crystal and giftware. Little Switzerland stores are located on six Caribbean islands (St. Thomas (3); St. Maarten/St. Martin (3); St. John (1); Aruba (6); Curacao (1); and Barbados (1)) and in Florida (Key West (3); Sunrise (1)) and Alaska (Skagway (2); Juneau (1); and Ketchikan (1)), and appeal primarily to tourists from the United States. Little Switzerland sells primarily non-TIFFANY brand products, but certain stores carry selected TIFFANY & CO. merchandise.
Temple St. Clair L.L.C.
In December 2002, the Company invested in Temple St. Clair L.L.C., a privately held company engaged in the design and wholesale sale of jewelry in the United States. Temple St. Clair has exclusive rights to the designs of Temple St. Clair Carr. In Fiscal 2003, Temple St. Clair opened its first retail boutiques in Costa Mesa, California and Short Hills, New Jersey. The results of Temple St. Clair's operations are being consolidated in the Registrant's financial statements based upon ownership interest and control over the operations of the business.
Iridesse, Inc.
In Fiscal 2004, the Company organized a new retail subsidiary, under the name Iridesse, Inc., to exclusively engage in the design and retail sale of pearl jewelry in the United States. In Fiscal 2004, Iridesse opened its first retail boutiques in Short Hills, New Jersey and McLean, Virginia. Iridesse has entered into lease agreements to open additional branches in Fiscal 2005, including a lease in Woodfield, Illinois and plans to open others. The results of Iridesse's operations are being consolidated in the Registrant's financial statements.
Wholesale Diamond Sales
In Fiscal 2004, the Company implemented the sale of rough and polished diamonds that were found unsuitable for Tiffany's needs. Rough or cut stones that do not meet Tiffany's quality standards are sold to third parties through the Other channel of distribution. The Company's objective from such sales is to recoup its original costs, thereby earning minimal, if any, gross margin on those transactions.
- PAGE 13 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Advertising and Promotion
Tiffany regularly advertises, primarily in newspapers and magazines, and periodically conducts product promotional events. In Fiscal 2002, 2003 and 2004, Tiffany spent approximately $101.9 million, $122.4 million and $135.0 million, respectively, on worldwide advertising, which include costs for media, production, catalogs, promotional events and other related items.
Public Relations (promotional) activity is a significant aspect of Registrant's business. Management believes that Tiffany's image is enhanced by a program of charity sponsorships, grants and merchandise donations. Donations are also made to The Tiffany & Co. Foundation, a private foundation organized to support 501(c)(3) charitable organizations with efforts concentrated in the education and preservation of the arts and environmental conservation. Tiffany also engages in a program of retail promotions and media activities to maintain consumer awareness of the Company and its products. Each year, Tiffany publishes its well-known Blue Book which showcases jewelry and other merchandise. Tiffany's window displays are another important aspect of Tiffany's promotional efforts. John Loring, Tiffany's Design Director, is the author of numerous books featuring TIFFANY & CO. products. Registrant considers these and other promotional efforts important in maintaining Tiffany's image.
Trademarks
The designations TIFFANY(R) and TIFFANY & CO.(R) are the principal trademarks of Tiffany, as well as serving as trade names. Through its subsidiaries, the Company has obtained and is the proprietor of trademark registrations for TIFFANY and TIFFANY & CO., as well as the TIFFANY BLUE BOX(R) and the color TIFFANY BLUE(R) for a variety of product categories in the United States and in other countries. Over the years, Tiffany has maintained a program to protect its trademarks and has instituted legal action where necessary to prevent others either from registering or using marks which are considered to create a likelihood of confusion with the Company or its products. Tiffany has been generally successful in such actions and management considers that its United States trademark rights in TIFFANY and TIFFANY & CO. are strong. However, use of the designation TIFFANY by third parties (often small companies) on unrelated goods or services, frequently transient in nature, may not come to the attention of Tiffany or may not rise to a level of concern warranting legal action. Tiffany actively pursues those who counterfeit or sell counterfeit TIFFANY & CO. goods through civil action and cooperation with criminal law enforcement agencies. However, counterfeit TIFFANY & CO. goods remain available in many markets and the cost of enforcement is expected to continue to rise. In the past two years, there has been an increase in the availability of counterfeit goods, predominantly silver jewelry, in various markets by street vendors and small retailers and on the Internet. The continued availability of counterfeit goods within these various markets has the potential, in the long term, to devalue the Tiffany brand.
Despite the general fame of the TIFFANY and TIFFANY & CO. name and mark for the Company's products and services, Tiffany is not the sole person entitled to use the name TIFFANY in every category in every country of the world; third parties have registered the name TIFFANY in the United States in the food services category, and in a number of foreign countries in respect of certain product categories (including, in a few countries, the categories of fragrance, cosmetics, jewelry, eyeglass frames, clothing and tobacco products) under circumstances where Tiffany's rights were not sufficiently clear under local law, and/or where management concluded that Tiffany's foreseeable business interests did not warrant the expense of litigation.
- PAGE 14 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Designer Licenses
Tiffany has been the sole licensee for jewelry designed by Elsa Peretti, Paloma Picasso and the late Jean Schlumberger since Fiscal 1974, 1980 and 1956, respectively. In Fiscal 1992, Tiffany acquired trademark and other rights necessary to sell the designs of the late Mr. Schlumberger under the TIFFANY-SCHLUMBERGER trademark. Ms. Peretti and Ms. Picasso retain ownership of copyrights for their designs and of their trademarks and exercise approval rights with respect to important aspects of the promotion, display, manufacture and merchandising of their designs. Tiffany is required by contract to devote a portion of its advertising budget to the promotion of their respective products; each is paid a royalty by Tiffany for jewelry and other items designed by them and sold under their respective names. Written agreements exist between Ms. Peretti and Tiffany and between Ms. Picasso and Tiffany but may be terminated by either party following six months notice to the other party. Tiffany is the sole retail source for merchandise designed by Ms. Peretti worldwide; however, she has reserved by contract the right to appoint other distributors in markets outside the United States, Canada, Japan, Singapore, Australia, Italy, the United Kingdom, Switzerland and Germany.
The designs of Ms. Peretti accounted for 15%, 15% and 14% of the Company's net sales in Fiscal 2002, 2003 and 2004, respectively. Merchandise designed by Ms. Picasso accounted for 4% of the Company's net sales in Fiscal 2002, 2003 and 2004.
Registrant's operating results could be adversely affected were it to cease to be a licensee of either of these designers or should its degree of exclusivity in respect of their designs be diminished.
Merchandise Purchasing, Manufacturing and Raw Materials
Merchandise offered for sale by the Company is supplied from Tiffany's jewelry and silver goods manufacturing facilities in Cumberland, Rhode Island; Cranston, Rhode Island; Pelham, New York; the hollowware manufacturing facility in Tiffany's Retail Service Center and through purchases and consignments from others. It is Registrant's long-term objective to continue its expansion of Tiffany's internal manufacturing operations. However, it is not expected that Tiffany will ever manufacture all of its needs. Factors to be considered in its decision to outsource manufacturing include product quality, gross margin improvement, access to or mastery of various jewelry-making skills and technology, support for alternative capacity and the cost of capital investments. The following table shows Tiffany's sources of jewelry merchandise, based on cost, for the periods indicated:
Jewelry Merchandise Fiscal Years
2002 2003 2004
---- ---- ----
Finished Goods produced by Tiffany* 58% 57% 63%
Finished Goods purchased from others 42% 43% 37%
--- --- ---
Total 100% 100% 100%
=== === ===
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*Includes raw materials provided by Tiffany to subcontractors.
A substantial majority of non-jewelry merchandise is purchased from others.
- PAGE 15 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Gems and precious metals used in making Tiffany's jewelry may be purchased from a variety of sources. For the most part, purchases of such materials are from suppliers with which Tiffany enjoys long-standing relationships.
Products containing one or more diamonds of varying sizes, including diamonds used as accents, side-stones and center-stones, accounted for approximately 36%, 40% and 43% of Tiffany's net sales in Fiscal 2002, 2003 and 2004, respectively. Products containing one or more diamonds of one carat or larger accounted for less than 10% of net sales in each of those years. Tiffany purchases cut diamonds principally from eight key vendors. Were trade relations between Tiffany and one or more of these vendors to be disrupted, the Company's sales would be adversely affected in the short term until alternative supply arrangements could be established. Diamonds of one carat or greater of the quality the Company demands are, on a relative basis, more difficult to acquire than smaller diamonds. Established sources for smaller stones would be more easily replaced in the event of a disruption in supply than could sources for larger-sized stones.
Except as noted above, Tiffany believes that there are numerous alternative sources for gems and precious metals and that the loss of any single supplier would not have a material adverse effect on its operations.
In Fiscal 1999, the Company made a 14.7% equity investment ($71 million) in Aber Diamond Corporation ("Aber"), a publicly-traded company headquartered in Canada, by purchasing 8 million unregistered shares of its common stock. In Fiscal 2004, the Company sold this investment. Aber holds a 40% interest in the Diavik Diamond Mine in Northwest Canada. Under the Company's continuing diamond purchase agreement with Aber, Tiffany is obligated to purchase at least $50 million in diamonds annually, if available, (in assortments of diamonds expected to cut/polish to Tiffany's quality standards) during the next 9 years.
The supply and price of rough (uncut and unpolished) diamonds in the principal world markets have been and continue to be significantly influenced by a single entity, the Diamond Trading Corporation (the "DTC") of De Beers Centenary AG, a Swiss corporation. However, the role of the DTC is rapidly changing and that change has greatly affected, and will continue to affect, traditional channels of supply in the markets for rough and cut diamonds. The DTC continues to supply a significant portion of the world market for rough, gem-quality diamonds, notwithstanding that its historical ability to control worldwide production supplies has been significantly diminished due to changing politics in diamond-producing countries and revised contractual arrangements with independent mine operators. Also, the DTC may no longer maintain a reserve of diamonds as a mechanism to control available supplies. Nonetheless, the DTC continues to exert a significant influence on the demand for polished diamonds through advertising and marketing efforts throughout the world and through the requirements it imposes on those who purchase rough diamonds from the DTC ("sight-holders"). However, the DTC has recently reduced the number of sight-holders and has announced that those who will remain sight-holders will be expected to be involved in diamond advertising, promotional and branding initiatives or to supply diamonds to those who are.
Until Fiscal 2003, Tiffany did not purchase rough diamonds. In Fiscal 2004, Tiffany acquired an equity interest in a firm that is a sight-holder. In addition to the aforementioned firm, some, but not all, of Tiffany's suppliers are DTC sight-holders, and it is estimated that a significant portion of the diamonds that Tiffany has purchased have had their source with the DTC.
- PAGE 16 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Tiffany expects to continue to purchase rough diamonds from Aber and other sellers through its affiliated companies. Tiffany sorts, processes, and cuts/polishes some diamonds purchased from Aber and other sellers. Other diamonds are provided to contractors for cutting/polishing and return. In conducting these activities, it is Tiffany's intention to supply its own needs for cut/polished diamonds to as great an extent as possible. Tiffany will strive to minimize the number of rough or cut stones that do not meet its quality standards and must be sold to third parties; however, some such sales are inevitable and have been conducted through Registrant's "Other" channel of distribution. The Company's objective from such sales is to recoup its original costs, thereby earning minimal, if any, gross margin on those transactions.
The availability and price of diamonds to the DTC, Tiffany and Tiffany's suppliers may be, to some extent, dependent on the political situation in diamond-producing countries, the opening of new mines and the continuance of the prevailing supply and marketing arrangements for rough diamonds. As a consequence of changes in the sight-holder system and increased competition in the retail diamond trade, substantial competition exists for rough diamonds, which resulted in significant increases in diamond prices in Fiscal 2004. Sustained interruption in the supply of rough diamonds, an over-abundance of supply or a substantial change in the marketing arrangements described above could adversely affect Tiffany and the retail jewelry industry as a whole. Changes in the marketing and advertising policies of DTC and its direct purchasers could affect consumer demand for diamonds. Additionally, an affiliate of the DTC has formed a joint venture with an affiliate of a major luxury goods retailer for the purpose of retailing diamond jewelry. This joint venture has become a competitor of Tiffany. Further, the DTC has encouraged its sight-holders to engage in diamond brand development, which may also increase demand for diamonds and affect the supply of diamonds in certain categories.
Increasing attention has been focused within the last few years on the issue of "conflict" diamonds. Conflict diamonds are extracted from war-torn geographic regions and sold by rebel forces to fund insurrection. Allegations have been made in the press that diamond trading is used as a source of funds to further terrorist activities. Concerned participants in the diamond trade, including Tiffany and non-government organizations, seek to exclude such diamonds, which represent a small fraction of the world's supply, from legitimate trade through an international system of certification and legislative initiatives. It is expected that such efforts will not substantially affect the supply of diamonds.
Synthetic diamonds have become available in small quantities. Although significant questions remain as to the ability of producers to produce synthetic diamonds economically within a full range of sizes and natural diamond colors, and as to consumer acceptance of synthetic diamonds, it is possible that synthetic diamonds may become a factor in the market. Should synthetic diamonds come into the market in significant quantities at prices significantly below those for natural diamonds of comparable quality, the price for natural diamonds may fall unless consumers are willing to pay a premium for natural diamonds. Such a price decline could affect the price that Tiffany is able to obtain for its products. Also, a significant decline in the price of natural diamonds may affect the economics of diamond mining, causing some mining operations to become uneconomic; this, in turn, could lead to shortages in natural diamonds.
Finished jewelry is purchased from approximately 80 manufacturers, most of which have long-standing relationships with Tiffany. Tiffany believes that there are alternative sources for most jewelry items; however, due to the craftsmanship involved in certain designs, Tiffany would have difficulty in finding readily available alternatives in the short term.
- PAGE 17 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Components for TIFFANY & CO. brand timepieces are manufactured and assembled by third parties. Approximately 57% of net watch sales during Fiscal 2004 were attributable to a single manufacturer. Nearly all movements for Tiffany's new MARK line of watches are purchased from a single manufacturer. The loss of this manufacturer could result in the unavailability of timepieces during the period necessary for Tiffany to arrange for new production.
Competition
Registrant encounters significant competition in all of its product lines from other third-party providers, some of which specialize in just one area in which the Company is active. Many of the Company's competitors have established worldwide, national or local reputations for style, quality, expertise and customer service similar to that of the Company and compete on the basis of that reputation. Other jewelers and retailers compete primarily through advertised price promotion. The Company competes on the basis of reputation for high quality products, brand recognition, customer service and distinctive value-priced merchandise and does not engage in price promotional advertising. See Merchandise Purchasing, Manufacturing and Raw Materials above.
Competition for engagement jewelry sales is particularly fierce and becoming more so. The rise of the Internet and increased use of diamond condition reports issued by independent gemological associations have given rise to the mistaken impression amongst certain consumers that diamonds are commodity items and that significant quality differences do not exist. Tiffany's price for diamonds reflects the rarity of the stones it offers and the rigid parameters it exercises with respect to the cut, clarity and other quality factors which increase the beauty of Tiffany diamonds, but also increase Tiffany's cost. Tiffany competes in this market by stressing quality, while some competitors offer inferior diamonds claiming they are comparable, but at lesser prices.
The international marketplace for the Company's products is highly competitive. Although the Company believes that the name TIFFANY & CO. is known internationally, and although Tiffany did operate retail stores in London and Paris prior to World War II, the Company did not have a retail presence in Europe in the post-war era until 1986. Accordingly, consumer awareness of Tiffany & Co. and its products is not as strong in Europe as in the U.S. or in Japan, where Tiffany has distributed its products for many years. The Company expects that its overseas stores will continue to experience intense competition from established retailers in international cities where TIFFANY & CO. stores are or may eventually be located.
Registrant also faces increasing competition in the area of direct marketing. A growing number of direct sellers compete for access to the same mailing lists of known purchasers of luxury goods. Tiffany currently distributes selected merchandise through its Website at www.tiffany.com and anticipates continuing competition in this area as the technology evolves. Tiffany does not offer diamond engagement jewelry through its Website, while certain of Tiffany's competitors do. Nonetheless, Tiffany will seek to maintain and improve its position in the Internet marketplace by refining and expanding its merchandise selection and services.
Seasonality
As a jeweler and specialty retailer, the Company's business is seasonal in nature, with the fourth quarter typically representing a proportionally greater percentage of annual sales, earnings from operations and cash flow. Management expects such seasonality to continue.
- PAGE 18 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Employees
As of January 31, 2005, the Registrant's subsidiary corporations employed an aggregate of approximately 7,341 full-time and part-time persons. Of those employees, 5,424 are employed in the United States. Of the total number of employees, approximately 1,704 persons are salaried employees, 932 are engaged in manufacturing and 3,695 are retail store personnel. Approximately 14 of the total number of employees are represented by unions. Registrant believes that relations with its employees and these unions are good.
ITEM 2. PROPERTIES
Registrant both owns and leases its principal operating facilities and occupies its various store premises under lease arrangements that are generally on a two to ten-year basis.
New York Flagship Store
In November 1999, Tiffany repurchased the land and building housing its flagship store at 727 Fifth Avenue in New York City. Prior to its repurchase, Tiffany had leased the building since 1984. Constructed for Tiffany in 1940, the building was designed to be a retail store for the Company and is believed to be well located for this function. Currently, approximately 40,000 gross square feet of this 124,000 square foot building are devoted to retail sales, with the balance devoted to administrative offices, certain product services, jewelry manufacturing and storage. In Fiscal 2000, Tiffany commenced a multiyear renovation and reconfiguration project to increase the store's selling space and provide additional floor space for customer service and special exhibitions. An additional selling floor was opened in November 2001 and renovations of three other floors were completed by the end of Fiscal 2004. Tiffany anticipates completion of its renovation plans within the next two years.
London Flagship Store
In October 2002, Registrant purchased through a subsidiary the building housing its flagship European store at 25/25A Old Bond Street in London and the adjacent building at 15 Albermarle Street. The London store had been leased since Fiscal 1986 and was expanded to its current 15,200 gross square feet in 1991. In Fiscal 2004, a renovation and reconfiguration plan commenced to increase the store's interior selling space by approximately 60%. The renovation plan will occur in several phases through Fiscal 2006.
Tokyo Flagship Store
In June 2003, through its purchase of a trust beneficiary interest, Registrant's Japanese affiliate acquired the land and building housing its flagship store in Tokyo's Ginza shopping district. The 61,000 square foot, nine-story building houses retail, restaurant and office tenants, including the TIFFANY & CO. store located on the street level, second and third floors. Prior to its purchase, the Tokyo flagship store had been leased and subleased by Tiffany-Japan to Mitsukoshi. The store was expanded to its current 12,000 gross square feet in Fiscal 1999.
- PAGE 19 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Retail Service Center
In Fiscal 1995, Tiffany entered into a lease of undeveloped property in Parsippany, New Jersey, in order to construct and occupy a new distribution facility. In April 1997, construction of the "Retail Service Center" ("RSC") on that property was completed and Tiffany commenced operations. The RSC is a combined warehouse, distribution, light manufacturing, computing and office center. To meet increased demand, the computer and office center areas were expanded during Fiscal 2001. In January 2001, Tiffany exercised its right under the lease to purchase the RSC for a scheduled purchase price. This capital lease buyout was completed on January 31, 2002. Registrant believes that the RSC has been properly designed to handle worldwide distribution functions and that it is suitable for that purpose. The RSC comprises approximately 370,000 square feet, of which approximately 186,000 square feet are devoted to office and computer operations use, with the balance devoted to warehousing, shipping, receiving, light manufacturing, merchandise processing and other distribution functions. The RSC specializes in receipt of merchandise from around the world and replenishment of retail stores.
Customer Fulfillment Center
In anticipation of growth in sales volume, in Fiscal 2001 Tiffany entered into a ground lease of undeveloped property in Hanover Township, New Jersey in order to construct and occupy a Customer Fulfillment Center ("CFC") to manage the warehousing and processing of direct-to-customer orders and to perform other distribution functions. Construction of the CFC was completed and Tiffany commenced operations at this facility in September 2003 under a temporary certificate of occupancy, with a permanent certificate of occupancy anticipated when the landlord completes certain corrective work to the property to the satisfaction of the Township. Tiffany and the landlord also have a dispute over the landlord's entitlement to reimbursement of certain costs associated with the landlord's site work. The CFC comprises approximately 266,000 square feet, of which approximately 34,500 square feet are devoted to office use, and the balance to warehousing, shipping, receiving, merchandise processing and other warehouse functions.
Manufacturing Facility - Cumberland, Rhode Island
Tiffany's manufacturing facility in Cumberland, Rhode Island commenced operations in May of 2001. It is a 100,000 square foot facility that was specially designed and constructed for Tiffany for the manufacture of jewelry. It produces a significant portion of the silver, gold and platinum jewelry and silver accessory items sold under the TIFFANY & CO. trademark.
Manufacturing Facility - Cranston, Rhode Island
On January 31, 2003 Tiffany purchased a warehouse facility and land located in Cranston, Rhode Island. During Fiscal 2003, Tiffany renovated the 75,000 square foot building to process metals for raw material use.
- PAGE 20 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Manufacturing Facilities - Westchester County, New York
On July 1, 1997, Tiffany entered into a lease for a 34,280 square foot manufacturing facility in Pelham, New York, to expire on June 30, 2008. In Fiscal 2004, Tiffany modified the lease to add an additional 10,200 square feet to the lease, subject to the original expiration date.
On February 16, 2005, Tiffany purchased approximately 22,000 square feet of space to be used as a manufacturing facility for jewelry setting in Mount Vernon, New York.
U.S. TIFFANY & CO. Branch Retail Store Leases
Set forth below is the expiration date for each of Tiffany's existing branch and subsidiary retail store leases (and, where applicable, optional renewal terms):
U.S. BRANCH TIFFANY & CO. STORE LEASES
CITY STATE/TERR. LOCATION EXPIRATION DATE RENEWAL OPTIONS
---- ----------- ---------------------------------- ------------------ -------------------
Atlanta GA Phipps Plaza Shopping Center July 31, 2010
Bal Harbour FL Bal Harbour Shops May 31, 2014
Bellevue WA Bellevue Square May 31, 2017
Beverly Hills CA Two Rodeo Drive October 6, 2020
Boca Raton FL Town Center at Boca January 31, 2010 One five-year term
Boston MA Copley Place July 31, 2009 Two five-year terms
Century City CA Century City Shopping Center June 30, 2009
Charlotte NC SouthPark Mall September 30, 2015 One five-year term
Chestnut Hill MA The Atrium at Chestnut Hill January 31, 2008 One five-year term
Chevy Chase MD 5500 Wisconsin Avenue January 31, 2006
Chicago IL 730 North Michigan Avenue October 20, 2012 Two five-year terms
Cincinnati OH Fountain Place November 30, 2012 Two five-year terms
Coral Gables FL Village of Merrick Park January 31, 2014 One five-year term
Costa Mesa CA South Coast Plaza January 31, 2019
Dallas TX The Galleria May 31, 2009
Dallas TX NorthPark Center May 31, 2009 One five-year term
Denver CO Cherry Creek Shopping Center January 31, 2008 One five-year term
East Hampton NY 53 Main Street February 29, 2012 Two five-year terms
Edina MN Galleria Shopping Center January 31, 2015 One five-year term
Greenwich CT 140 Greenwich Avenue July 31, 2010 Two five-year terms
Hackensack NJ Riverside Square Mall September 30, 2006
Honolulu HI Ala Moana Center January 31, 2011
Honolulu HI 2100 Kalakaua Avenue October 31, 2017 Two five-year terms
Houston TX The Galleria September 30, 2006
Kansas City MS Country Club Plaza January 31, 2020 One five-year term
King of Prussia PA The Plaza at King of Prussia November 30, 2005 One five-year term
Las Vegas NV Bellagio March 1, 2008 One ten-year term
Manhasset NY Americana Shopping Center June 9, 2008
Maui HI Whalers Village July 31, 2005 Renewal under
negotiation
Maui HI The Shops at Wailea November 30, 2010 One five-year term
Oak Brook IL Oakbrook Center April 30, 2009 Two five-year terms
Old Orchard IL Old Orchard Shopping Center April 30, 2010 One five-year term
Orlando FL The Mall at Millenia December 31, 2012 One five-year term
Palm Beach FL 259 Worth Avenue May 31, 2007 Two five-year terms
Palm Beach Gardens FL The Gardens of Palm Beaches January 31, 2015 One five-year term
Palm Desert CA The Gardens on El Pasco January 31, 2014 One five-year term
Palo Alto CA Stanford Shopping Center May 31, 2007
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- PAGE 21 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
CITY STATE/TERR. LOCATION EXPIRATION DATE RENEWAL OPTIONS ---- ----------- ---------------------------------- ------------------ ------------------- Philadelphia PA The Bellevue June 30, 2010 One five-year term Portland OR Pioneer Place December 31, 2010 One five-year term San Diego CA Fashion Valley Shopping Center December 31, 2007 One five-year term San Francisco CA Union Square October 23, 2011 One ten-year term Santa Clara (San CA Westfield Shoppingtown Valley January 31, 2012 Jose) Fair Scottsdale AZ Scottsdale Fashion Square December 31, 2008 One five-year term Seattle WA Pacific Place October 28, 2008 Two five-year terms Short Hills NJ The Mall at Short Hills January 31, 2010 St. Louis MO Plaza Frontenac September 26, 2012 One five-year term Tampa FL International Plaza January 31, 2011 One five-year term Tamuning Guam Tumon Bay - DFS February 28, 2008 Tamuning Guam Tumon Sands Plaza September 30, 2008 Troy MI The Somerset Collection September 30, 2007 Vienna VA Fairfax Square March 31, 2010 One five-year term Walnut Creek CA The Corner April 28, 2013 Two five-year terms Westport CT 40 Post Road East February 28, 2015 One five-year term White Plains NY The Westchester March 31, 2010 |
New U.S. TIFFANY & CO. Store Leases
In addition to the U.S. leases described herein on pages 21 and 22, Tiffany has entered into the following new leases for domestic stores expected to open in Fiscal 2005: a 10-year lease for a 3,036 square foot store at Carmel Plaza in Carmel, California, a 10-year lease for a 5,845 square foot store at The Waterside Shops in Naples, Florida, a 10-year lease for a 5,613 square foot store on Colorado Boulevard in Pasadena, California, and a 10-year lease for a 5,980 square foot store at The Shops at La Cantera in San Antonio, Texas.
International TIFFANY & CO. Branch Retail Store Leases
INTERNATIONAL BRANCH TIFFANY & CO. STORE LEASES
COUNTRY CITY LOCATION EXPIRATION DATE RENEWAL OPTIONS
------- ------------ ----------------------- ------------------ -------------------------
Australia Sydney 28 Castlereagh Street September 15, 2018
Australia Melbourne 267 Collins Street October 31, 2005 Three five-year terms
Brazil Sao Paulo Jardins February 29, 2008 One five-year term
Brazil Sao Paulo Shopping Center January 1, 2006 Two five-year terms
Iguatemi
Canada Toronto 85 Bloor Street West August 31, 2006 One seven-year term
England London The Royal Exchange August 31, 2016 Three five-year terms
England London 145 Sloane Street March 24, 2014
France Paris 6 Rue de la Paix April 1, 2011 One three-year term
Germany Frankfurt 20 Goethestrasse January 31, 2011 One five-year term
Germany Munich Residenzstrasse 11 January 31, 2009
Hong Kong Hong Kong Int'l February 20, 2009
Airport
Hong Kong Int'l Finance Center October 26, 2008
Hong Kong The Landmark May 31, 2005 Renewal under negotiation
Hong Kong Kowloon The Peninsula February 28, 2007
Hong Kong Pacific Place July 6, 2008
Italy Florence Via Tournabuoni December 31, 2007 One six-year term
Italy Milan Via della Spiga October 31, 2005 One six-year term
Italy Rome Via Del Babuino December 31, 2007 One six-year term+
Korea Pusan Paradise Hotel September 20, 2005
Malaysia Kuala Lumpur Suria KL City Centre November 30, 2005 Renewal under negotiation
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- PAGE 22 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Mexico Mexico City Masaryk May 31, 2009 Two five-year terms Singapore Raffles Hotel September 15, 2006 Singapore Ngee Ann City September 14, 2005 One three-year term Switzerland Zurich Bahnhofstrasse 14 September 30, 2010 Auto five-year terms Taiwan Taipei Regent Hotel April 30, 2006 Taiwan Taipei Taipei Financial Center May 7, 2009 |
+ Renewal subject to conditions imposed by Italian law, including right of landlord to occupy premises for its own use.
LITTLE SWITZERLAND Branch Retail Store Leases
LITTLE SWITZERLAND BRANCH STORE LEASES
CITY / ISLAND STATE/TERR. LOCATION EXPIRATION DATE RENEWAL OPTIONS
------------- ----------- ----------------------- ----------------- ---------------------
Juneau AK 236 S. Franklin St. January 1, 2006 One ten-year term
Ketchikan AK 328 Mission St. February 28, 2010 One three-year term
Skagway AK 5th & Broadway April 30, 2007
Skagway AK 21/2 Broadway November 1, 2006 One five-year term
Key West FL 400 Front Street October 31, 2007
Key West FL Hilton May 31, 2005 One three-year term
Key West FL 402 Duval Street October 31, 2006 Two five-year terms
Sunrise FL Sawgrass Mills November 1, 2009
Aruba Caribbean 14 Caya G.F. Beticao November 14, 2006
Islands Croes, Oranjestad
Aruba Caribbean J.E. Irausquin Blvd March 31, 2007
Islands 230, Palm Beach
Aruba Caribbean J.E. Irausquin Blvd 83, January 21, 2006
Islands Palm Beach
Aruba Caribbean Wyndham Resort, Palm May 31, 2006 One three-year term
Islands Beach
Aruba Caribbean Tamarijn Hotel, December 31, 2005 One three-year term
Islands Oranjestad
Aruba Caribbean Royal Plaza, Oranjestad January 31, 2006 Three five-year terms
Islands
Barbados Caribbean Da Costa's Mall , January 31, 2006 Three five-year terms
Islands Brigetown
Curacao Caribbean Breedestraat 44-P November 14, 2007 One five-year term
Islands
St. John Caribbean The Westin Resort December 31, 2005
Islands
St. Maarten Caribbean #52 Front Street, July 27, 2005 One five-year term
Islands Philipsburg
St. Maarten Caribbean World Gifts Imports, December 31, 2008 One five-year term
Islands Harbor Village
St. Martin Caribbean 6 Rue de la Liberte, November 30, 2012
Islands Marigot
St. Thomas+ Caribbean 01 Main Street June 30, 2008 Two four-year terms
Islands
St. Thomas Caribbean Havensight Mall Wico July 31, 2013
Islands Dock
St. Thomas Caribbean 48 AB Norre Gade November 30, 2013 One ten-year term
Islands
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+ Additional space in the Main Street store is operated under two separate leases, the first additional lease expiring on May 31, 2006 with a renewal option of one five-year term and the second additional lease expiring on October 31, 2008.
- PAGE 23 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
TEMPLE ST CLAIR Branch Retail Store Leases
TEMPLE ST CLAIR BRANCH STORE LEASES
CITY STATE/TERR. LOCATION EXPIRATION DATE RENEWAL OPTIONS ----------- ----------- ---------------------- ---------------- --------------- Costa Mesa CA South Coast Plaza January 31, 2014 Short Hills NJ The Mall at Short Hills January 31, 2013 |
IRIDESSE Branch Retail Store Leases
IRIDESSE BRANCH STORE LEASES
CITY STATE/TERR. LOCATION EXPIRATION DATE RENEWAL OPTIONS
----------- ----------- ----------------------- ------------------- ---------------
McLean VA The Galleria at Tyson's September, 30, 2014
Corner
Short Hills NJ The Mall at Short Hills January 31, 2014
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New IRIDESSE Store Leases
In addition to the U.S. leases described herein on page 24, Iridesse expects to open three to four new domestic stores in 2005, including a 10-year lease for a 1,473 gross square foot store in Woodfield, Illinois.
ITEM 3. LEGAL AND ENVIRONMENTAL PROCEEDINGS
Registrant and Tiffany are from time to time involved in routine litigation incidental to the conduct of Tiffany's business, including proceedings to protect its trademark rights, litigation with parties claiming infringement of their intellectual property rights by Tiffany, litigation instituted by persons alleged to have been injured upon premises within Registrant's control and litigation with present and former employees and customers. Although litigation with present and former employees is routine and incidental to the conduct of Tiffany's business, as well as for any business employing significant numbers of U.S.-based employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions claiming discrimination on the basis of age, gender, race, religion, disability or other legally protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. However, Registrant believes that litigation currently pending to which it or Tiffany is a party or to which its properties are subject will be resolved without any material adverse effect on Registrant's financial position, earnings or cash flows.
On or about July 1, 2004, both Tiffany and the landlord of Tiffany's Customer Fulfillment Center ("River Park") requested arbitration of the parties' continuing dispute over their respective obligations surrounding completion of River Park's site work (Tiffany and Company v. River Park Business Center, Inc., American Arbitration Association). In connection with the arbitration, River Park's then pending civil claim in the Superior Court of New Jersey (Morris County), River Park Business Center, Inc. v. Tiffany and Company, was dismissed in September 2004.
In the arbitration, Tiffany asserts River Park's continuing breach of its obligations to complete Landlord's Work by the close of Fiscal 2001, as originally required under the Ground Lease, and to obtain timely site plan approval from the Township of Hanover. Tiffany seeks damages stemming from River Park's continuous delays in completing its obligations, which damages Tiffany contends are in excess of $1,000,000. In its arbitration complaint, River Park
- PAGE 24 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
seeks an unspecified amount in damages alleging entitlement to reimbursement of grading costs and excess installation costs of the landfill gas venting system.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended January 31, 2005.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Registrant are:
NAME AGE POSITION YEAR JOINED TIFFANY
Michael J. Kowalski 53 Chairman of the Board of Directors and 1983
Chief Executive Officer
James E. Quinn 53 President 1986
Beth O. Canavan 50 Executive Vice President 1987
James N. Fernandez 49 Executive Vice President and 1983
Chief Financial Officer
Victoria Berger-Gross 49 Senior Vice President - Human Resources 2001
Patrick B. Dorsey 54 Senior Vice President - General Counsel 1985
and Secretary
Fernanda M. Kellogg 58 Senior Vice President - Public Relations 1984
Jon M. King 48 Senior Vice President - Merchandising 1990
Caroline D. Naggiar 47 Senior Vice President - Marketing 1997
John S. Petterson 46 Senior Vice President - Operations 1988
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Michael J. Kowalski. Mr. Kowalski assumed the role of Chairman of the Board in January 2003, following the retirement of William R. Chaney. He has served as the Registrant's Chief Executive Officer since February 1999 and on the Registrant's Board of Directors since January 1995. Since joining Tiffany in 1983 as Director of Financial Planning, Mr. Kowalski held a variety of merchandising management positions and served as Executive Vice President from 1992 to 1996 with overall responsibility in the areas of merchandising, marketing, advertising, public relations and product design until his election as President in 1997. Mr. Kowalski is a member of the Board of Directors of Fairmont Hotels & Resorts and the Bank of New York. The Bank of New York is Tiffany's principal banking relationship, serving as Administrative Agent and a lender under Tiffany's credit agreement and as a trustee of Tiffany's Employee Pension Plan.
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James E. Quinn. Mr. Quinn was appointed President effective January 31, 2003. He had served as Vice Chairman since 1998. After joining Tiffany in July 1986 as Vice President of branch sales for the Company's business-to-business sales operations, Mr. Quinn had various responsibilities for sales management and operations. He was promoted to Executive Vice President on March 19, 1992 and assumed responsibility for retail and corporate sales for the Americas in 1994. In January 1995, he became a member of Registrant's Board of Directors. He has responsibility for worldwide sales. Mr. Quinn is a member of the board of directors of BNY Hamilton Funds, Inc. and Mutual of America Capital Management, Inc.
Beth O. Canavan. Ms. Canavan joined Tiffany in May 1987 as Director of New Store Development. She later held the positions of Vice President, Retail Sales Development in 1990, Vice President and General Manager of the New York flagship store in 1992 and Eastern Regional Vice President in 1994. In 1997, she assumed the position of Senior Vice President for U.S. Retail. In January 2000, she was promoted to Executive Vice President responsible for retail sales activities in the U.S. and Canada and retail store expansion. In May 2001, Ms. Canavan also assumed responsibility for direct sales and business sales activities in the U.S. and Canada.
James N. Fernandez. Mr. Fernandez joined Tiffany in October 1983 and has held various positions in financial planning and management prior to his appointment as Senior Vice President-Chief Financial Officer in April 1989. In January 1998, he was promoted to Executive Vice President-Chief Financial Officer. Presently, he has responsibility for accounting, treasury, investor relations, information technology, financial planning, business development and diamond operations, and overall responsibility for distribution, manufacturing, customer service and security. Mr. Fernandez is a member of the Board of Directors of The Dun & Bradstreet Corporation.
Victoria Berger-Gross. Dr. Berger-Gross joined Tiffany in February 2001 as Senior Vice President - Human Resources. Prior to joining Tiffany, she served as Senior Vice President & Director of Human Resources at Lehman Brothers from May 1999, Senior Director - Human Resources at Bertelsmann A.G.'s BMG Entertainment from March 1997, and Vice President - Organizational Effectiveness at Personnel Decisions International from January 1991.
Patrick B. Dorsey. Mr. Dorsey joined Tiffany in July 1985 as General Counsel and Secretary.
Fernanda M. Kellogg. Ms. Kellogg joined Tiffany in October 1984 as Director of Retail Marketing. She assumed her current responsibilities in January 1990.
Jon M. King. Mr. King joined Tiffany in 1990 as a jewelry buyer and has held various positions in the Merchandising Division, assuming responsibility for product development in 2002 as Group Vice President. He assumed his current responsibilities in March 2003.
Caroline D. Naggiar. Ms. Naggiar joined Tiffany in June 1997 as Vice President - Marketing Communications. She assumed her current responsibilities in February 1998.
John S. Petterson. Mr. Petterson joined Tiffany in 1988 as a management associate. He was promoted to Senior Vice President - Corporate Sales in May 1995 and, in February 2000, his responsibilities were expanded to include Direct Mail and the E-Commerce business. In May 2001, Mr. Petterson assumed the new role of Senior Vice President - Operations, with responsibility for worldwide distribution, customer service and security activities. His responsibilities were expanded in February 2003 to include manufacturing operations.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Registrant's Common Stock is traded on the New York Stock Exchange. In consolidated trading, the high and low selling prices per share for shares of such Common Stock for Fiscal 2003 were:
Fiscal 2003 High Low --------------------- ------- ------- First Fiscal Quarter $ 28.98 $ 21.60 Second Fiscal Quarter $ 35.50 $ 27.19 Third Fiscal Quarter $ 47.55 $ 32.79 Fourth Fiscal Quarter $ 49.45 $ 39.00 |
In consolidated trading, the high and low selling prices per share for shares of such Common Stock for Fiscal 2004 were:
Fiscal 2004 High Low --------------------- ------- ------- First Fiscal Quarter $ 43.26 $ 35.44 Second Fiscal Quarter $ 39.78 $ 32.38 Third Fiscal Quarter $ 35.94 $ 27.00 Fourth Fiscal Quarter $ 32.76 $ 29.47 |
On March 24, 2005, the high and low selling prices quoted on such exchange were $32.66 and $32.20, respectively. On March 24, 2005 there were 5,957 record holders of Registrant's Common Stock.
It is Registrant's policy to pay a quarterly dividend on the Registrant's Common Stock, subject to declaration by Registrant's Board of Directors. In Fiscal 2003, a dividend of $0.04 per share of Common Stock was paid on April 10, 2003, and dividends of $0.05 per share of Common Stock were paid on July 10, 2003, October 10, 2003 and January 12, 2004. In Fiscal 2004, a dividend of $0.05 per share of Common Stock was paid on January 12, 2004, and dividends of $0.06 per share of Common Stock were paid on July 12, 2004, October 11, 2004 and January 10, 2005.
In calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant shown on the cover page of this Report on Form 10-K, 1,494,731 shares of Registrant's Common Stock beneficially owned by the executive officers and directors of the Registrant (exclusive of shares which may be acquired on exercise of employee stock options) were excluded, on the assumption that certain of those persons could be considered "affiliates" under the provisions of Rule 405 promulgated under the Securities Act of 1933.
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The following table indicates the Company's stock repurchases of equity securities in the fourth quarter of Fiscal 2004:
Issuer Purchases of Equity Securities
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum
------------------- Shares (or Units) Paid per Share Shares (or Units) Number (or
Purchased (or Unit) Purchased as Part of Approximate Dollar
------------------- ----------------- Publicly Announced Value) of Shares, or
Plans or Programs* Units) that May Yet
-------------------- Be Purchased Under
the Plans or
Programs*
--------------------
November 1, 2004 to 400,000 $31.25 400,000 $57,424,000
November 30, 2004
December 1, 2004 to 900,000 $30.73 900,000 $29,767,000
December 31, 2004
January 1, 2005 to 0 0 0 $29,767,000
January 31, 2005
TOTAL 1,300,000 $30.89 1,300,000 $29,767,000*
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* In November 2003, the Board of Directors expanded the Company's stock repurchase program, which was first announced on September 21, 2000 and scheduled to expire in November 2003; the Board extended the program until November 30, 2006 and increased the remaining authorization by $100,000,000, allowing the Company to repurchase up to $116,500,000 of the Company's outstanding Common Stock in addition to those which already had been purchased. Under a prior program, which expired in 2000, the Company had purchased 4,484,400 shares.
In March 2005, the Board of Directors approved a new stock repurchase program and terminated the previously existing program (which was due to expire in November 2006). The amount available for repurchase, under the previous plan, as of January 31, 2005 was approximately $29,767,000. The new stock repurchase program, effective immediately, authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. Repurchases under this program in excess of $159,000,000 will be subject to lender approval under the Company's multi-bank credit facility. The new program expires on March 30, 2007.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005, page 18.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference from Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005, pages 19-32.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005, page 31.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005, pages 34-61.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, Registrant's chief executive officer and chief financial officer concluded that, as of the end of the period covered by this annual report, Registrant's disclosure controls and procedures are effective to ensure that information required to be disclosed by Registrant in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
In addition, Registrant's chief executive officer and chief financial officer have determined that there have been no changes in Registrant's internal control over financial reporting during the period covered by this annual report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, Registrant's internal control over financial reporting.
Registrant's management, including its chief executive officer and chief financial officer necessarily applied their judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management's control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee, that it will succeed in its stated objectives.
MANAGEMENTS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on internal control over financial reporting and the report of the independent registered public accounting firm are incorporated by reference to pages 33-35 of Registrant's Annual Report to Stockholders for the Fiscal Year ended January 31, 2005.
ITEM 9B. OTHER INFORMATION
NONE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Registrant's Proxy Statement dated April 14, 2005, pages 5-6 and 28-30.
Code of Ethics and Other Corporate Governance Disclosures
Registrant has adopted a Code of Business and Ethical Conduct for its Directors, Chief Executive Officer, Chief Financial Officer and all other officers of Registrant. A copy of this Code is posted on the corporate governance section of the Registrant's website, www.shareholder.com/tiffany/. Registrant intends to disclose any material amendments to its Code of Business and Ethical Conduct, as well as any waivers by posting such information on the same website. The Registrant will also provide a copy of the Code of Business and Ethical Conduct to stockholders upon request.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Registrant's Proxy Statement dated April 14, 2005, pages 16-26.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Registrant's Proxy Statement dated April 14, 2005, pages 5-6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Executive Officers of the Registrant herein on pages 25-26. Board of Directors information incorporated by reference from Registrant's Proxy Statement dated April 14, 2005, page 9 and pages 28-30.
ITEM 14. PRINCIPAL INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES
Incorporated by reference from Registrant's Proxy Statement dated April 14, 2005, pages 7-8.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed As Part of This Report:
1. Financial Statements:
Data incorporated by reference from
the 2004 Annual Report to Stockholders
of Tiffany & Co. and Subsidiaries:
Report of Independent Registered Public Accounting Firm
(following this Form 10-K)
Consolidated Balance Sheets
as of January 31, 2005 and 2004
Consolidated Statements of Earnings
for the years ended January 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity and Comprehensive Earnings for the years ended January 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows
for the years ended January 31, 2005, 2004 and 2003
Notes to consolidated financial statements
2. Financial Statement Schedules:
The following financial statement schedule should be read in conjunction with the consolidated financial statements incorporated by reference herein:
II. Valuation and qualifying accounts and reserves.
All other schedules have been omitted since they are neither applicable nor required, or because the information required is included in the consolidated financial statements and notes thereto.
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3. Exhibits:
The following exhibits have been filed with the Securities and Exchange Commission, but are not attached to copies of this Form 10-K other than complete copies filed with said Commission and the New York Stock Exchange:
Exhibit Description
3.1 Restated Certificate of Incorporation of Registrant. Incorporated by
reference from Exhibit 3.1 to Registrant's Report on Form 8-K dated
May 16, 1996.
3.1a Amendment to Certificate of Incorporation of Registrant.
Incorporated by reference from Exhibit 3.1 to Registrant's Report on
Form 8-K dated May 20, 1999.
3.1b Amendment to Certificate of Incorporation of Registrant dated May
18, 2000. Incorporated by reference from Exhibit 3.1b to
Registrant's Report on Form 10-K for the Fiscal Year ended January
31, 2001.
3.2 Restated By-Laws of Registrant, as last amended September 18, 2003.
Incorporated by reference from Exhibit 3.2 to Registrant's Report on
Form 10-K for the Fiscal Year ended January 31, 2004.
4.1 Amended and Restated Rights Agreement dated as of April 8, 2004 by
and between Registrant and Mellon Investor Services LLC, as Rights
Agent. Incorporated by reference from Exhibit 4.1 to Registrant's
Report on Form 10-K for the Fiscal Year ended January 31, 2004.
10.5 Designer Agreement between Tiffany and Paloma Picasso dated April 4,
1985. Incorporated by reference from Exhibit 10.5 filed with
Registrant's Registration Statement on Form S-1, Registration No.
33-12818 (the "Registration Statement").
10.122 Agreement dated as of April 3, 1996 among American Family Life
Assurance Company of Columbus, Japan Branch, Tiffany & Co. Japan,
Inc., Japan Branch, and Registrant, as Guarantor, for yen
5,000,000,000 Loan Due 2011. Incorporated by reference from Exhibit
10.122 filed with Registrant's Report on Form 10-Q for the Fiscal
quarter ended April 30, 1996.
10.122a Amendment No. 1 to the Agreement referred to in Exhibit 10.122 above
dated November 18, 1998. Incorporated by reference from Exhibit
10.122a filed with Registrant's Report on Form 10-K for the Fiscal
Year ended January 31, 1999.
10.122b Guarantee by Tiffany & Co. of the obligations under the Agreement
referred to in Exhibit 10.122 above dated April 3, 1996.
Incorporated by reference from Exhibit 10.122b filed with
Registrant's Report on Form 8-K dated August 2, 2002.
10.122c Amendment No. 2 to Guarantee referred to in Exhibit 10.122b above,
dated October 15, 1999. Incorporated by reference from Exhibit
10.122c filed with Registrant's Report on Form 8-K dated August 2,
2002.
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10.122d Amendment No. 3 to Guarantee referred to in Exhibit 10.122b above,
dated July 16, 2002. Incorporated by reference from Exhibit 10.122d
filed with Registrant's Report on Form 8-K dated August 2, 2002.
10.123 Agreement made effective as of February 1, 1997 by and between
Tiffany and Elsa Peretti. Incorporated by reference from Exhibit
10.123 to Registrant's Report on Form 10-K for the Fiscal Year ended
January 31, 1997.
10.126 Form of Note Purchase Agreement between Registrant and various
institutional note purchasers with Schedules B, 5.14 and 5.15 and
Exhibits 1A, 1B, and 4.7 thereto, dated as of December 30, 1998 in
respect of Registrant's $60 million principal amount 6.90% Series A
Senior Notes due December 30, 2008 and $40 million principal amount
7.05% Series B Senior Notes due December 30, 2010. Incorporated by
reference from Exhibit 10.126 filed with Registrant's Report on Form
10-K for the Fiscal Year ended January 31, 1999.
10.126a First Amendment and Waiver Agreement to Form of Note Purchase
Agreement referred to in previously filed Exhibit 10.126, dated May
16, 2002. Incorporated by reference from Exhibit 126a filed with
Registrant's Report on Form 8-K dated June 10, 2002.
10.129 Agreement made the 1st day of August 2001 by and between Tiffany &
Co. Japan Inc. and Mitsukoshi Ltd. of Japan. Incorporated by
reference from Exhibit 10.128 filed with Registrant's Report on Form
8-K dated August 1, 2001.
10.130 Credit Agreement dated as of November 5, 2001, by and among
Registrant, Tiffany and Company, Tiffany & Co. International, each
other Subsidiary of Registrant that is a Borrower and is a signatory
thereto and The Bank of New York, as the Swing Line Lender, as the
Issuing Bank, as a Lender, and as Administrative Agent, ABN AMRO
Bank N.V., The Chase Manhattan Bank, The Dai-ichi Kangyo Bank Ltd.,
Firstar Bank, NA, and Fleet National Bank, Fleet Precious Metals
Inc. (collectively, as a Lender). Incorporated by reference from
Exhibit 10.130 filed with Registrant's Report on Form 10-Q for the
Fiscal quarter ended October 31, 2001.
10.130a Amendment No. 1 to Credit Agreement referred to in previously filed
Exhibit 10.130, dated April 12, 2002. Incorporated by reference from
Exhibit 10.130a filed with Registrant's Report on Form 10-Q for the
Fiscal quarter ended April 30, 2002.
10.130b Amendment No. 2 to Credit Agreement referred to in previously filed
Exhibit 10.130, dated June 30, 2003. Incorporated by reference from
Exhibit 10.130b filed with Registrant's Report on Form 10-K for the
Fiscal Year ended January 31, 2004.
10.130c Increase Supplement to Credit Agreement referred to in previously
filed Exhibit 10.130, dated September 28, 2004.
10.130d Amendment No. 3 to Credit Agreement referred to in previously filed
Exhibit 10.130, dated January 27, 2005.
10.131 Guaranty Agreement dated as of November 5, 2001, with respect to the
Credit Agreement (see Exhibit 10.129 above) by and among Registrant,
Tiffany and Company,
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Tiffany & Co. International, and Tiffany & Co. Japan Inc. and The
Bank of New York, as Administrative Agent. Incorporated by reference
from Exhibit 10.131 filed with Registrant's Report on Form 10-Q for
the Fiscal quarter ended October 31, 2001.
10.132 Form of Note Purchase Agreement between Registrant and various
institutional note purchasers with Schedules B, 5.14 and 5.15 and
Exhibits 1A, 1B and 4.7 thereto, dated as of July 18, 2002 in
respect of Registrant's $40,000,000 principal amount 6.15% Series C
Notes due July 18, 2009 and $60,000,000 principal amount 6.56%
Series D Notes due July 18, 2012. Incorporated by reference from
Exhibit 10.132 filed with Registrant's Report on Form 8-K dated
August 2, 2002.
10.133 Guaranty Agreement dated July 18, 2002 with respect to the Note
Purchase Agreements (see Exhibit 10.132 above) by Tiffany and
Company, Tiffany & Co. International and Tiffany & Co. Japan Inc. in
favor of each of the note purchasers. Incorporated by reference from
Exhibit 10.133 filed with Registrant's Report on Form 8-K dated
August 2, 2002.
10.134 Translation of Condition of Bonds applied to Tiffany & Co. Japan
Inc. First Series Yen Bonds due 2010 in the aggregate principal
amount of 15,000,000,000 yen issued September 30, 2003 (for
Qualified Investors Only). Incorporated by reference from Exhibit
10.134 filed with Registrant's Report on Form 10-K for the Fiscal
Year ended January 31, 2004.
10.135 Translation of Application of Bonds for Tiffany & Co. Japan Inc.
First Series Yen Bonds due 2010 in the aggregate principal amount of
15,000,000,000 yen issued September 30, 2003 (for Qualified
Investors Only). Incorporated by reference from Exhibit 10.135 filed
with Registrant's Report on Form 10-K for the Fiscal Year ended
January 31, 2004.
10.135a Translation of Amendment of Application of Bonds referred to in
Exhibit 10.135. Incorporated by reference from Exhibit 10.135a filed
with Registrant's Report on Form 10-K for the Fiscal Year ended
January 31, 2004.
10.136 Payment Guarantee dated September 30, 2003 made by Tiffany & Co. for
the benefit of the Qualified Investors of the Bonds referred to in
Exhibit 10.134. Incorporated by reference from Exhibit 10.136 filed
with Registrant's Report on Form 10-K for the Fiscal Year ended
January 31, 2004.
10.145 Ground Lease between Tiffany and Company and River Park Business
Center, Inc., dated November 29, 2000.
10.145a First Addendum to the Ground Lease between Tiffany and Company and
River Park Business Center, Inc., dated November 29, 2000.
13.1 Annual Report to Stockholders for Fiscal Year ended January 31, 2005
(pages 18-61 of such Annual Report have been filed in electronic
format).
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14.1 Code of Business and Ethical Conduct and Business Conduct Policy.
Incorporated by reference from Exhibit 14.1 filed with Registrant's
Report on Form 10-K for the Fiscal Year ended January 31, 2004.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Executive Compensation Plans and Arrangements
Exhibit Description
4.3 Registrant's Amended and Restated 1998 Employee Incentive Plan and
standard terms of stock option award (transferable and
non-transferable). Incorporated by reference from Exhibit 4.3 filed
with Registrant's Report on Form 10-K for the Fiscal Year ended
January 31, 2003.
4.4 Registrant's 1998 Directors Option Plan. Incorporated by reference
from Exhibit 4.3 to Registrant's Registration Statement on Form S-8,
file number 333-67725, filed November 23, 1998.
10.3 Registrant's 1986 Stock Option Plan and terms of stock option
agreement, as last amended on July 16, 1998. Incorporated by
reference from Exhibit 10.3 filed with Registrant's Report on Form
10-K for the Fiscal Year ended January 31, 1999.
10.49 Form of Indemnity Agreement, approved by the Board of Directors on
March 11, 2005 for use with all directors and executive officers.
Incorporated by reference from Exhibit 10.49 filed with Registrant's
Report on Form 8-K dated March 16, 2005.
10.60 Registrant's 1988 Director Stock Option Plan and form of stock
option agreement, as last amended on November 21, 1996. Incorporated
by reference from Exhibit 10.60 to Registrant's Report on Form 10-K
for the Fiscal Year ended January 31, 1997.
10.106 Amended and Restated Tiffany and Company Executive Deferral Plan
originally made effective October 1, 1989, as amended effective
January 1, 2003. Incorporated by
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reference from Exhibit 10.106 filed with Registrant's Report on Form
10-Q for the Fiscal Quarter ended October 31, 2002.
10.108 Registrant's Amended and Restated Retirement Plan for Non-Employee
Directors originally made effective January 1, 1989, as amended
through January 21, 1999. Incorporated by reference from Exhibit
10.108 filed with Registrant's Report on Form 10-K for the Fiscal
Year ended January 31, 1999.
10.109 Summary of informal incentive cash bonus plan for managerial
employees. Incorporated by reference from Exhibit 10.109 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.113 Tiffany and Company Pension Plan, Amended and Restated Effective as
of March 30, 2004. Incorporated by reference from Exhibit 10.113
filed with Registrants Report on Form 10-K for the Fiscal Year ended
January 31, 2004.
10.114 1994 Tiffany and Company Supplemental Retirement Income Plan,
Amended and Restated as of March 7, 2005. Incorporated by reference
from Exhibit 10.114 filed with Registrant's Report on Form 8-K dated
March 16, 2005.
10.127b Form of Retention Agreement between and among Registrant and Tiffany
and each of its executive officers and Appendices I to III to the
Agreement. Incorporated by reference from Exhibit 10.127b filed with
Registrant's Report on Form 10-K for the Fiscal Year ended January
31, 2003.
10.128 Group Long Term Disability Insurance Policy issued by UnumProvident,
Policy No. 533717 001. Incorporated by reference from Exhibit 10.128
filed with Registrant's Report on Form 10-K for the Fiscal Year
ended January 31, 2003.
10.137 Summary of arrangements for the payment of premiums on life
insurance policies owned by executive officers. Incorporated by
reference from Exhibit 10.137 filed with Registrant's Report on Form
10-K for the Fiscal Year ended January 31, 2004.
10.138 Tiffany and Company Un-funded Retirement Income Plan to Recognize
Compensation in Excess of Internal Revenue Code Limits. Incorporated
by reference from Exhibit 10.138 filed with Registrant's Report on
Form 10-K for the Fiscal Year ended January 31, 2004.
10.139 Form of Fiscal 2005 Cash Incentive Award Agreement for certain
executive officers under Registrant's 1998 Employee Incentive Plan.
Incorporated by reference from Exhibit 10.139 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.140 Form of Terms of Performance-Based Restricted Stock Unit Grants to
Executive Officers under Registrant's 1998 Employee Incentive Plan.
Incorporated by reference from Exhibit 10.139 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.141 Form of Non-Competition and Confidentiality Covenants for use in
connection with Performance-Based Restricted Stock Unit Grants to
Registrant's Executive Officers and Time-Vested Restricted Unit
Awards made to other officers of Registrant's affiliated
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|
companies pursuant to the Registrant's 1998 Employee Incentive Plan
and pursuant to the Tiffany and Company Un-funded Retirement Income
Plan to Recognize Compensation in Excess of Internal Revenue Code
Limits. Incorporated by reference from Exhibit 10.141 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.142 Terms of Stock Option Award (Transferable Non-Qualified Option)
under Registrant's 1998 Directors Option Plan as revised March 7,
2005. Incorporated by reference from Exhibit 10.142 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.143 Terms of Stock Option Award (Standard Non-Qualified Option) under
Registrant's 1998 Employee Incentive Plan as revised March 7, 2005.
Incorporated by reference from Exhibit 10.143 filed with
Registrant's Report on Form 8-K dated March 16, 2005.
10.144 Terms of Stock Option Award (Transferable Non-Qualified Option)
under Registrant's 1998 Employee Incentive Plan as revised March 7,
2005 (form used for Executive Officers). Incorporated by reference
from Exhibit 10.144 filed with Registrant's Report on Form 8-K dated
March 16, 2005.
- PAGE 37 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
|
(b) Reports on Form 8-K.
On November 12, 2004, Registrant filed a Report on Form 8-K
|
reporting its unaudited earnings and results of operations for the three month period ended October 31, 2004.
On December 10, 2004, Registrant filed a Report on Form 8-K reporting the issuance of two press releases. The first reported press release announcing the agreement between Registrant and Aber Diamond Corporation to increase the price at which Registrant purchases diamonds from Aber to market value and to eliminate certain restrictions on the sale of Aber shares held by Registrant. The second reported press release announcing the sale of Registrant's entire holding of Aber Diamond Corporation through a private offering in the United States and on the Toronto Stock Exchange.
On December 18, 2004, Registrant filed a Report on Form 8-K reporting the issuance of a press release announcing its recommendation of the rejection of a below-market "mini-tender" offer from TRC Capital Corporation.
On January 7, 2005, Registrant filed a Report on Form 8-K reporting the issuance of a press release announcing its 12% increase in Holiday Season Sales, comparable U.S. Store sales increase 8%.
On February 28, 2005, Registrant filed a Report on Form 8-K reporting the issuance of a press release announcing its sales and earnings results for the full year.
On March 16, 2005, Registrant filed a Report on Form 8-K reporting various changes to forms of changed awards, terms and agreements subject to such changes made in Fiscal 2005 by Registrant's Compensation Committee of its Board of Directors. Attached to the Report are the following Exhibits:
Exhibit Description
10.49 Form of Indemnity Agreement, approved by the Board of
Directors on March 11, 2005 for use with all directors
and executive officers.
10.109 Summary of informal incentive cash bonus plan for
managerial employees.
10.114 1994 Tiffany and Company Supplemental Retirement Income
Plan, Amended and Restated as of March 7, 2005.
10.139 Form of Fiscal 2005 Cash Incentive Award Agreement for
certain executive officers under Registrant's 1998
Employee Incentive Plan.
10.140 Form of Terms of Performance-Based Restricted Stock
Unit Grants to Executive Officers under Registrant's
1998 Employee Incentive Plan.
10.141 Form of Non-Competition and Confidentiality Covenants
for use in connection with Performance-Based Restricted
Stock Unit Grants to Registrant's Executive Officers
and Time-Vested Restricted Unit Awards made to other
officers of Registrant's affiliated companies pursuant
to the
- PAGE 38 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
|
Registrant's 1998 Employee Incentive Plan and pursuant
to the Tiffany and Company Un-funded Retirement
Income Plan to Recognize Compensation in Excess of
Internal Revenue Code Limits.
|
10.142 Terms of Stock Option Award (Transferable Non-Qualified Option) under Registrant's 1988 Directors Option Plan as revised March 7, 2005.
10.143 Terms of Stock Option Award (Standard Non-Qualified Option) under Registrant's 1988 Employee Incentive Plan as revised March 7, 2005.
10.144 Terms of Stock Option Award (Transferable Non-Qualified Option) under Registrant's 1998 Employee Incentive Plan as revised March 7, 2005 (form used for Executive Officers).
On March 18, 2005, Registrant filed a Report on Form 8-K reporting the issuance of a press release announcing that its Board of Directors approved a new stock repurchase program authorizing the Company to repurchase up to $400 million of its Common Stock through open market or private transactions.
On April 14, 2005, Registrant filed a Report on Form 8-K reporting the filing of its Annual Report to Stockholders and reconciling the net earnings, gross margin and statements in said report with those announced on February 28, 2005, to conform to Staff Accounting Bulletin No. 107, issued March 29, 2005, by the Securities and Exchange Commission.
- PAGE 39 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TIFFANY & CO.
(Registrant)
Date: April 14, 2005 By: /s/ Michael J. Kowalski
-------------------------------
Michael J. Kowalski
Chief Executive Officer
|
- PAGE 40 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By: /s/ Michael J. Kowalski By: /s/ James N. Fernandez
---------------------------------- ----------------------
Michael J. Kowalski James N. Fernandez
Chairman and Chief Executive Officer Executive Vice President
(principal executive officer) (director) (principal financial officer)
By: /s/ James E. Quinn By: /s/ Warren S. Feld
------------------ -----------------------------
James E. Quinn Warren S. Feld
President Vice President
(director) (principal accounting officer)
By: /s/ William R. Chaney By: /s/ Rose Marie Bravo
--------------------- --------------------
William R. Chaney Rose Marie Bravo
Director Director
By: /s/ Samuel L. Hayes III By: /s/ Abby F. Kohnstamm
----------------------- ---------------------
Samuel L. Hayes, III Abby F. Kohnstamm
Director Director
By: /s/ Charles K. Marquis By: /s/ J. Thomas Presby
---------------------- --------------------
Charles K. Marquis J. Thomas Presby
Director Director
By: /s/ William A. Shutzer
----------------------
William A. Shutzer
Director
April 14, 2005
- PAGE 41 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
|
PRICEWATERHOUSECOOPERS LLP
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Tiffany & Co.:
Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 31, 2005 appearing in the January 31, 2005 Annual Report to Shareholders of Tiffany & Co. (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP New York, New York March 31, 2005 |
- PAGE 42 - TIFFANY & CO. REPORT ON FORM 10-K FY 2004
TIFFANY & CO. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
-------- ---------- -------- -------- --------
Additions
-------------------------------
Balance at Charged to
beginning costs and Charged to Balance at end
Description of period expenses other accounts Deductions of period
------------------------------- ----------- ----------- -------------- ---------- --------------
Year Ended
January 31, 2005:
Reserves deducted from
assets:
Accounts receivable allowances:
Doubtful accounts $2,325,462 $1,976,551 -- $2,227,362(a) $2,074,651
Sales returns 4,666,605 973,605 -- 223,573(b) 5,416,637
Allowance for inventory
liquidation and
obsolescence 21,983,185 2,432,504 2,934,967(e) 6,422,807(c) 20,927,849
Allowance for inventory
shrinkage 4,591,185 2,265,940 -- 2,120,696(d) 4,736,429
LIFO reserve 30,587,252 33,471,162 -- -- 64,058,414
|
(a) Uncollectible accounts written off.
(b) Adjustment related to sales returns previously provided for.
(c) Liquidation of inventory previously written down to market.
(d) Physical inventory losses.
(e) Reclassification from gross inventory to reserves.
TIFFANY & CO. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
-------- ----------- -------- -------- --------
Additions
--------------------------------
Balance at Charged to
beginning costs and Charged to Balance at end
Description of period expenses other accounts Deductions of period
------------------------------- ----------- ----------- -------------- ---------- --------------
Year Ended
January 31, 2004:
Reserves deducted from
assets:
Accounts receivable allowances:
Doubtful accounts $2,129,652 $2,081,919 -- $1,886,109(a) $2,325,462
Sales returns 6,128,611 382,305 -- 1,844,311(b) 4,666,605
Allowance for inventory
liquidation and
obsolescence 23,029,454 6,532,576 -- 7,578,845(c) 21,983,185
Allowance for inventory
shrinkage 4,361,478 1,272,520 -- 1,042,813(d) 4,591,185
LIFO reserve 20,135,443 10,451,809 -- -- 30,587,252
|
(a) Uncollectible accounts written off.
(b) Adjustment related to sales returns previously provided for.
(c) Liquidation of inventory previously written down to market.
(d) Physical inventory losses.
TIFFANY & CO. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
-------- ----------- -------- -------- --------
Additions
--------------------------------
Balance at Charged to
beginning costs and Charged to Balance at end
Description of period expenses other accounts Deductions of period
------------------------------- ----------- ----------- -------------- ---------- --------------
Year Ended
January 31, 2003:
Reserves deducted from
assets:
Accounts receivable allowances:
Doubtful accounts $2,795,400 $828,794 $120,083(d) $1,614,625(a) $2,129,652
Sales returns 4,082,816 2,045,795 -- -- 6,128,611
Allowance for inventory
liquidation and
obsolescence 18,833,164 12,258,231 1,436,131(d) 9,498,072(b) 23,029,454
Allowance for inventory
shrinkage 3,518,845 1,555,388 70,676(d) 783,431(c) 4,361,478
LIFO reserve 18,970,581 1,164,862 -- -- 20,135,443
|
(a) Uncollectible accounts written off.
(b) Liquidation of inventory previously written down to market.
(c) Physical inventory losses.
(d) Amounts established or assumed in connection with a business acquisition.
Exhibit 10.130c Tiffany & Co.
Report on Form 10-K
INCREASE SUPPLEMENT
INCREASE SUPPLEMENT, dated as of September 28, 2004, to the Credit Agreement, dated as of November 5, 2001, among Tiffany & Co., Tiffany and Company, Tiffany & Co. International, the other Borrowers party thereto, the Lenders party thereto, and The Bank of New York, as Administrative Agent (as amended and in effect on the date hereof, the "Credit Agreement"). Capitalized terms used herein which are not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.
1. Pursuant to Section 2.7(c) of the Credit Agreement, the Parent hereby requests each Lender to increase its Core Currency Commitment as more specifically set forth below such that, immediately after giving effect to this Increase Supplement, the Aggregate Core Currency Commitments shall be $194,000,000 and the Aggregate Individual Currency Commitments shall remain at $56,000,000.
2. Upon the effectiveness of this Increase Supplement, each of the Lenders shall be deemed to have increased its Core Currency Commitment as follows:
-----------------------------------------------------------------------------------------------
LENDER CORE CURRENCY CORE CURRENCY AMOUNT OF INCREASE
COMMITMENT COMMITMENT OF CORE CURRENCY
(BEFORE GIVING (AFTER GIVING COMMITMENT
EFFECT TO THIS EFFECT TO THIS
INCREASE INCREASE
SUPPLEMENT) SUPPLEMENT)
-----------------------------------------------------------------------------------------------
The Bank of New York $28,750,000 $37,500,000 $8,750,000
-----------------------------------------------------------------------------------------------
ABN AMRO Bank N.V. $20,000,000 $28,250,000 $8,250,000
-----------------------------------------------------------------------------------------------
JPMorgan Chase Bank $16,250,000 $24,500,000 $8,250,000
-----------------------------------------------------------------------------------------------
Mizuho Corporate Bank, Ltd. $34,750,000 $43,000,000 $8,250,000
-----------------------------------------------------------------------------------------------
U.S. Bank, National Association $10,500,000 $18,750,000 $8,250,000
-----------------------------------------------------------------------------------------------
Fleet National Bank/Fleet $33,750,000 $42,000,000 $8,250,000
Precious Metals Inc.
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
TOTAL $144,000,000 $194,000,000 $50,000,000
-----------------------------------------------------------------------------------------------
|
3. Upon the effectiveness of this Increase Supplement, Exhibit A-1 and Exhibit A-2 attached hereto shall replace Exhibit A-1 and Exhibit A-2 to the Credit Agreement.
4. This Increase Supplement shall become effective upon receipt by the Administrative Agent of:
a) a copy of this Increase Supplement executed by the Administrative Agent, the Issuing Bank, the Swing Line Lender and each Lender; and
b) a fee for the account of each Lender in an amount equal to five basis points (0.05%) of the amount of the increase in such Lender's Core Currency Commitment as shown in Paragraph 2 above.
5. Upon the effectiveness of this Increase Supplement each Lender shall
(i) be deemed to have entered into a master assignment and acceptance agreement
with respect to its Core Currency Commitment and outstanding Revolving Loans and
(ii) make the necessary payment to the Administrative Lender to reflect the
assignment to it of Revolving Loans, in each case as contemplated by Section
2.7(c)(C) of the Credit Agreement.
6. Each Borrower shall compensate each Lender in accordance with Section 3.5 of the Credit Agreement for all reasonable losses, expenses and liabilities incurred by such Lender as a result of the increases contemplated herein.
7. The Parent hereby represents and warrants to the Administrative Agent and each Lender that, at the time of and immediately after giving effect to this Increase Supplement, no Default or Event of Default shall have occurred and be continuing and each of the representations and warranties contained in the Credit Agreement are true and correct with the same effect as though such representations and warranties had been made both immediately before and after giving effect to this Increase Supplement except to the extent that any representation or warranty under Section 4.1 of the Credit Agreement expressly relates to an earlier date.
[signature pages follow]
TIFFANY
INCREASE SUPPLEMENT
IN WITNESS WHEREOF, this Increase Supplement has been executed and delivered as of the day and year first above written.
TIFFANY & CO., a Delaware corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Executive Vice President and Chief
----------------------------------------
Financial Officer
|
TIFFANY AND COMPANY, a New York corporation
By: /s/ Patrick B. Dorsey
-------------------------------------------
Name: Patrick B. Dorsey
-----------------------------------------
Title: Senior Vice President, General
----------------------------------------
Counsel and Secretary
----------------------------------------
|
TIFFANY & CO. INTERNATIONAL, a Delaware
corporation
By: /s/ Patrick B. Dorsey
-------------------------------------------
Name: Patrick B. Dorsey
-----------------------------------------
Title: Vice President and Secretary
----------------------------------------
|
TIFFANY
INCREASE SUPPLEMENT
SOCIETE FRANCAISE POUR LE DEVELOPMENT DE LA
PORCELAINE D'ART (S.A.R.L.), a French
corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Authorized Signatory
----------------------------------------
|
TIFFANY & CO. ITALIA S.P.A., an Italian
corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Attorney in Fact
----------------------------------------
|
TIFFANY & CO. JAPAN INC., a Delaware corporation
By: /s/ Patrick B. Dorsey
-------------------------------------------
Name: Patrick B. Dorsey
-----------------------------------------
Title: Vice President and Secretary
----------------------------------------
|
TIFFANY & CO. PTE., LTD., a Singapore corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Authorized Signatory
----------------------------------------
|
TIFFANY & CO., a United Kingdom corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Chief Financial Officer
----------------------------------------
|
TIFFANY
INCREASE SUPPLEMENT
TIFFANY & CO. WATCH CENTER AG, a Swiss
corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Authorized Signatory
----------------------------------------
|
TIFFANY KOREA LTD., a Korean corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Chief Financial Officer
----------------------------------------
|
TIFFANY & CO. MEXICO, S.A. de C.V., a Mexican corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Vice President
----------------------------------------
|
TIFFANY & CO. OF NEW YORK LIMITED, a Hong Kong
corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Attorney by a Power of Attorney
----------------------------------------
|
SINDAT LIMITED, a Hong Kong corporation
By: /s/ James N. Fernandez
-------------------------------------------
Name: James N. Fernandez
-----------------------------------------
Title: Attorney by a Power of Attorney
----------------------------------------
|
TIFFANY
INCREASE SUPPLEMENT
AGREED:
THE BANK OF NEW YORK,
as Administrative Agent, Issuing Bank,
Swing Line Lender and as a Lender
By: /s/ Johna M. Fidanza
---------------------------------------
Name: Johna M. Fidanza
-------------------------------------
Vice President
------------------------------------------
|
ABN AMRO BANK N.V
By: /s/ Ronald C. Spurga /s/ Frederick G. Jennings
---------------------------------------
Name: Ronald C. Spurga Frederick G. Jennings
-------------------------------------
Title: Vice President Vice President
------------------------------------
|
JPMORGAN CHASE BANK
By: /s/ Wendy Segal
---------------------------------------
Name: Wendy Segal
-------------------------------------
Title: Vice President
------------------------------------
|
MIZUHO CORPORATE BANK, LTD.
By: /s/ Bertram H. Tang
---------------------------------------
Name: Bertram H. Tang
-------------------------------------
Title: Senior Vice President & Team Leader
--------------------------------------
|
U.S. BANK, NATIONAL ASSOCIATION
By: /s/ John Franceschi
---------------------------------------
Name: John Franceschi
-------------------------------------
Title: Vice President
------------------------------------
|
FLEET NATIONAL BANK/
FLEET PRECIOUS METALS INC.
By: /s/ Richard M. Seufert
---------------------------------------
Name: Richard M. Seufert
-------------------------------------
Title: Sr. Vice President
------------------------------------
|
TIFFANY EXHIBIT A-1
LIST OF CORE CURRENCY COMMITMENTS
-----------------------------------------------------------------------------------
CORE CORE CURRENCY AGGREGATE
LENDER CURRENCY COMMITMENT COMMITMENT
COMMITMENT PERCENTAGE PERCENTAGE
-----------------------------------------------------------------------------------
The Bank of New York $37,500,000 %19.32989691 %21.00
-----------------------------------------------------------------------------------
ABN AMRO Bank N.V. $28,250,000 %14.56185567 %13.30
-----------------------------------------------------------------------------------
JPMorgan Chase Bank $24,500,000 %12.62886598 %18.80
-----------------------------------------------------------------------------------
Mizuho Corporate Bank, Ltd. $43,000,000 %22.16494845 %18.80
-----------------------------------------------------------------------------------
U.S. Bank, National Association $18,750,000 % 9.66494845 % 9.30
-----------------------------------------------------------------------------------
Fleet National Bank/ $42,000,000 %21.64948454 %18.80
Fleet Precious Metals Inc.
-----------------------------------------------------------------------------------
TOTAL $194,000,000 100% 100%
============ ==== ====
-----------------------------------------------------------------------------------
|
TIFFANY EXHIBIT A-2
LIST OF INDIVIDUAL CURRENCY COMMITMENTS
Lender Individual Currency Commitment
------ ------------------------------
Mizuho Corporate Bank, Ltd. $4,000,000
U.S. Bank, National Association $2,000,000
HONG KONG DOLLARS
-----------------
Lender Individual Currency Commitment
------ ------------------------------
The Bank of New York $0
EUROS (FRANCE)
--------------
Lender Individual Currency Commitment
------ ------------------------------
JPMorgan Chase Bank $5,000,000
ABN AMRO Bank N.V. $5,000,000
EUROS (ITALY)
-------------
Lender Individual Currency Commitment
------ ------------------------------
JPMorgan Chase Bank $15,000,000
KOREAN WON
----------
Lender Individual Currency Commitment
------ ------------------------------
The Bank of New York $12,000,000
MEXICAN PESOS
-------------
Lender Individual Currency Commitment
------ ------------------------------
Fleet National Bank/Fleet Precious Metals
Inc. $5,000,000
|
Lender Individual Currency Commitment
------ ------------------------------
The Bank of New York $3,000,000
SINGAPORE DOLLARS
-----------------
Lender Individual Currency Commitment
------ ------------------------------
The Bank of New York $0
SWISS FRANCS
------------
Lender Individual Currency Commitment
------ ------------------------------
JPMorgan Chase Bank $2,500,000
U.S. Bank, National Association $2,500,000
|
Exhibit 10.130d Tiffany & Co.
Report on Form 10-K
TIFFANY & CO.
AMENDMENT NO. 3
AMENDMENT NO. 3 (this "Amendment"), dated as of January 27, 2005, to the Credit Agreement, dated as of November 5, 2001, by and among Tiffany & Co., Tiffany and Company, Tiffany & Co. International, the other Borrowers party thereto, the Lenders party thereto and The Bank of New York, as Administrative Agent (as amended by Amendment No. 1, dated as of April 12, 2002, and Amendment No. 2, dated as of June 30, 2003, the "Credit Agreement").
Except as otherwise provided herein, capitalized terms used herein which are not defined herein shall have the meanings set forth in the Credit Agreement.
In consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and pursuant to Section 11.1 of the Credit Agreement, the Parent, the Borrowers and the Administrative Agent hereby agree as follows:
1. Section 8.8 of the Credit Agreement is hereby amended by deleting the amount "$200,000,000" referred to in clause (iii) thereof and replacing it with the amount "$300,000,000".
2. This Amendment shall become effective immediately upon receipt by the Administrative Agent of this Amendment executed by a duly authorized officer or officers of the Parent, the Borrowers, the Required Lenders and the Administrative Agent.
3. Except as amended hereby, the Credit Agreement and the other Loan Documents shall remain in full force and effect.
4. In order to induce the Administrative Agent to execute this Amendment
and the Required Lenders to consent hereto, the Parent and the Borrowers each
hereby (a) certifies that, on the date hereof and immediately before and after
giving effect to this Amendment, all representations and warranties contained in
the Credit Agreement are and will be true and correct in all respects, (b)
certifies that, immediately before and after giving effect to this Amendment, no
Default or Event of Default exists or will exist under the Loan Documents, and
(c) agrees to pay the reasonable fees and disbursements of counsel to the
Administrative Agent incurred in connection with the preparation, negotiation
and closing of this Amendment.
4. Each of the Parent and the Borrowers hereby (a) reaffirms and admits the validity, enforceability and continuation of all the Loan Documents to which it is a party and its obligations thereunder, (b) agrees and admits that as of the date hereof it has no valid defenses to or offsets against any of its obligations under the Loan Documents to which it is a party and each of the Guarantors hereby consents to this Agreement and (c) in its capacity as a Guarantor, consents to this Amendment.
5. This Amendment may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. It shall not be necessary in making proof of this Amendment to produce or account for more than one counterpart signed by the party to be charged.
6. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.
[Signature pages follow]
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
The parties have caused this Amendment to be duly executed as of the date first written above.
TIFFANY & CO., a Delaware corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Executive Vice President and Chief
Financial Officer
|
TIFFANY AND COMPANY, a New York
corporation
By: /s/ Patrick B. Dorsey
-------------------------------------
Name: Patrick B. Dorsey
Title: Senior Vice President, General
Counsel and Secretary
|
TIFFANY & CO. INTERNATIONAL, a
Delaware corporation
By: /s/ Patrick B. Dorsey
-------------------------------------
Name: Patrick B. Dorsey
Title: Vice President and Secretary
|
SOCIETE FRANCAISE POUR LE
DEVELOPMENT DE LA PORCELAINE
D'ART (S.A.R.L.), a French corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Authorized Signatory
|
TIFFANY & CO. ITALIA S.P.A., an Italian
corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Attorney in Fact
|
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
TIFFANY & CO. JAPAN INC., a
Delaware corporation
By: /s/ Patrick B. Dorsey
-------------------------------------
Name: Patrick B. Dorsey
Title: Vice President and Secretary
|
TIFFANY & CO. PTE., LTD., a Singapore corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Authorized Signatory
|
TIFFANY & CO., a United Kingdom corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Chief Financial Officer
|
TIFFANY & CO. WATCH CENTER AG, a
Swiss corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Authorized Signatory
|
TIFFANY KOREA LTD., a Korean
corporation
By: /s/ James N. Fernandez
------------------------------------
Name: James N. Fernandez
Title: Chief Financial Officer
|
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
TIFFANY & CO. MEXICO, S.A. de C.V., a
Mexican corporation
By: /s/ James N. Fernandez
-------------------------------------
Name: James N. Fernandez
Title: Vice President
|
TIFFANY & CO. OF NEW YORK LIMITED,
a Hong Kong corporation
By: /s/ James N. Fernandez
------------------------------------
Name: James N. Fernandez
Title: Attorney by a Power of Attorney
|
SINDAT LIMITED, a Hong Kong corporation
By: /s/ James N. Fernandez
------------------------------------
Name: James N. Fernandez
Title: Attorney by a Power of Attorney
|
THE BANK OF NEW YORK, as
Administrative Agent
/s/ Johna M. Fidanza ------------------------------------------ Johna M. Fidanza Vice President |
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
THE BANK OF NEW YORK, individually
/s/ Johna M. Fidanza ------------------------- Johna M. Fidanza Vice President |
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
ABN AMRO BANK N.V.
By: /s/ Ronald C. Spurga
--------------------------------
Name: Ronald C. Spurga
Title: Vice President
/s/ Frederick G. Jennings
Frederick G. Jennings
Vice President
|
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
JPMORGAN CHASE BANK, N.A.
By: /s/ Susan H. Atha
-----------------------
Name: Susan H. Atha
Title: Vice President
|
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
MIZUHO CORPORATE BANK, LTD.
By: /s/ Bertram H. Tang -------------------------------------------------- Name: Bertram H. Tang Title: Senior Vice President & Team Leader |
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
U.S. BANK, NATIONAL ASSOCIATION
By: /s/ John Franceschi
------------------------
Name: John Franceschi
Title: Vice President
|
TIFFANY & CO.
AMENDMENT NO. 3 TO THE CREDIT AGREEMENT
AGREED AND CONSENTED TO:
FLEET NATIONAL BANK/
FLEET PRECIOUS METALS INC.
By: /s/ Anthony J. Capuano ------------------------------------ Name: Anthony J. Capuano Title: Senior Vice President By: /s/ Sharon A. Delfino --------------------------------- Name: Sharon A. Delfino Title: VP. |
Exhibit 10.145 Tiffany & Co.
Report on Form 10-K
GROUND LEASE
BY AND BETWEEN
RIVER PARK BUSINESS CENTER, INC.,
LANDLORD
-AND-
TIFFANY AND COMPANY,
TENANT
TABLE OF CONTENTS
ARTICLE 1 - DEFINITIONS.................................................. 1
ARTICLE 2 - DEMISE AND TERM.............................................. 4
ARTICLE 3 - FIXED ANNUAL RENT............................................ 5
ARTICLE 4 - NET LEASE AND INDEMNITY...................................... 6
ARTICLE 5 - REAL ESTATE TAXES AND OTHER IMPOSITIONS...................... 8
ARTICLE 6 - USE AND COMPLIANCE........................................... 9
ARTICLE 7 - UTILITIES AND SERVICES....................................... 13
ARTICLE 8 - REPAIR AND MAINTENANCE....................................... 14
ARTICLE 9 - MECHANICS' AND OTHER LIENS................................... 16
ARTICLE 10 - ALTERATIONS.................................................. 16
ARTICLE 11 - SITE PLAN APPLICATION/RIGHT TO
TERMINATE/LANDLORD'S WORK/TENANTS WORK.................... 18
ARTICLE 12 - INSURANCE.................................................... 27
ARTICLE 13 - DAMAGE OR DESTRUCTION........................................ 30
ARTICLE 14 - CONDEMNATION................................................. 32
ARTICLE 15 - LANDLORD'S RIGHT TO CURE TENANT'S DEFAULTS................... 33
ARTICLE 16 - CONDITIONAL LIMITATIONS - DEFAULT PROVISIONS................. 34
ARTICLE 17 - WAIVER OF TRIAL BY JURY/NO WAIVER OF COUNTERCLAIM............ 38
ARTICLE 18 - QUIET ENJOYMENT.............................................. 38
ARTICLE 19 - SURRENDER OF PREMISES AND TITLE TO PROPERTY.................. 38
ARTICLE 20 - HOLDING OVER................................................. 39
ARTICLE 21 - ASSIGNMENT AND SUBLETTING.................................... 40
ARTICLE 22 - TENANT REPRESENTATION........................................ 43
ARTICLE 23 - ESTOPPEL CERTIFICATES........................................ 43
ARTICLE 24 - INVALIDITY OF PARTICULAR PROVISIONS.......................... 44
ARTICLE 25 - SUBORDINATION................................................ 44
ARTICLE 26 - BROKER....................................................... 46
ARTICLE 27 - NOTICES...................................................... 46
ARTICLE 28 - TITLE........................................................ 47
ARTICLE 29 - MEMORANDUM OF LEASE.......................................... 47
ARTICLE 30 - ARBITRATION.................................................. 47
ARTICLE 31 - EXHIBITION OF PREMISES....................................... 47
ARTICLE 32 - LEASEHOLD MORTGAGES.......................................... 48
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ARTICLE 33 - RIGHT OF FIRST OFFER......................................... 49 ARTICLE 34 - MISCELLANEOUS................................................ 50 |
GROUND LEASE
THIS LEASE made as of the 29th day of November , 2000, between RIVER PARK BUSINESS CENTER, INC., a Delaware corporation, having an office at 47 Parsippany Road, Whippany, New Jersey 07981 (herein called "Landlord") and TIFFANY AND COMPANY, a New York corporation having an office at 727 Fifth Avenue, New York, New York 10022 (herein called "Tenant").
WITNESSETH:
For good and reasonable consideration, Landlord and Tenant hereby agree as follows:
ARTICLE 1 - DEFINITIONS
1.1 As used herein, the following terms and phrases shall have the meanings indicated, which meanings shall be applicable to the singular and plural nouns and verbs of any tense:
(a) Additional Rent: All monies hereunder due from Tenant to Landlord other than the Fixed Annual Rent.
(b) Alteration: Defined in Section 10.1(a).
(c) Approvals: Defined in Section 11.7.
(d) Approvals Date: The day after the day by which any appeal of the approval by the Hanover Township Planning Board of Tenant's "Application" (as defined in Section 11.2) for the "Initial Improvements" (as defined in Section 11.2) must be commenced, or, if any appeals have been commenced, the date on which such appeals are finally resolved in Tenant's favor, and are no longer subject to any right of appeal.
(e) Base Price Index: The Price Index for the month in which the Rent Commencement Date occurs.
(f) Building: Defined in Section 11.2(a).
(g) Commencement Date: Defined in Section 2.2.
(h) Contamination: The uncontained or uncontrolled presence of or release of Hazardous Materials into any environmental media from, upon, within, below, or into the Demised Premises, so as to require remediation, cleanup or investigation under any applicable Environmental Law.
(i) Demised Premises: The Land, together with the Improvements, and all easements, rights and appurtenances to the Land.
(j) Environmental Laws: All Legal Requirements concerning human health and the environment.
(k) Event of Default: Defined in Section 16.1.
(l) Fee Mortgage: Any mortgage, as amended or modified from time to time, given by Landlord on its fee interest in the Land or this Lease.
(m) Fee Mortgagee: The holder at any time of a Fee Mortgage, and prior to the placement thereof Fee Mortgagee shall mean the issuer of a commitment for such Fee Mortgage.
(n) Fixed Annual Rent (also referred to herein as the "Fixed Rent"):
Defined in Section 3.1(a).
(o) Hazardous Materials: Any "hazardous chemical," "hazardous substance" or similar term as defined in any present and future Environmental Law, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601, et. seq. ("CERCLA"); the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. 6901 et. seq. ("RCRA"); the Occupational Safety and Health Act, 29 U.S.C. 651 et. seq. ("OSHA"); the New Jersey Industrial Site Recovery Act, as amended, N.J.S.A. 13:1K-6 et. seq. ("ISRA"); the New Jersey Spill Compensation and Control Act, as amended, N.J.S.A. 58:10-23. 11b et. seq. ("Spill Act"); the New Jersey Underground Storage of Hazardous Substances Act, as amended, N.J.S.A. 58:10A-21 et. seq.; the New Jersey Solid Waste Management Act, as amended, N.J.S.A., 13:1E-1 et seq.; and the New Jersey Water Pollution Control Act, as amended, N.J.S.A. 58:10A-1 et. seq., as each may subsequently be amended.
(p) Impositions: All Real Estate Taxes, occupancy taxes, personal property taxes, water and sewer charges other than water and sewer rents (to the extent such water and sewer rents are included in Real Estate Taxes), and all other taxes and governmental charges, general or special, ordinary or extraordinary, foreseen or unforeseen, of any kind or nature whatsoever which shall or may during the Term be assessed, levied, charged, confirmed or imposed upon or become payable out of or become a lien on the Demised Premises, or any part thereof, or the rent and income received by or for the account of Tenant from any subtenants or for any use or occupancy of the Demised Premises. No franchise, corporate, estate, inheritance, succession, capital levy or capital stock tax of Landlord, and no income, profit or revenue tax upon the income or receipts of Landlord, shall be included as Impositions, except that if at any time during the Term the methods of taxation shall be altered so that in addition to or in lieu of or as a substitute for the whole or any part of any Real Estate Taxes there shall be levied, assessed or imposed (i) a tax, license fee or other charge on the rents received or (ii) any other type of tax or other imposition in lieu of, or as a substitute for, or in addition to, the whole or any portion of any Real Estate Taxes, then the same shall be included as Impositions under this Lease to the extent that such amounts would be payable if the Demised Premises were the only property of Landlord subject thereto.
(q) Improvements: The Building and other improvements including, without limitation, site improvements and Alterations constructed on the Land from time to time.
(r) Initial Improvements: Defined in Section 11.2.
(s) Intentionally Deleted.
(t) Institutional Lender: Any commercial, national or savings bank, savings and loan association, trust company, insurance company, real estate investment trust or pension or retirement fund.
(u) Insurance Requirements: The requirements, whether now or hereafter in force, of any insurer or a fire insurance rating organization or any other organization performing the same or similar functions, applicable to the Demised Premises, or the use or manner of use thereof.
(v) Land: All that certain plot, piece or parcel of land in the Township of Hanover, County of Morris and State of New Jersey, generally known as Block 8901, Lots 3 and 11, and more particularly described in Exhibit A attached hereto and incorporated herein by reference.
(w) Leasehold Mortgage: Any mortgage, deed of trust or similar security instrument which is a lien on the leasehold estate of Tenant created by this Lease, as such security instrument may be amended or modified from time to time.
(x) Leasehold Mortgagee: The holder at any time of a Leasehold Mortgage, and prior to the placement thereof "Leasehold Mortgagee" shall mean the issuer of a commitment for such Leasehold Mortgage.
(y) Legal Requirements: All laws, statutes, ordinances, orders, directives, opinions, rules, regulations and requirements of all federal, state and municipal governments, and the appropriate agencies, offices, bureaus, departments, boards and commissions thereof, whether now or hereafter in force, including, but not limited to Environmental Laws and all covenants, agreements, restrictions and encumbrances contained in any Permitted Encumbrance applicable to the Demised Premises or the use or manner of use of the foregoing.
(z) Notice of Termination: Defined in Section 16.1.
(aa) Other Impositions: The Impositions other than Real Estate Taxes.
(bb) Price Index: The Consumer Price Index for All Urban Consumers, All Items, New York - Northeastern New Jersey, published by the Bureau of Labor Statistics of the United States Department of Labor. If at any time said Consumer Price Index is no longer issued, then the term "Price Index" shall mean a substitute or successor index selected by Landlord and Tenant jointly, or, in the event of their failure to agree, within thirty (30) days after notice by one to the other to such effect, by arbitration in accordance with Article 30 hereof, adjusted, if necessary to be comparable, to said Consumer Price Index.
(cc) Person: The word "person" shall mean a natural person, a partnership, a corporation, a limited liability company, or any other form of business or legal association or entity.
(dd) Real Estate Taxes: All real estate taxes, assessments and water and sewer rents, general or special, ordinary or extraordinary, foreseen or unforeseen, of any kind or nature whatsoever attributable to the Demised Premises, or any part thereof.
(ee) "Rent" shall mean both Fixed Annual Rent and Additional Rent.
(ff) Rent Commencement Date: Subject to the last sentence of Section 11.2(b)(ii) hereof, April 1, 2002.
(gg) Taking: Defined in Section 14.1(a).
(hh) Tenant's Work: Defined in Section 11.6.
(ii) Term: The thirty (30) year period described in Section 2.2., as same may be extended pursuant to the terms hereof, but in any event the Term shall end on any date when this Lease is sooner terminated pursuant to its terms or applicable law.
(jj) Unavoidable Delay: Any delay suffered by a party to this Lease
resulting from any (i) act of God, (ii) fire, flood, earthquake, blizzard, storm
or other casualty, (iii) industry-wide strike, lockout or other labor dispute,
(iv) riot, insurrection, civil commotion, sabotage, vandalism or enemy or
hostile governmental action, (v) industry-wide inability to procure labor,
materials or supplies, (vi) transportation delay or freight embargo, (vii) Legal
Requirements of an unusual nature, including, without limitation, rationing or
restriction in respect of any construction work or the use of labor or
materials, (viii) judicial or other legal restriction or proceeding, actual or
threatened, pertaining to or affecting the performance of any covenant to be
performed hereunder, (ix) failure or delay by the other party to this Lease in
the full and prompt performance of its obligations under this Lease, (x) failure
or delay by any contractor, subcontractor, supplier or materialman, or (xi)
other condition beyond the control of the party suffering the delay provided
that (1) lack of funds shall not be deemed beyond the control of a party, (2)
the affected party must take all reasonable steps to avoid or minimize the delay
and (3) the affected party gives the other party notice of the delay and the
affected party's best estimate of the projected duration of the delay promptly
after the occurrence of the above events.
ARTICLE 2 - DEMISE AND TERM
2.1 Upon and subject to the terms and conditions set forth herein, Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Demised Premises for the Term. Each party hereby expressly covenants and agrees to observe and perform all of the obligations herein contained on its part to be observed and performed.
2.2 The Term shall be the period commencing on the date hereof (the "Commencement Date") and continuing to and ending at midnight of the date which is the thirtieth (30th) anniversary of the Rent Commencement Date (as herein defined) (hereinafter referred to as the "Expiration Date") unless this Lease is sooner terminated. However, if the Term is extended by Tenant's effective exercise of Tenant's right to extend the Term, the "Expiration Date" shall be changed to the last day of the latest extended period as to which Tenant shall have effectively exercised its right to extend the Term. Promptly following the Rent
Commencement Date, the parties hereto shall enter into an agreement in form and substance reasonably satisfactory to Landlord and Tenant setting forth the Rent Commencement Date, but the failure to do so shall not affect the Rent Commencement Date or the Expiration Date.
2.3 (a) Tenant, subject to the provisions of this Section 2.3,
by notice ("Extension Notice") to Landlord to be delivered at least twelve (12)
months prior to the Expiration Date, may extend the term of this Lease for an
additional twenty (20) years (the "Extension Term"), beginning at midnight on
the thirtieth (30th) anniversary of the Rent Commencement Date and expiring on
the fiftieth (50th) anniversary of the Rent Commencement Date. Tenant shall not
be permitted to extend the Term pursuant to this Section 2.3 if this Lease is
not in full force and effect or there is an uncured Event of Default at the time
of delivery of the Extension Notice to Landlord. If Tenant does so extend the
Term, it shall be on all of the terms and conditions contained herein except:
(i) Fixed Annual Rent shall be redetermined in accordance with Section 2.3(b)
and (ii) Tenant shall have no right to further extend the Term.(b) (i) During
the Extension Term, Fixed Annual Rent shall equal the greater of (A) the fair
market rental value of the Demised Premises for a twenty (20) year lease on the
date which is the Expiration Date of the initial Term of this Lease (without
extension), on the basis that the Demised Premises is then unencumbered by this
Lease, and taking into account the facts that Landlord will have no vacancy
period, no broker's commission, and no build-out obligation; and (B) the Fixed
Annual Rent for the final year of the initial Term.
(ii) After receipt of the Extension Notice, Landlord and Tenant shall work together in good faith to establish the Fixed Annual Rent for the twenty (20) year Extension Term. If, within ninety (90) days of delivery of the Extension Notice, no agreement has been reached, and memorialized in writing, as to what the Fixed Annual Rent will be, either party may submit the matter to arbitration pursuant to Article 30 for a binding determination thereon.
(iii) If the Fixed Annual Rent for the Extension Term is not determined by the first day of the Extension Term Tenant shall continue to pay Fixed Annual Rent at the same rate as was being paid on the Expiration Date of the original Term until such determination is made. Once the determination is made, then commencing on the first day of the next calendar month, and continuing thereafter in accordance with Section 3.2, Tenant shall pay 1/12th of the new Fixed Annual Rent. Additionally, there will be a cash adjustment, payable within thirty (30) days of such determination, from Landlord to Tenant or Tenant to Landlord, as appropriate, to correct any overpayment or underpayment for the period commencing on the first day of the Extension Term and ending on the last day of the calendar month in which the determination of the new Fixed Annual Rent is made.
ARTICLE 3 - FIXED ANNUAL RENT
3.1 (a) The fixed annual rent ("Fixed Rent" or "Fixed Annual Rent") for the period from the Rent Commencement Date to the date which is the day immediately preceding the fifth (5th) anniversary of the Rent Commencement Date, is Nine Hundred Sixty Five Thousand ($965,000) Dollars.
(b) Fixed Annual Rent shall be adjusted on the 5th, 10th 15th, 20th
and 25th anniversary of the Rent Commencement Date to equal the sum of: (A) the
Fixed Annual Rent on the day prior to such adjustment, and (B) seventy (70%)
percent of the product of: (y) the Fixed Annual Rent on the day prior to such
adjustment, and (z) a fraction, the numerator of which is the difference between
the Price Index on the date such Fixed Annual Rent adjustment is effective and
the Price Index on the date five (5) years prior to such adjustment date, i.e.,
the Rent Commencement Date, or 5th, 10th, 15th, or 20th anniversary thereof, as
appropriate, and the denominator of which is the Price Index on the date five
(5) years prior to such adjustment date, i.e., the Rent Commencement Date, or
5th, 10th, 15th, or 20th anniversary thereof, as appropriate.
3.2 Subject to this Section 3.2, Tenant shall pay the Fixed Annual Rent to Landlord in equal monthly installments in advance on the first day of each calendar month during the Term. If the Rent Commencement Date is not the first day of a calendar month, Fixed Annual Rent for the period commencing on the Rent Commencement Date and ending on the last day of the calendar month during which the Rent Commencement Date occurs shall be apportioned and shall be paid on the Rent Commencement Date. If the Expiration Date is not the last day of a calendar month, Fixed Annual Rent for the period commencing on the first day of the calendar month during which the Expiration Date occurs and ending on the Expiration Date shall be apportioned and shall be paid on the first day of such calendar month. Fixed Annual Rent for the first full calendar month of the Term following the Rent Commencement Date shall be paid to Landlord on the date hereof. In accordance with Article 11, this first month's Fixed Annual Rent shall be refunded to Tenant upon Tenant's termination of the Lease in accordance with Article 11.
3.3 The Fixed Annual Rent and all Additional Rent and all other charges payable by Tenant hereunder shall be paid promptly when due, without notice or demand therefor, and without deduction, abatement, counterclaim or set-off of any amount for any reason whatsoever except as herein expressly provided to the contrary. All amounts payable by Tenant to Landlord under the provisions of this Lease shall be paid to Landlord in lawful money of the United States at the place provided herein for notices to Landlord or at such other place and/or to such other person as Landlord may from time to time designate by notice to Tenant. Until such time as Landlord shall designate otherwise, all amounts payable by Tenant to Landlord under the provisions of this Lease shall be paid to Landlord's address set forth above.
3.4 In the event that any installment of Rent due hereunder shall be overdue for five (5) days, such overdue Rent, at Landlord's option, shall bear interest at a per annum rate equal to five percent (5%) over the "prime rate" as established by Citibank, N.A. (or its successors) from time to time or the maximum rate permitted by law, whichever is less, commencing on the sixth (6th) day after the due date and continuing thereafter until paid (the "Late Payment Rate").
ARTICLE 4 - NET LEASE AND INDEMNITY
4.1 (a) Except as herein expressly provided to the contrary, this Lease is intended to be, and shall be construed as, an absolute net lease, whereby under all circumstances and conditions (whether now or hereafter existing or within the contemplation of the parties) the Fixed Rent shall be absolutely net to Landlord, and Tenant shall pay any and all claims, liabilities, losses, damages, expenses and costs (including, without limitation, reasonable
attorneys' fees), obligations and charges of every kind and nature whatsoever, which accrue on or after the Rent Commencement Date (or, if expressly set forth herein, the Commencement Date), and throughout the Term in respect of or in connection with the Demised Premises and the ownership, leasing, operation, management, maintenance, repair, rebuilding, restoration, use or occupation thereof or any portion thereof, other than any interest, principal or any other charge in connection with any Fee Mortgage.
(b) Except to the extent expressly provided for in this Lease: (i) no happening, event, occurrence, or situation during the Term whether foreseen or unforeseen, and however extraordinary, shall permit Tenant to quit the Demised Premises or surrender this Lease or shall relieve Tenant from Tenant's obligations hereunder; and (ii) Tenant waives any rights now or hereafter conferred upon it by Legal Requirements, or otherwise, to quit the Demised Premises, or any part thereof, to surrender this Lease or to claim any abatement, diminution, reduction or suspension of Rent on account of any such event, happening, occurrence or situation.
4.2 (a) Tenant shall indemnify and hold harmless Landlord and its partners, members, joint venturers, directors, officers, agents, servants and employees (each, a "Tenant Indemnitee") from and against any and all claims arising from or in connection with (i) the conduct or management of the Demised Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord or its partners, joint venturers, directors, officers, agents, servants or employees) in the Demised Premises during the Term or, if caused by Tenant, during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises; (ii) any act, omission or negligence of Tenant or any of its subtenants or licensees or its or their partners, members, joint venturers, directors, officers, agents, employees or contractors, including, without limitation, pursuant to Sections 5.7 and 6.3; (iii) any accident, injury or damage whatsoever (unless caused solely by Landlord's negligence) occurring in the Demised Premises; and (iv) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; together with all costs, expenses, liabilities, damages, and penalties incurred in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorneys' fees and expenses incurred in connection with each such claim or motion or proceeding and in enforcing this indemnification. In case any action or proceeding is brought against Landlord and/or its partners, members, joint venturers, directors, officers, agents and/or employees in connection with the conduct or management of the Demised Premises or by reason of any claim referred to above, Tenant, upon notice from Landlord shall, at Tenant's cost and expense, resist and defend such action or proceeding by counsel of Tenant's choice reasonably satisfactory to Landlord.
(b) If any claim, action or proceeding is made or brought against any Tenant Indemnitee, which claim Tenant shall be obligated to indemnify against pursuant to the terms of this Lease, then, upon demand by any such Tenant Indemnitee, Tenant, at its sole cost and expense, shall defend such claim, action or proceeding by the attorneys of Tenant's choice, such choice to be subject to the Tenant Indemnitee's approval, which approval shall not be unreasonably withheld or delayed. The attorneys for Tenant's insurer are deemed approved by all Tenant's Indemnitees.
4.3 (a) Landlord shall indemnify and hold harmless Tenant and its members, partners, joint venturers, directors, officers, agents, servants and employees (each, a "Landlord Indemnitee") from and against any and all claims arising from or in connection with any breach or default by Landlord in the full and prompt payment and performance of Landlord's obligations set forth in Article 11 of this Lease; together with all costs, expenses, liabilities, damages, and penalties incurred in connection with each such claim or action or proceeding brought thereon, including, without limitation, all reasonable attorneys' fees and expenses incurred in connection with each such claim or motion or proceeding and in enforcing this indemnification. In case any action or proceeding is brought against Tenant and/or its partners, members, joint venturers, directors, officers, agents and/or employees by reason of any claim referred to above, Landlord, upon notice from Tenant shall, at Landlord's cost and expense, resist and defend such action or proceeding by counsel of Landlord's choice reasonably satisfactory to Tenant.
(b) If any claim, action or proceeding is made or brought against any Landlord Indemnitee, which claim Landlord shall be obligated to indemnify against pursuant to the terms of this Lease, then, upon demand by any such Landlord Indemnitee, Landlord, at its sole cost and expense, shall defend such claim, action or proceeding by the attorneys of Landlord's choice, such choice to be subject to the Landlord Indemnitee's approval, which approval shall not be unreasonably withheld or delayed. The attorneys for Landlord's insurer are deemed approved by all Landlord Indemnitees.
ARTICLE 5 - REAL ESTATE TAXES AND OTHER IMPOSITIONS
5.1. Tenant shall pay directly to the relevant taxing authority as Additional Rent all of the Real Estate Taxes accruing on or after the Rent Commencement Date and thereafter throughout the Term in respect of the Demised Premises. Tenant shall deliver to Landlord copies of the receipted bills or other reasonable evidence of such payment within thirty (30) days following any such payment.
5.2. Tenant shall also pay, as herein provided, all of the Other Impositions levied, assessed or imposed upon or relating to all or any part of the Demised Premises or arising from or levied against the ownership, leasing, operation, use, occupancy or possession of all or any part of the Demised Premises accruing on or after the Rent Commencement Date and thereafter throughout the Term.
5.3. Unless Tenant receives the same directly from the taxing authority, Landlord shall submit to Tenant true copies of the Real Estate Tax bills and any bills which shall be received by Landlord for Other Impositions (not including Other Impositions for which Tenant shall be billed directly or for which Tenant shall be required by law to file a tax return), together with a statement of the facts and information needed to calculate the amounts due and payable from Tenant for such Real Estate Taxes and Other Impositions pursuant to the provisions of Section 5.1 and Section 5.2.
5.4. Tenant shall also pay when due and before any penalty or interest shall be charged thereon directly to the appropriate taxing or other governmental authority all of the Other Impositions for which Tenant shall be billed directly or for which Tenant shall be required by
law to file a tax return, and Tenant shall deliver to Landlord (a) copies of receipted bills for such Other Impositions as shall be paid by Tenant directly to any taxing or other governmental authority within fifteen (15) days after receipt of such bills by Tenant and (b) copies of tax returns filed for such Other Impositions as shall be paid directly by Tenant within fifteen (15) days after payment of such Other Impositions.
5.5.If, by law, any Impositions may be payable at the option of the taxpayer in installments (whether or not interest shall accrue on the unpaid balance thereof), Landlord shall exercise the option to pay same in installments. The installments (and interest thereon) as the same become due and payable shall be included in the computation of Impositions, except that the entire unpaid amount thereof shall be included in the computation of Impositions on the installment payment date thereunder immediately prior to the date which is one year before the expiration of the Term, subject to the apportionment described in Section 5.6.
5.6.Impositions shall be apportioned between Landlord and Tenant as of the Rent Commencement Date and the Expiration Date or sooner termination of this Lease, so that Tenant shall pay only the portion of the Impositions allocable to the Term.
5.7.Tenant has the sole and exclusive right to contest the amount or validity of Impositions allocable to years falling wholly or partially within the Term, in any manner permitted by law, in the name of Tenant, and whenever necessary in the name of Landlord, provided and upon condition that Tenant notifies Landlord of such contest and conducts such contest with due diligence and in good faith and that such contest shall be without cost, liability or expense to Landlord and provided further that Tenant pay such Impositions, unless not legally obligated to do so, pending the outcome of any such contest. Landlord shall cooperate with Tenant and shall execute any documents or pleadings reasonably required for such purpose. Such contest may include appeals from any judgment, decree or order until a final determination is made by a court or governmental department or authority having final jurisdiction in the matter. Tenant will be entitled to 100% of the net amount of any remission, refund, or credit (retrospective or, as to the balance of the Term, prospective) of Impositions paid or payable by Tenant after payment of all related costs and expenses, and Landlord shall be entitled to the remainder of such net amount. Tenant has no obligation to Landlord to undertake, or once undertaken complete, such contest or, except to the extent that a remission refund, or credit relating to the Demised Premises is actually received by Tenant, any liability to Landlord for any amount pursuant to this Section 5.7. Further, Landlord acknowledges Tenant has the sole and exclusive right to conduct such contest as Tenant determines in its sole discretion, including without limitation the right to settle any contest on such terms as Tenant approves in its sole discretion, without obligation or liability to Landlord.
ARTICLE 6 - USE AND COMPLIANCE
6.1.Tenant may use and occupy the Demised Premises for any lawful purpose. Tenant shall not use, improve, occupy or permit or suffer the use, improvement or occupancy of the Demised Premises or any part thereof in any manner which would constitute a violation of Legal Requirements or Insurance Requirements or make void or voidable any insurance then in force with respect thereto, unless such insurance is promptly replaced with substantially similar coverage, or constitute a public or private nuisance.
6.2.(a) Tenant, at Tenant's sole cost and expense, shall promptly comply or cause compliance with all Legal Requirements and Insurance Requirements, foreseen or unforeseen, ordinary as well as extraordinary, whether or not the same shall presently be within the contemplation of the parties hereto and, during the first twenty years of the Term following the Rent Commencement Date, whether or not the same shall require expenditures ("Capital Expenditures") which, in accordance with GAAP, are to be capitalized, including, without limitation, any structural or extraordinary repairs or Alterations.
(b) (i) If, after the twentieth anniversary of the Rent Commencement Date, during the balance of the Term, as extended, compliance with Legal Requirements or Insurance Requirements, requires Capital Expenditures, Landlord and Tenant shall be responsible for the cost thereof, in accordance with Section 6.2(b)(ii), provided, however, to the extent such compliance requiring Capital Expenditures is necessitated by Tenant's change in the use of the Demised Premises from a warehouse/distribution facility with affiliated office space to a materially different use, Tenant shall be solely obligated for the cost of such Capital Expenditures. Upon receiving notice of such a requirement, Tenant shall deliver a notice to Landlord, which notice shall comply with the last sentence of this Section 6.2(b)(i), and which shall include: (A) notice of such requirement; (B) a plan of action including, without limitation, a description of any work to be undertaken; and (C) a budget which may include reasonable supervision fees, and an allocation for overhead, but not profit. Landlord shall have thirty (30) days from delivery of the notice to provide Tenant with whatever comments Landlord might have concerning the information delivered. Landlord and Tenant shall work in good faith to agree on a plan of action. However, if Landlord and Tenant cannot so agree within sixty (60) days of Tenant's original delivery of the described notice, either party may submit the issue to arbitration pursuant to Article 30 hereof for resolution. If Landlord does not respond to Tenant's notice within thirty (30) days of delivery of same Landlord will be deemed to have approved performance by Tenant of the suggested plan of action. Tenant's notice shall specifically set forth, in bold type, that Landlord's failure to respond within thirty (30) days shall be deemed approval of the suggested plan of action.
(ii) (A) Tenant shall perform the approved (or deemed approved) plan of action for Landlord's account and at Landlord's sole cost and expense. The approved (or deemed approved) budget (so long as prepared in good faith) shall not represent a ceiling on the costs to be incurred by Landlord in Tenant's performance of the plan of action, but Tenant shall act in good faith to perform in accordance with such budget and shall keep Landlord informed of any material variations therefrom. The plan of action shall be implemented in the manner set forth in Article 8 in a good and workmanlike manner.
(B) Tenant shall submit invoices for payment or reimbursement to Landlord from time to time, but no more frequently than monthly, for materials on-site, work in place, "soft" costs incurred, and other out-of-pocket costs or expenses reasonably incurred in connection with such work and in accordance with the plan of action. Invoices shall be accompanied by reasonable evidence of third party expenditures, e.g., third party invoices. Landlord shall pay Tenant's invoices within thirty (30) days of receipt.
(C) Upon completion of the plan of action, the total out-of-pocket cost to Landlord of implementing same may be amortized over the useful life of the work
completed, but in no event more than ten (10) years, and the amortized portion of such cost allocable to the remaining initial Term hereof, without extension (if the Legal Requirement or Insurance Requirement is imposed during the initial Term), or the remaining Extension Term (if the Legal Requirement or Insurance Requirement is imposed during the Extension Term ), shall be charged to Tenant, and shall be payable to Landlord, within thirty (30) days of Landlord billing Tenant for same. Landlord and Tenant agree that if a Capital Expenditure is made in the initial Term, and the useful life of the work extends into the Extension Term (if any) Tenant shall not be obligated to pay for the portion of the cost thereof which is allocable to the Extension Term, but that the value of such work shall be taken into account, to the extent appropriate, in determining the Fixed Annual Rent for the Extension Term pursuant to Section 2.3 hereof.
6.3. Tenant, at its sole cost and expense, after notice to Landlord, may contest any Legal Requirement in any manner permitted by law, and Tenant may defer compliance therewith during the pendency of such contest, provided and upon condition that (a) such noncompliance shall not constitute a criminal act on the part of Landlord nor shall the Demised Premises or any part thereof be subject to being condemned or vacated, nor shall the certificate of occupancy for the Building be suspended, (b) such contest shall be without cost, liability or expense to Landlord, and (c) Tenant shall prosecute such contest with due diligence and in good faith. Landlord shall cooperate with Tenant and shall execute any documents or pleadings reasonably required for the purpose of any such contest. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, liabilities, losses, damages, fines, penalties, costs and expenses (including without limitation reasonable attorneys' fees) in connection with Tenant's failure or delay in complying with any Legal Requirement. Tenant may terminate any such contest at any time, in which event Tenant shall promptly pay or perform all of the requirements of such contested Legal Requirement.
6.4. Other than as set forth in Section 11.3, Tenant shall obtain and keep in full force and effect any and all necessary permits, licenses, certificates, or other authorizations required in connection with the lawful and proper use, occupancy, operation and management of the Demised Premises, as same are used from time to time, and Tenant shall indemnify and hold Landlord harmless from and against any and all claims, liabilities, damages, losses, costs and expenses (including without limitation reasonable attorneys' fees) in connection therewith.
6.5. No abatement, diminution or reduction of any Fixed Annual Rent, Additional Rent or other charges payable by Tenant hereunder shall be claimed by or allowed to Tenant for any inconvenience, annoyance, interruption, cessation or loss of business or other occurrence, including, without limitation, such as are caused directly or indirectly by any Unavoidable Delays.
6.6. Without limiting Section 6.2(a) hereof: (a) Tenant agrees that all its activities on the Demised Premises during the Term will be conducted in compliance with Environmental Laws. Except for Landlord's obligations as set forth in Section 11.3, Tenant shall be responsible for obtaining all permits or licenses or approvals under Environmental Laws necessary for Tenant's operation of its business on the Demised Premises and shall make all notifications and registrations required by any applicable Environmental Laws. Tenant shall at all times comply with the terms and conditions of all such permits, licenses, approvals, notifications and registrations and with any other applicable Environmental Laws.
(b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, kept or used in or about the Demised Premises, or transported to or from the Demised Premises, in any manner that violates any Environmental Laws. Tenant shall not cause or permit the release of any Hazardous Materials by Tenant or its agents, contractors, employees or invitees into any environmental media such as air, water or land in any manner that violates any Environmental Laws. If such described release shall occur, Tenant shall (i) clean up or otherwise remedy such release and any associated Contamination to the extent required by, and take any and all other actions required under, applicable Environmental Laws, and (ii) notify and keep Landlord reasonably informed of such release and response.
(c) Tenant shall under no circumstances whatsoever (i) cause or
permit any activity on the Demised Premises which would cause the Demised
Premises to become subject to regulation as a hazardous waste treatment, storage
or disposal facility under RCRA or the regulations promulgated thereunder, or
(ii) discharge Hazardous Materials into the storm sewer system serving the
Demised Premises in any manner that violates any Environmental Laws.
(d) Tenant shall be responsible for all fines, suits, procedures, claims, actions and costs, including, without limitation, attorneys' fees, of any kind arising out of or in any way connected with any spills or discharges of Hazardous Materials at the Demised Premises which occur during the Term unless caused by Landlord, its agents, servants, or employees; and for all fines, suits, procedures, claims and actions of any kind arising out of Tenant's failure to provide all information, make all submissions, and take all actions required by the NJDEP. Tenant shall have no responsibility for the failure of Landlord to provide any information, make any submissions, or take any actions in accordance with Landlord's obligations as set forth in Section 11.3.
(e) Tenant shall provide Landlord with reasonable advance notice of any meetings with, or inspections conducted by, the NJDEP in each instance in connection with ISRA, and Landlord's representatives shall have the right to attend any such meeting or inspection.
6.7.(a) At least ninety (90) days prior to the expiration or earlier termination of this Lease, Tenant agrees to seek a determination from the New Jersey Department of Environmental Protection ("NJDEP") in the form of a Letter of Non-Applicability ("LNA"), that the New Jersey Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq. or any successor Environmental Law ("ISRA"), is inapplicable to the Tenant's cessation of operations and termination of this Lease. Tenant represents, warrants, and covenants that any information contained in any application for an LNA submitted pursuant to this subsection will be true and complete. Tenant represents that the Standard Industrial Classification (SIC) number, as designated in the Standard Industrial Classification Manual prepared by the Office of Management and Budget in the Executive Office of the President of the United States, applicable to Tenant's operations does not subject this transaction to the requirements of ISRA. Landlord shall cooperate in all reasonable aspects with Tenant in obtaining any required governmental action in connection with ISRA, including, without limitation, supplying all information reasonably requested by Tenant, and executing any applications, easements, or other documents Tenant reasonably believes necessary or desirable and which do not increase in any material fashion Landlord's obligations under this Lease. In the event the LNA is granted, Tenant shall promptly provide Landlord with a copy thereof.
(b) In the event that an LNA is denied by NJDEP, notice of such
denial shall be delivered promptly to Landlord. Tenant shall satisfy its
obligations under ISRA prior to the Expiration Date or earlier termination of
this Lease: (i) by securing an approval of the Tenant's Negative Declaration; or
(ii) by securing an approval of the Tenant's Remedial Action Workplan,
completing the implementation of such Plan, and obtaining from NJDEP a "No
Further Action" letter. Tenant shall bear sole responsibility for any
investigation and cleanup costs, fees, penalties, or damages associated with
ISRA compliance. In the event that Tenant is unable to complete its ISRA
compliance obligations by the Expiration Date or earlier termination of this
Lease, Landlord shall continue to provide Tenant with reasonable access to the
Demised Premises, provided that any work undertaken by Tenant shall be performed
in such a manner as to minimize interference with Landlord's or any other
tenant's use of the Demised Premises. However, Landlord reserves its rights to
deem Tenant a holdover tenant in the event that Tenant's ISRA compliance
unreasonably restricts Landlord's or any other tenant's use of the Demised
Premises. Notwithstanding the foregoing, Tenant is not responsible for any
contamination which pre-exists the Approvals Date, including, without
limitation, any contamination discovered in any test performed by Tenant
pursuant to Section 11.4 unless Tenant has caused such contamination.
(c) Tenant shall provide Landlord with copies of all correspondence, documents and reports, including, without limitation, sampling results submitted to or received from any governmental agency or third party in connection with Tenant's compliance with ISRA.
(d) Notwithstanding any of the foregoing to the contrary, in no event shall Tenant be responsible for any compliance or any costs or expenses of any required cleanup or clean-up plan where the spills or discharges which create the need for such compliance, cleanup or plan occurred prior to the Approvals Date unless such spill or discharge is caused by Tenant's acts or omissions or those of its contractors, agents or employees.
(e) Tenant consents to Landlord taking any and all actions on or under the Demised Premises that, in Landlord's reasonable judgment, are necessary to investigate, remediate, or otherwise address environmental conditions at the Demised Premises in satisfaction of Landlord's obligations under this Lease provided, however, Landlord shall take such actions in such manner so as to interfere with Tenant's use and enjoyment of the Demised Premises only to the minimum extent reasonably practicable, and shall promptly restore any damage to the Demised Premises caused by Landlord.
(f) The provisions of this Article 6 shall survive the expiration or earlier termination of this Lease.
ARTICLE 7 - UTILITIES AND SERVICES
7.1. Tenant shall arrange for, and promptly pay when due all amounts and charges for, the providing of all utilities and services required, used, rendered or supplied in or to the Demised Premises accruing after the Rent Commencement Date and thereafter throughout the Term. Except as provided in Article 11, Landlord shall have no obligation to provide for the same.
ARTICLE 8 - REPAIR AND MAINTENANCE
8.1. (a) (i) Tenant shall take good care of the Demised Premises, make all
repairs thereto, interior and exterior, structural and non-structural, ordinary
and extraordinary, foreseen and unforeseen, and shall maintain and keep the
Demised Premises in good order, repair and condition, ordinary wear and tear,
casualty and condemnation excepted. Tenant shall perform the obligation set
forth in the first sentence of this Section 8.1 during the first twenty (20)
years of the Term following the Rent Commencement Date at its sole cost and
expense. If, after the twentieth anniversary of the Rent Commencement Date,
during the balance of the Term, as extended, compliance with the first sentence
of this Section 8.1 requires a Capital Expenditure, Landlord and Tenant shall be
responsible for the cost in accordance with Section 8.1(a)(ii). Upon becoming
aware of such a requirement, Tenant shall deliver a notice to Landlord which
notice shall comply with the last sentence of this Section 8.1(a)(i) and which
shall include: (A) notice of such requirement; (B) a plan of action including,
without limitation, a description of any work to be undertaken; and (C) a budget
which may include reasonable supervision fees, and an allocation for overhead,
but not profit. Landlord shall have thirty (30) days from delivery of the notice
to provide Tenant with whatever comments Landlord might have concerning the
information delivered. Landlord and Tenant shall work in good faith to agree on
a plan of action. However, if Landlord and Tenant cannot so agree within sixty
(60) days of Tenant's original delivery of the described notice, or if Landlord
and Tenant cannot agree as to the necessity for a Capital Expenditure, or the
proper division of the cost of any Capital Expenditure, either party may submit
the issue to arbitration pursuant to Article 30 hereof for resolution. If
Landlord does not respond to Tenant's notice within thirty (30) days of delivery
of same Landlord will be deemed to have approved performance by Tenant of the
suggested plan of action. Tenant's notice shall specifically set forth, in bold
type, that Landlord's failure to respond within thirty (30) days shall be deemed
approval of the suggested plan of action.
(ii) (A) Tenant shall perform the approved (or deemed approved) plan of action for Landlord's account and at Landlord's sole cost and expense. The approved (or deemed approved) budget (so long as prepared in good faith) shall not represent a ceiling on the costs to be incurred by Landlord in Tenant's performance of the plan of action, but Tenant shall act in good faith to perform in accordance with such budget and shall keep Landlord informed of any material variations therefrom. The plan of action shall be implemented in the manner set forth in this Article 8 in a good and workmanlike manner.
(B) Tenant shall submit invoices for payment or reimbursement to Landlord from time to time, but no more frequently than monthly, for materials on-site, work in place, "soft" costs incurred, and other out of pocket costs or expenses reasonably incurred in connection with such work and in accordance with the plan of action. Invoices shall be accompanied by reasonable evidence of third party expenditures, e.g., third party invoices. Landlord shall pay Tenant's invoices within thirty (30) days of receipt.
(C) Upon completion of the required plan of action, the total out-of-pocket cost to Landlord of implementing same may be amortized over the useful life of the work completed, but in no event more than ten (10) years, and the amortized portion of such cost allocable to the remaining initial Term hereof, without extension (if the relevant work becomes required during the initial Term), or the remaining Extension Term (if the relevant work becomes
required during the Extension Term ), may be charged to, and shall be payable to Landlord by Tenant, within thirty (30) days of Landlord billing Tenant for same. Landlord and Tenant agree that if a Capital Expenditure is made in the initial Term, and the useful life of the work extends into the Extension Term (if any) Tenant shall not be obligated to pay for the portion of the cost thereof which is allocable to the Extension Term, but that the value of such work shall be taken into account, to the extent appropriate, in determining the Fixed Annual Rent for the Extension Term pursuant to Section 2.3 hereof.
(iii) Landlord's obligations as set forth in this Section 8.1 shall not relieve Tenant of Tenant's obligation to maintain the Demised Premises in accordance with the first sentence of Section 8.1(a)(i).
8.2. (a) Subject to Section 8.2(b), on at least three (3) business days
prior notice to Tenant, and accompanied at all times by a representative of
Tenant, which representative Tenant shall make available to Landlord, Tenant
shall permit any authorized representative of Landlord and any Fee Mortgagee to
enter the Demised Premises at all reasonable times for the purpose of inspecting
all or any part thereof and, to the extent expressly provided for under this
Section 8.2, making any repairs, replacements and restorations to the Demised
Premises or any part thereof. If Tenant shall fail to perform in any material
fashion its obligations as set forth in Section 6.2 or 8.1 hereof, and such
failure continues for thirty (30) days after notice from Landlord (or, if such
failure cannot reasonably be corrected in thirty (30) days, if Tenant does not
commence to correct such failure within thirty (30) days of notice from Landlord
and thereafter fails to prosecute such correction to completion with due
diligence and in good faith), Landlord and any party designated by Landlord
shall have the right, but not the obligation, to enter the Demised Premises and
perform such work. Tenant shall reimburse Landlord upon demand as Additional
Rent for any cost and expense incurred by Landlord or such designee therefor,
including, without limitation, all incidental costs and expenses (including,
without limitation, reasonable attorneys' fees) in connection therewith. During
the progress of any work Landlord is required or permitted to do under the
provisions of this Lease, Landlord or its designee may bring, keep and store on
the Demised Premises all necessary materials, supplies, equipment and tools, but
shall be obligated to comply with Tenant's reasonable rules as to the storage of
same and the hours during which work is conducted (which Tenant may insist are
outside normal day time business hours), so as to minimize, to the extent
reasonably practicable, the impact of such work on Tenant's operations. Subject
to compliance with the prior sentence, Landlord and its designee shall not in
any event be liable for any inconvenience, annoyance, interruption, cessation or
loss of business or other occurrence as pertains to Tenant or any other occupant
of the Demised Premises or any part thereof on account of entering the Demised
Premises, performing such work, or bringing, keeping or storing any materials,
supplies, equipment or tools into, on or through the Demised Premises, and the
obligations of Tenant under this Lease shall not thereby be affected in any
manner whatsoever.
(b) Notwithstanding Section 8.2(a), if a representative of a governmental agency is demanding that due to an emergency Landlord grant such governmental agency access to the Demised Premises, and contacting Tenant is not reasonable in the circumstances, Landlord may grant such governmental agency access to the Demised Premises to address the emergency.
ARTICLE 9 - MECHANICS' AND OTHER LIENS
9.1. Tenant shall not suffer or permit any mechanics' or other liens (except for leasehold mortgage liens permitted pursuant to Article 32 and such as are caused by any acts or omissions of Landlord) to be recorded or filed against the Demised Premises or any part thereof or against the interests therein of Landlord or Tenant. If any such lien (except for leasehold mortgage liens permitted pursuant to Article 32 and such as are caused by any acts or omissions of Landlord) shall at any time be recorded or filed against the Demised Premises or any such interest therein, and the party recording such lien has commenced any formal legal process to foreclose such lien, Tenant shall cause the same to be discharged of record within thirty (30) days of notice of such commencement by either payment, deposit or bond. If Tenant shall fail to cause any such lien to be discharged of record within such period, Landlord shall have the right (in addition to all other remedies), but not the obligation, to cause the discharge of such lien of record either by paying the amount claimed to be due, by deposit in court or by bond. Tenant shall reimburse Landlord upon demand as Additional Rent for any amount paid or deposited by Landlord therefor, including, without limitation, all incidental costs and expenses (including, without limitation, reasonable attorneys' fees) in connection therewith, together with interest on all such amounts at the Late Payment Rate from the date of payment or deposit by Landlord.
ARTICLE 10 - ALTERATIONS
10.1. (a) Tenant, at Tenant's sole cost and expense, may make from time to
time, without Landlord's consent, any alteration, addition, change, replacement,
installation, improvement, deletion, or removal (herein collectively called
"Alteration"), in or to the Demised Premises, provided, however, in each case
Tenant: (i) shall submit to Landlord copies of marked shop drawings or the final
as-built detailed plans and specifications of such Alteration prepared, if
required by Legal Requirement, by a registered architect or professional
engineer; (ii) shall not demolish the Building, unless a substitute building
with a footprint of at least 250,000 square feet is constructed by Tenant, at
Tenant's sole cost and expense, in replacement of the demolished Building; and
(iii) shall perform any Alteration in compliance with all Legal Requirements and
Insurance Requirements.
(b) If any structural Alteration: (i) changes the footprint of the
Building as initially constructed in accordance with this Lease, or (ii) reduces
the volume of the Building as initially constructed in accordance with this
Lease, or (iii) changes the material used on the facade of the Building as
initially constructed in accordance with this Lease, and in any such instance,
(i), (ii), or (iii), reduces the value of the Building at the time of the making
of such Alteration, or if any Alteration modifies the base building systems such
that the modified system would not be reasonably sufficient to provide
electrical, plumbing, sprinklers, and HVAC services to a Building with between
30,821 and 37,671 square feet of office space and between 206,580 and 252,486
square feet of warehouse/distribution space (Landlord acknowledging it is not
necessary to air condition warehouse/distribution space), then in each instance,
Tenant nonetheless may make such Alteration, but, prior to the expiration or
earlier termination of this Lease, must restore the Demised Premises to the
condition which existed immediately prior to the making of such Alteration,
which restoration obligation, once fulfilled by Tenant, shall be subject to
reasonable wear and tear and Articles 13 and 14 hereof.
(c) Either Landlord or Tenant may request the conclusion of the
other as to whether any proposed or existing Alteration is of the nature that
would require Tenant, absent Landlord consent, to restore the Demised Premises
in accordance with Section 10.1(b). Landlord shall provide such conclusion
within thirty (30) days of being provided the information reasonably required to
make such a conclusion, e.g., plans or specifications, or both, depending on the
relevant Alteration. If Landlord fails to respond timely, Landlord will be
deemed to have concluded the Alteration does not require Tenant to restore the
Demised Premises in accordance with Section 10.1(b). Tenant shall provide such
conclusion within thirty (30) days of Landlord's request. If Tenant fails to
respond timely, Tenant will be deemed to have concluded the Alteration does
require Tenant to restore the Demised Premises in accordance with Section
10.1(b). A party's conclusion shall not bind the other party hereto, but shall
estop the party making (or being deemed to make) such conclusion. Any dispute as
to whether any existing or proposed Alteration requires Tenant to restore the
Demised Premises in accordance with Section 10.1(b) shall be determined by
arbitration pursuant to Article 30. Either Landlord or Tenant may insist on
proceeding to make this determination utilizing any expedited procedures then
being utilized by the American Arbitration Association.
(d) Except as set forth in Section 10.1(b), Tenant shall not have any obligation to remove or restore any Alteration.
(e) No Alteration will cause Fixed Annual Rent to change, provided, however, any Alteration made during the initial Term, without extension, shall be taken into account, to the extent appropriate, in determining the Fixed Annual Rent for the Extension Term pursuant to Section 2.3 hereof. Tenant shall be solely responsible for any change in Additional Rent caused by the making of any Alteration.
(f) To the extent that Landlord, pursuant to Article 8 (but not Article 6), incurs the cost of a Capital Expenditure for any Improvement which Tenant, in the process of making any Alteration, removes, and to the extent that the removal of the improvement for which Landlord has made a Capital Expenditure and the making of the Alteration reduces the value of the Building, and Tenant does not have a restoration obligation pursuant to Section 10.1(b) and has not received Landlord's consent to the relevant Alteration ( this Section 10.1(f) in no way implying any such Landlord consent is needed), Tenant shall reimburse to Landlord the present value of the net loss in value to Landlord's reversionary interest in the Demised Premises, if any, Landlord suffers by the making of the Alteration and the removal of the improvement for which Landlord has made a Capital Expenditure.
10.2 (a) Whether under the provisions of this Lease or otherwise, neither Tenant, nor any subtenant, nor any agent, employee, representative, contractor, or subcontractor of either Tenant or any subtenant, shall have any power or authority to do any act or thing or to make any contract or agreement which will bind Landlord or which may create or be the foundation for any mechanic's lien or other lien or claim upon or against Landlord's interest in the Demised Premises, and Landlord shall have no responsibility to Tenant or to any subtenant, contractor, subcontractor, supplier, materialman, workman or other person, firm or corporation who shall engage in or participate in any construction of any Alteration unless Landlord shall expressly undertake such obligation by an agreement in writing signed by Landlord and made between
Landlord and Tenant, or such subtenant, contractor, subcontractor, supplier, materialman, workman, or other person, firm or corporation.
(b) Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanic's or other lien for any such labor or materials shall attach to or affect the estate or interest of Landlord in and to the Demised Premises.
ARTICLE 11 - SITE PLAN APPLICATION/RIGHT TO
TERMINATE/LANDLORD'S WORK/TENANTS WORK
11.1 (a) Landlord acknowledges that in order to construct the Initial Improvements without seeking a variance and to allow vehicular ingress and egress from and to Parsippany Road and vehicular ingress from Route 10, it is necessary to obtain a zoning change amendment ("Zoning Amendment") to the Township of Hanover (the "Township") ordinance, and approvals ("Access Approvals") from the New Jersey State Department of Transportation ("DOT"), the County of Morris and any other relevant governmental agencies for the described ingress and egress. The Zoning Amendment has been obtained, but is still subject to appeal. The DOT Access Approval has been obtained. Tenant is working to obtain the Morris County Access Approval. If at any time prior to the Approvals Date, the Zoning Amendment, having been adopted, is thereafter repealed, or other legislation is adopted which would necessitate the Tenant obtain variances to construct the Initial Improvements as currently contemplated, other than the currently contemplated sign variances, Tenant may elect to seek the variances it requires to develop the Initial Improvements as currently contemplated. If Tenant so elects, Tenant shall seek to obtain the required variances with due diligence and in good faith, provided, however, that at any time after the Township's repeal of the Zoning Amendment, or the adoption of other legislation which would necessitate the aforesaid variances, Tenant may cease such efforts and terminate this Lease. Landlord may also terminate this Lease, at any time after the Township's repeal of the Zoning Amendment or the adoption of other legislation which would necessitate the aforesaid variances, unless upon receipt of a termination notice from Landlord Tenant affirms to Landlord that Tenant is attempting, with due diligence and in good faith, to obtain the required variances.
(b) If by June 30, 2001: (i) the Zoning Amendment is repealed, or
(ii) any variances requested by Tenant are not received, other than the
currently contemplated sign variances, or (iii) the Access Approvals are not
received, each of (i), (ii), or (iii) beyond any right of appeal, either
Landlord or Tenant, at any time prior to the adoption of the Zoning Amendment,
or the receipt of the requested variances and the receipt of the Access
Approvals, and the expiration of the periods in which any appeals of any may be
brought, may terminate this Lease by notice to the other. In the event this
Lease is terminated pursuant to this Section 11.1 same shall be without force or
effect except for the refund of Rent pursuant to Section 3.2 and the provisions
hereof which expressly survive termination of this Lease, and neither Landlord
nor Tenant shall have any rights against the other except pursuant to such
surviving provisions. If Landlord or Tenant terminates this Lease pursuant to
this Section 11.1(b) after the Approvals Date has occurred such termination
shall be deemed to have occurred pursuant to Section 11.2(b)(iv) for all
purposes of this Lease.
11.2 (a) Tenant, with due diligence and in good faith, at Tenant's sole cost and expense, shall attempt to obtain the Approvals for the construction on the Land of a Building ("Building") and site improvements substantially as shown on Exhibit B annexed hereto and made a part hereof (as Tenant may change same from time-to-time in the manner contemplated in this Section 11.2(a) in connection with working to obtain the Approvals, collectively, the "Initial Improvements"). Tenant's obligations shall include, without limitation, the preparation and submission of a major site plan and minor subdivision application ("Application") with appropriate supporting drawings and documentation to the Planning Board of Hanover Township ("Planning Board") and, in the event the Application is approved by the Planning Board, and Tenant does not exercise its rights pursuant to Section 11.2(b)(iii), the subsequent execution and delivery to the Township of a Developer's Agreement in form and substance reasonably acceptable to Tenant. The Application, in the first instance, shall conform to the Zoning Amendment so as to avoid the need for variances (other than the currently contemplated sign variances). Landlord acknowledges that in working to obtain the Approvals Tenant may determine that a modification to the plans as shown on Exhibit B and/or the Application will facilitate the likelihood of obtaining the Approvals. Accordingly, Tenant shall have the right to modify the plans as shown on Exhibit B and/or the Application from time to time as Tenant, in its good faith judgment, deems appropriate in connection with Tenant working to obtain the Approvals. Landlord shall cooperate in all reasonable means with Tenant in obtaining the Approvals including, without limitation, supplying all information in Landlord's possession reasonably requested by Tenant, executing any applications or other documents Tenant reasonably believes necessary or desirable and which do not increase in other than a de minimus manner Landlord's obligations under this Lease, and attending meetings at Tenant's request to provide testimony in support of the Application, and shall not knowingly taking any actions which would negatively impact the likelihood that Tenant will receive the Approvals. Landlord is free to attend any meetings attended by Tenant with representatives of any governmental body or agency in connection with obtaining any required Approval, for the purpose of Landlord observing the meeting. However, Tenant shall conduct the meeting, and need not solicit, nor follow, Landlord's advice. Tenant has no obligation to inform Landlord of meetings which are to occur, provided, however Tenant, upon request from Landlord, shall inform Landlord of any meetings which, at the time of the response, are then scheduled to occur.
(b) (i) If, despite complying with Section 11.2(a), Tenant fails to
cause the Approvals Date to occur by June 30, 2001, Tenant, at any time until
the Approvals Date has occurred, shall have the right to terminate this Lease by
notice to Landlord and, until Tenant does so, shall continue to comply with
Section 11.2(a) to attempt to cause the Approvals Date to occur.
(ii) If Tenant fails to cause the Approvals Date to occur by December 31, 2001, Landlord, at any time subsequent to December 31, 2001 and prior to Tenant causing the Approvals Date to occur, and subject to the terms of this paragraph, may terminate this Lease. If Landlord delivers notice to Tenant terminating this Lease pursuant to this subparagraph, such notice shall contain a date of termination, which shall be at least ten (10) days after delivery of the notice. Provided no Event of Default shall have occurred and be continuing, Tenant, subject to it having complied with its Section 11.1 and 11.2(a) obligations, prior to the effective date of the termination, may extend, until the six (6) month anniversary of the specified termination date, the period of time in which Tenant may seek to cause the Approvals Date to occur, by
delivering notice of such extension, together with a payment in the amount of
$482,500, to Landlord prior to the specified termination date. Such payment
shall be non-refundable, and deemed earned by Landlord in full upon delivery
thereof. If, by such six (6) month anniversary, Tenant has still not caused the
Approvals Date to occur, and provided no Event of Default shall have occurred
and be continuing, Tenant, subject to it having continued to comply with its
Section 11.1 and 11.2(a) obligations, may extend until the one (1) year
anniversary of the specified termination date the period of time in which Tenant
may seek to cause the Approvals Date to occur, by delivering notice of such
further extension, together with a second $482,500 payment, to Landlord prior to
the end of the first six (6) month extension. This second payment also shall be
non-refundable, and deemed earned by Landlord in full upon delivery thereof. If,
by such one (1) year anniversary, Tenant has still not caused the Approvals Date
to occur, this Lease shall terminate and be of no force or effect except for
those provisions which expressly survive such termination. However, if, during
either effective extension, the Approvals Date does occur, Landlord's
termination notice shall be void, and this Lease shall continue in full force
and effect pursuant to its terms. If Tenant has extended the time in which it
can attempt to cause the Approvals Date to occur pursuant to this Section
11.2(b)(ii), the Rent Commencement Date shall be deemed to be the Approvals
Date, and Tenant shall receive a credit against the first amounts of Fixed
Annual Rent due hereunder (after crediting Tenant for the first month's rent
paid on the date hereof) equal to the pro-rata portion of the relevant $482,500
payment which is allocable to the period of time subsequent to the occurrence of
the Rent Commencement Date ( such payment to be deemed earned evenly over the
six month extension period to which it relates).
(iii) (A) If the Application is approved by the Planning Board, but subject to any "Unacceptable Condition" ( as defined in this subparagraph), Tenant, within ten (10) days of receipt of the Planning Board resolution memorializing the approval of the Application, may terminate this Lease. Further, although Tenant has the obligation to utilize diligent efforts to negotiate a reasonably acceptable Developer's Agreement, it has no obligation to execute or deliver a Developer's Agreement which is not reasonable. An "Unacceptable Condition" is any condition or conditions which limit Tenant's ability to develop the Improvements in all material respects as shown on the final amended Application submitted by Tenant to the Planning Board, or limit Tenant's ability to use and enjoy the Demised Premises, when developed, materially in the manner contemplated by Tenant, or, subject to the balance of this Section 11.2(b)(iii), which necessitate the construction of off-site or off-tract improvements or off-site or off-tract contributions which, in the aggregate, are reasonably projected by Tenant to result in "Off-Site Costs" (as defined in Section 11.3(c)) in excess of either: (y) if the "Landlord's Tract" (as defined in Section 11.3(c)) is delivered to the Township in connection with obtaining the Approvals, $1,575,000, or (z) if the Landlord's Tract is not delivered to the Township in connection with obtaining the Approvals, $1,000,000.
(B) Landlord also shall have the right, subject to the balance of this Section 11.2(b)(iii), to terminate this Lease within ten (10) days of receipt of the Planning Board resolution memorializing the approval of the Application, if the approval of the Application is subject to any condition or conditions which necessitate the construction of off-site or off-tract improvements or off-site or off-tract contributions which, in the aggregate, are reasonably projected by Landlord to result in Off-Site Costs, exclusive of the Off-Site Costs set forth on Exhibit G annexed hereto and made a part hereof, for which Landlord has no responsibility, in
excess of either:(y) if the "Landlord's Tract" (as defined in Section 11.3(c)) is delivered to the Township in connection with obtaining the Approvals, $1,575,000, or (z) if the Landlord's Tract is not delivered to the Township in connection with obtaining the Approvals, $1,000,000.
(C) If Tenant delivers a notice to Landlord to terminate this Lease exclusively due to projected Off-Site Costs exceeding the relevant threshold set forth in Section 11.2(b)(iii)(A), or Landlord delivers a notice to Tenant to terminate this Lease in accordance with Section 11.2(b)(iii)(B), the recipient ("Non-Terminating Party") of such notice shall have the right, but not the obligation, to nullify such termination by delivery to the other party hereto ("Terminating Party"), within ten (10) days of delivery of the termination notice to the Non-Terminating Party, a notice in which the Non-Terminating Party agrees to be solely responsible for the payment of all Off-Site Costs in excess of the relevant threshold set forth in Section 11.2(b)(iii)(A) or Section 11.2(b)(iii)(B), as appropriate ( the Off-Site Costs not in excess of such threshold to be shared between Landlord and Tenant in accordance with Section 11.3(c) hereof).
(iv) If, despite efforts complying with its obligations under
this Article 11, Tenant, after having caused the Approvals Date to occur, fails
to obtain any of the Approvals by December 31, 2001, Tenant, at any time
subsequent to June 30, 2001 and prior to January 10, 2002, but not thereafter,
and subject to Section 11.10, shall have the right to terminate this Lease by
notice to Landlord, such notice to be accompanied by a one-time termination fee
payment to Landlord in the amount of $1,000,000. Additionally, if Landlord, at
Tenant's request, has performed any work pursuant to Section 11.3(b)(ii)(A) or
11.9, Tenant shall reimburse Landlord for the direct out-of-pocket costs
expended by Landlord in performing such work within ten (10) days of Landlord
billing Tenant for such work, such bill to be accompanied by reasonable
documentary evidence of the amounts expended. If Tenant does not so terminate
this Lease Tenant shall continue to attempt to obtain the Approvals. This
Section 11.2(b)(iv) shall survive the expiration or earlier termination of this
Lease.
(v) If this Lease is terminated by Tenant or Landlord pursuant to this Section 11.2 the Lease shall be without force or effect, except for the amount due from Tenant to Landlord pursuant to Sections 11.3(b)(ii)(A) or 11.9, if any, the amount due from Tenant to Landlord pursuant to Section 11.2(b)(iv), if any, and the refund of Rent in accordance with Section 3.2, and the provisions hereof which expressly survive termination of this Lease, and neither Landlord nor Tenant shall have any rights against the other except pursuant to such surviving provisions. Landlord acknowledges no payment is due from Tenant in connection with a termination of the Lease by Tenant pursuant to Sections 11.2(b)(i) or 11.2(b)(iii). This Section 11.2(b)(v) shall survive the expiration or earlier termination of this Lease.
11.3 (a) In connection with obtaining the Approvals for the Initial Improvements, the construction of the Initial Improvements, and the maintenance of the Demised Premises throughout the Term, Landlord, at Landlord's sole cost and expense, shall do the following:
(i) subject to Section 11.9, cause all utilities to be available to the Land, in the locations, and meeting the criteria, set forth on Exhibit B annexed hereto and made a part hereof; and
(ii) subject to Section 11.9, pay all one time sewer application, connection and permit fees (but not review and engineering fees) for not more than 15,100 gallons per day of usage; and
(iii) subject to Section 11.9, construct all off-site improvements in connection with the Route 10 and Parsippany Road driveways to the Demised Premises as required by the DOT Access Approval and otherwise as shown on Exhibit B ( but not any additional off-site improvements required by the County of Morris); and
(iv) subject to Section 11.9, remove from the Demised Premises and dispose of, off the Demised Premises, all Contamination on Lot 3 beyond NJDEP's most stringent clean up criteria for Hazardous Materials; and
(v) in addition to the above, perform the obligations set forth in Sections 11.3(b) and 11.3(c).
(b) (i) (A) Landlord with due diligence and in good faith, shall attempt to obtain all required approvals ( "Landlord DEP Approvals") in connection with its obligations set forth in this Section 11.3(b), including, without limitation, an amendment of the NJDEP Landfill Closure Plan. Landlord shall use diligent efforts to obtain the required modifications to its major disruption of a landfill permit to allow consolidation of the landfill on the Parsippany Road portion of the Demised Premises so that Tenant may construct the Initial Improvements entirely outside the footprint of the relocated landfill. Landlord shall perform all work attendant to the approved disruption, including, without limitation, disposal off of the Demised Premises of any material or importation of any fill or cover material if necessary and will thereafter satisfy all permit conditions. Thereafter, throughout the Term, Landlord, at its sole cost and expense, shall be responsible for all location and re-location of wells, testing, maintenance, and reporting as necessitated by Legal Requirements and compliance with all permit conditions contained in the Major Disruption of Landfill Permit issued by NJDEP. Landlord, in order to comply with its obligations pursuant to this Section, shall be permitted access to the Demised Premises, exclusive of the Building, on three (3) business days notice to Tenant, without Tenant supervision. Landlord shall perform its obligations as set forth in this Section 11.3(b)(i)(A) at its sole cost and expense, provided, however, Tenant shall be responsible for the increase in the cost of the engineering, acquisition, permitting, and installation of a methane gathering and/or disbursement system which is different than the system contemplated in that certain report captioned Whippany Landfill Redevelopment Closure/Post-Closure Plan dated December, 2000 as prepared by Malcolm Pirnie, Inc. . Tenant acknowledges it is currently contemplating a system which is projected to exceed the cost of the originally contemplated system by approximately $100,000 to $200,000. Upon completion of the installation of the system Landlord shall present Tenant with evidence of the calculation of the amount due and amounts actually expended. Tenant shall pay immediately the amount requested, or so much thereof as Tenant agrees is due. If there is a dispute as to any portion of the amount Landlord claims it is
due pursuant to this Section 11.3(b)(i)(A) the amount due Landlord shall be determined pursuant to Article 30.
(B) If, despite Landlord complying with Section 11.3(b)(i)(A), the DEP affirmatively denies Landlord's application for the Landlord DEP Approvals, either party may terminate this Lease by notice to the other. If the Landlord DEP Approvals are not received by August 31 , 2001, Tenant, at any time until the Landlord DEP Approvals are received, shall have the right to terminate this Lease by notice to Landlord. If this Lease is terminated by Tenant or Landlord pursuant to this Section 11.3(b)(i)(B) this Lease shall be without force or effect, except for the refund of Rent in accordance with Section 3.2, and the provisions hereof which expressly survive termination of this Lease, and neither Landlord nor Tenant shall have any rights against the other except pursuant to such surviving provisions.
(ii) (A) Landlord shall raise and grade the Land in accordance
with Exhibit C annexed hereto and made a part hereof, and the Landlord DEP
Approvals. Landlord shall do this work at Landlord's sole cost and expense, but
for (y) a payment of $250,000, and (z) a payment equal to the lesser of (I)
one-half the "Winter Premium Costs" (as defined in Section 11.3(b)(ii)(B)), and
(II) $125,000, each such payment being payable by Tenant to Landlord upon
Landlord's completion of this work. Fill meeting the specifications set forth on
Exhibit D annexed hereto and made a part hereof will be required to achieve
these elevations. It is currently estimated that approximately 21,000 cubic
yards of fill are required. Landlord shall be responsible to pay for the
purchase of 21,000 cubic yards of fill. If additional fill meeting the required
specifications is required for Landlord to perform its work, Tenant shall pay
for same. Landlord shall be responsible for the removal and relocation onto
other portions of the Demised Premises as shown on Exhibit C of all unsuitable
fill within the footprint of the Building, and outside the footprint of the
Building, but within sixty (60) feet thereof which, in Tenant's reasonable
opinion, is unsuitable to support the Initial Improvements. Landlord, absent a
request from Tenant, shall not commence such work. Landlord, subsequent to
issuance of the Landlord DEP Approvals and upon Tenant's request, shall commence
such work and prosecute same in good faith and with due diligence. If Landlord
proceeds to prosecute such work at Tenant's request in accordance with this
prior sentence, and Tenant or Landlord thereafter terminates this Lease pursuant
to Section 11.2(b), Tenant promptly upon demand from Landlord together with
reasonable documentary evidence, shall reimburse Landlord for the costs Landlord
incurred in prosecuting such work including, without limitation, all of the
Winter Premium Costs.
(B) Landlord and Tenant agree that, in all likelihood, if the work described in Section 11.3(b)(ii)(A) is performed in the winter certain costs ( collectively, the "Winter Premium Costs") will have to be incurred in order to prosecute the work in the cold weather. Accordingly, if Tenant requests Landlord to commence such work at any time between November 1, 2001 and February 28, 2002, Landlord shall be free to incur such Winter Premium Costs as good construction practice necessitates. Tenant shall be responsible for one-half such Winter Premium Costs, if any. Landlord shall advise Tenant of all Winter Premium Costs prior to incurring same. If there is a dispute as to which costs incurred by Landlord are Winter Premium Costs, or whether it was proper for Landlord to have incurred same, the dispute shall be determined pursuant to Article 30.
(c) Landlord acknowledges that in connection with obtaining the Approvals, Tenant shall agree to the performance of certain "off-site and off-tract improvements" and the making of certain "off-site and off-tract contributions." In addition to Landlord's obligations set forth in Sections 11.3(a)(i)-(iv), inclusive, and 11.3(b), Landlord shall bear the first $250,000 of costs (collectively, "Off-Site Costs") attributable to any additional off-site and off-tract improvements and off-site and off-tract contributions including, without limitation, the costs of compliance with all obligations set forth in the relevant Developer's Agreement, but excluding any Off-Site Costs incurred in connection with those items set forth on Exhibit G , for which Landlord shall have no responsibility. Off-Site Costs include the costs of sidewalks located on the Demised Premises and adjacent to a public roadway, notwithstanding that such sidewalks are not actually "off-site". If the Off-Site Costs exceed $250,000, Tenant shall bear the next $250,000 thereof. If the Off-Site Costs exceed $500,000, Landlord and Tenant each shall pay one half ofall additional costs of off-site and off-tract improvements and contributions , pari passu. Landlord, promptly upon demand from Tenant together with reasonable documentary evidence, shall reimburse Tenant for Landlord's share of the Off-Site Costs. Tenant acknowledges Landlord has no obligation to dedicate any privately owned land to the Township. Notwithstanding the prior sentence, Tenant and Landlord agree that if Landlord dedicates privately owned land to the Township in connection with the receipt of the Approvals the value thereof will be included as an Off-Site Cost for purposes of this Section 11.3(c). Landlord and Tenant agree that for purposes of the prior sentence Landlord's land consisting of approximately 3 acres and which is adjacent to the Demised Premises ("Landlord's Tract"), if dedicated to the Township ( or alternative governmental body), has a total value of $575,000. Upon contribution of such land to the Township ( or alternative governmental body) Landlord will be deemed to have made the payment of an Off-Site Cost in the amount of $575,000, less the cash or cash equivalent consideration, if any, received by Landlord from the Township ( or alternative governmental body) for such conveyance, and Tenant shall pay to Landlord Tenant's share of such Off-Site Cost.
(d) (i) Landlord and Tenant shall work together so that the responsibilities of Landlord pursuant to this Article 11 are performed in a logical sequence, and in coordination with Tenant's activities, and are completed as soon as is practicable. Notwithstanding the prior sentence, however, if Landlord shall fail to complete any of its obligations as set forth in Section 11.3(a)(iv) or 11.3(b)(ii), within twenty (20) weeks of Tenant requesting Landlord to commence same, or Landlord being obligated to commence same, Tenant may, but need not, enter the Demised Premises and diligently perform and complete any such obligation, in which event Landlord shall reimburse Tenant within ten (10) days of demand for any reasonable cost or expense incurred by Tenant or its designee therefor, including, without limitation, all incidental costs and expenses (including reasonable attorneys' fees) in connection therewith and, in addition thereto, regardless of whether Landlord or Tenant completes such obligations, Tenant shall receive one day of abatement of both Fixed Annual Rent and Additional Rent for each day of delay suffered due to Landlord's failure to timely finish its work as aforesaid.
(ii) (A) Landlord shall secure its obligations as set forth in
this Section 11.3 by depositing into escrow with, at Landlord's election, either
Citibank, N.A. or Chase Manhattan Bank, N.A. or their respective successors
("Escrow Agent") the sum of One Million Two Hundred Fifty Thousand ($1,250,000)
Dollars. Such deposit shall be made within ten (10) days of a request by Tenant
that Landlord commence the work described in Section
11.3(b)(ii)(A). The terms of the escrow agreement shall be subject to the
reasonable approval of Landlord and Tenant. However, the escrow agreement shall
provide that if Tenant makes a demand on Landlord for reimbursement pursuant to
Section 11.3(d)(i) and Landlord fails to make such reimbursement on a timely
basis Tenant may make a demand on Escrow Agent for reimbursement of such amount,
and that Tenant may make such demands on Escrow Agent from time to time as
Tenant elects, provided any such demand will be made within one (1) year of
Tenant's demand on Landlord pursuant to Section 11.3(d)(i). The escrow agreement
also shall provide that as Landlord prosecutes the work described in Sections
11.3(a)(i) to (iv), inclusive and 11.3(b)(ii)(A) Landlord may make a demand on
the Escrow Agent for reimbursement of amounts expended by Landlord, and the
Escrow Agent shall disburse such amounts from time to time in the nature of a
construction loan as the work progresses. Landlord acknowledges that no
disbursements shall be made to Landlord form the escrow account for work
Landlord has performed if, at the time of Landlord's request for reimbursement,
the remaining amount of escrowed funds is less than the amount of money required
to complete Landlord's obligations as set foth in this Section 11.3. The amount
of the escrowed funds is not a limit on the amount Landlord is obligated to
spend to fulfill its obligations as set forth in this Article 11.
(B) Upon Tenant's acknowledgment of the completion of Landlord's obligations as set forth in this Section 11.3 any remaining balance of escrowed funds which has not been previously demanded by Tenant shall be returned to Landlord. Any previously demanded balance which is in dispute shall be held and ultimately delivered in accordance with the dispute resolution provisions of the escrow agreement. Landlord, at any time, may demand Tenant acknowledge that Landlord has completed its obligations under Section 11.3 and Tenant shall respond promptly and reasonably. If Tenant and Landlord cannot agree as to whether Landlord has completed such obligations the issue may be submitted by either party to arbitration in accordance with Article 30.
(e) Tenant shall have the right to approve any third-party contractor to be utilized by Landlord in the performance of any of its work described in this Section 11.3, such approval not to be unreasonably withheld or delayed. Landlord shall submit the name of each proposed contractor, together with reasonable biographical and (if appropriate) financial information to Tenant. Tenant shall have fifteen (15) days to approve or disapprove such contractor, and, in the case of disapproval, explain to Landlord the basis of such disapproval. If Tenant does not respond within said fifteen (15) day period Tenant will be deemed to have approved Landlord's request.
11.4 From and after the Commencement Date Tenant shall have the right to come upon the Demised Premises to perform such tests as it believes appropriate in connection with studying the Land and planning for the design and construction of the Initial Improvements, including, without limitation, environmental, soil and geotechnical testing.
11.5 Promptly after the Approvals Date and subject to Tenant's rights pursuant to Article 11, Tenant, at Tenant's sole cost and expense, with due diligence and in good faith, shall attempt to negotiate an acceptable Developer's Agreement and to satisfy the conditions specified in the resolution adopted by the Planning Board memorializing its approval of the Application. Upon execution and delivery of an acceptable Developer's Agreement and receipt of all
Approvals, Tenant shall commence construction of the Initial Improvements and shall thereafter, with due diligence and in good faith, prosecute such construction to completion. Tenant's costs shall include, without limitation, any required COAH fee.
11.6. Tenant covenants and agrees that construction of the Initial Improvements, as well as any repairs, restorations, building, rebuilding, Alterations and other work which Tenant shall be required or permitted to do under the provisions of this Lease (collectively called "Tenant's Work"), shall be performed in accordance with all Legal Requirements, Insurance Requirements, plans and specifications submitted therefor and approved in any case when approval thereof is required, and all of the other provisions of this Lease.
11.7. No Tenant's Work shall be commenced unless all required municipal and other governmental permits, authorizations and approvals (collectively, the "Approvals") required for the work then being done, including, without limitation, from the DEP, Morris County Planning Board, Morris County Soil Conservation District, Morris County Mosquito Commission, and Hanover Township, shall have been obtained by Tenant. Tenant, with due diligence and in good faith, shall attempt to obtain same. Landlord shall, upon the written request of Tenant, execute any documents reasonably necessary to be signed by Landlord to obtain any such permits, authorizations and approvals, provided and upon condition that same shall be without cost, liability or expense to Landlord.
11.8. During the progress of any work Tenant is required or permitted to do under the provisions of this Lease, Tenant or its designee may bring, keep and store on the Demised Premises all necessary materials, supplies, equipment and tools.
11.9. Landlord shall commence, and thereafter prosecute, the work described in Section 11.3(a)(i)-(iv), inclusive, with due diligence and in good faith promptly after Tenant no longer has a termination right pursuant to this Article 11. Other than at Tenant's request, Landlord need not commence or prosecute the described work while Tenant has a termination right pursuant to this Article 11. If at any time prior to Landlord being obligated to commence and prosecute such work Tenant requests Landlord to do so, Landlord shall do so in good faith and with due diligence. If Tenant or Landlord thereafter terminates this Lease pursuant to Section 11, Tenant, promptly upon demand from Landlord together with reasonable documentary evidence, shall reimburse Landlord for the costs Landlord incurred in prosecuting such work. This Section 11.9 shall survive the expiration or earlier termination of this Lease.
11.10 (a) If Tenant delivers a notice to Landlord to terminate this Lease pursuant to Section 11.2(b)(iv) Landlord may, but need not, seek to obtain whatever Approval or Approvals which Tenant has failed to obtain. If Landlord makes such election it shall notify Tenant of same within ten (10) days of delivery to Landlord of Tenant's termination notice. Failure to deliver such notice shall cause Tenant's termination notice to be effective. If Landlord makes such election it shall proceed with due diligence and in good faith to obtain such Approval or Approvals. If Landlord obtains such Approval or Approvals prior to the later of (i) December 31, 2001, and (ii) the three month anniversary of the date of Tenant's termination notice, this Lease shall remain in full force and effect, the $1,000,000 delivered by Tenant to Landlord\
pursuant to Section 11.2(b)(iv) shall be returned to Tenant within ten (10) days of Landlord obtaining the Approvals with interest thereon at the rate of eight (8%) per cent per annum from the date of delivery of the money to Landlord to the date of return to Tenant, and Tenant shall not be obligated to reimburse Landlord for any out of pocket expenses pursuant to Section 11.2(b)(ii), but Tenant shall reimburse Landlord for all costs reasonably incurred in obtaining the Approval or Approvals. However, if Landlord has not obtained the Approval or Approvals by the later of (i) December 31, 2001, and (ii) the three month anniversary of the date of Tenant's termination notice, this Lease shall terminate immediately and be without force or effect except for the amount due from Tenant to Landlord pursuant to Sections 11.3(b)(ii)(A) or 11.9, if any, the amount due from Tenant to Landlord pursuant to Section 11.2(b)(iv), and the refund of Rent in accordance with Section 3.2, and the provisions hereof which expressly survive termination of this Lease, and neither Landlord nor Tenant shall have any rights against the other except pursuant to such surviving provisions.
(b) Section 34.10 shall be of no force or effect subsequent to Tenant's delivery of a termination notice. Tenant shall be free to pursue alternative locations to the Demised Premises during the period Landlord is working to obtain the needed Approval or Approvals, provided, however, that if Landlord is successful in obtaining the needed Approval or Approvals this Lease shall remain in full force and effect in accordance with Section 11.10(a) regardless of any transactions into which Tenant enters.
11.11 Tenant, except to the extent required by governing securities laws or regulations, shall not issue any press release concerning the execution of this Lease or its construction of the Initial Improvements at the Demised Premises until such time as Tenant no longer has a right to terminate this Lease pursuant to this Article 11.
ARTICLE 12 - INSURANCE
12.1. Tenant shall maintain or cause to be maintained the following insurance:
(a) broad form boiler and machinery insurance with limits for each accident in an amount not less than the full replacement cost of all boiler, pressure vessels, heating, ventilating and air-conditioning equipment and miscellaneous electrical apparatus owned or operated by the Tenant;
(b) commercial general liability insurance against claims occurring in or upon the Demised Premises for bodily injury (including death), personal injury, products and completed operations, blanket contractual liability, owner's and contractor's protective liability, non-owned automobile liability and property damage in limits of not less that $5,000,000 per occurrence. The general liability limit may be lower than $5,000,000 as long as the combined general liability and umbrella liability insurance limits total $25,000,000 on an occurrence basis;
(c) umbrella liability insurance in an amount not less that $20,000,000 per occurrence in excess of the general liability and employer's liability limits;
(d) workers' compensation insurance sufficient to meet all statutory requirements and employer's liability insurance covering accident, injury, illness or death of an employee of the Tenant;
(e) during any period of construction on the Building by Tenant, builder's risk insurance ( completed value form) insuring perils covered by the loss-special form (all risk, extended coverage) shall be purchased for the replacement value of the Alteration when the work is not insured under Tenant's property insurance policy;
(f) insurance covering the Demised Premises against loss or damage by fire, such risks as are customarily included in all risk coverage endorsements and vandalism and malicious mischief, in an amount equal to one hundred percent (100%) of the full replacement cost of the Improvements and in a policy or policies that provide payment of full replacement value without deduction for depreciation, if such one hundred percent (100%) coverage is available from any responsible insurance company of recognized responsibility licensed or authorized to do business in the State of New Jersey, but in any event in amount not less than the amount sufficient to avoid the effect of the co-insurance provisions of the applicable policy or policies; and
(g) rent, or use and occupancy or rental value insurance (which may be maintained as part of business interruption coverage) in an amount at least sufficient to meet the payments for one (1) year of the Fixed Rent provided for in Article 3 and the Impositions provided for in Article 5, the proceeds of which insurance shall be payable directly to Landlord from the insurance carrier, a copy of which policies shall be delivered to and held by Landlord.
12.2. The policies of insurance (except workmen's compensation) to be
maintained by Tenant under the provisions of this Lease shall name as the
insureds Landlord and Tenant as their respective interests may appear, and at
Landlord's request in respect of any specific policy or policies shall name each
Fee Mortgagee as an additional insured (under a standard non-contributing
mortgagee clause attached to such policy or policies whenever applicable).
Tenant shall deliver to Landlord, and each Fee Mortgagee if named as an insured
thereunder, such fully paid-for policies (or certificates thereof) at least ten
(10) days before the Commencement Date. Such policies shall be issued by
responsible companies of recognized responsibility licensed to do business in
the State of New Jersey. Such policies shall contain a provision whereby the
same cannot be canceled unless Landlord, and any Fee Mortgagee if named as an
insured thereunder, are given at least thirty (30) days' prior written notice of
such cancellation. Tenant shall procure and pay for renewals of such insurance
from time to time before the expiration thereof, and Tenant shall deliver to
Landlord, and any Fee Mortgagee if named as an insured thereunder, such renewal
policies (or certificates thereof) at least thirty (30) days before the
expiration of any existing policy. Coverage may be maintained as part of
blanket, multi-property policies, as long as the same shall not adversely affect
the coverage required herein.
12.3. Tenant shall cause any insurance policy in respect of loss or damage
to the Demised Premises to provide that any loss (a) shall be adjusted by Tenant
and Landlord jointly, each acting reasonably, and (b) except as set forth in
Section 12.1(g), shall be paid directly to Tenant.
12.4. In respect of any real, personal or other property located in, at or upon the Demised Premises, and in respect of the Demised Premises itself, Tenant hereby releases Landlord from any and all liability or responsibility to Tenant or anyone claiming by, through or under Tenant, by way of subrogation or otherwise, for any loss or damage caused by fire or any other casualty whether or not such fire or other casualty shall have been caused by the fault or negligence of Landlord or anyone for whom Landlord may be responsible. Tenant shall require its insurance carriers to include in Tenant's policies a clause or endorsement whereby the insurer waives any rights of subrogation against Landlord.
12.5. Tenant shall not carry separate or additional insurance, concurrent in form or contributing in the event of any loss with any insurance required to be maintained by Tenant under this Lease, unless such separate or additional insurance shall comply with and conform to all of the provisions and conditions of this Article 12. Tenant shall promptly give notice to Landlord, and each Fee Mortgagee and Leasehold Mortgagee if named as an insured, of such separate or additional insurance and shall promptly deliver to Landlord, and each Fee Mortgagee and Leasehold Mortgagee, if named as an insured, such fully paid-for policy (or a certificate thereof).
12.6. (a) All insurance provided for in Section 12.1 shall be effected under standard form policies issued by insurers of recognized responsibility, permitted and licensed to do business in the State of New Jersey, rated in Best's Insurance Guide, or any successor thereto (or, if there be none, an organization having a similar function and national reputation) as having a general policyholder rating of at least "A" and a financial rating of at least "XIII".
(b) Tenant, upon written request of Landlord, but no more often then
once every two (2) years, shall obtain and deliver to Landlord, within fifteen
(15) days of such request, a written certification form Tenant's insurer or
independent insurance agent to the effect that the insurance policies then being
maintained by Tenant comply in all material respects with the requirements of
this Article 12.
12.7 (a) Landlord shall obtain and maintain, or cause to be maintained, throughout the Term the following insurance with companies and in form meeting the requirements of Section 12.6:
(i) insurance in the form of the sample policy annexed hereto as Exhibit F and made a part hereof, inclusive of coverages A-L, inclusive, as set forth therein, such policy to be non-cancelable without prior notice to Tenant . Landlord acknowledges that the initial premium due shall cause the insurance to be in place for twenty years. Landlord shall pay the premium or premiums required prior to such premium or premiums being due so that such policy continues in full force and effect throughout the Term. Landlord shall also pay to Tenant from time-to - time, within ten (10) days of demand therefor, the amount of any deductible which reduces the amount of proceeds which would otherwise be payable pursuant to such policy. If Landlord fails to cause the premium or premiums required to be paid to cause such policy to be maintained throughout the Term Tenant, immediately upon receipt of a notice of non-payment either from Landlord or the insurance company, without notice to Landlord, may make such payment or payments to the insurance company (or other appropriate payee) and deduct the amount of any such payment or payments from next payments of Fixed Rent due until Tenant
has been reimbursed for the full amount of such payment or payments together with interest thereon at the Late Payment Rate from the date advanced by Tenant until the date on which Tenant reduces Fixed Rent then payable, due to the making of such payment or payments by Tenant. Similarly, if Landlord does not reimburse Tenant for the amount of any deductible demanded Tenant may deduct the amount of any such deductible from next payments of Fixed Rent due, until Tenant has been reimbursed for the full amount of such deductible together with interest thereon at the Late Payment Rate from the date such deductible was due from Landlord until the date on which Tenant reduces Fixed Rent then payable, due to Landlord's failure to timely make such payment to Tenant. If any amount due Tenant hereunder exceeds the remaining Fixed Rent payable pursuant to this Lease, Landlord's obligation to Tenant shall survive the expiration or earlier termination of this Lease.
(ii) commercial general liability insurance against claims occurring in or upon the Demised Premises for bodily injury (including death), personal injury, products and completed operations, blanket contractual liability, owner's and contractor's protective liability, non-owned automobile liability and property damage in limits of not less that $5,000,000 per occurrence.
(iii) until the occurrence of the Rent Commencement Date, umbrella liability insurance in an amount not less that $20,000,000 per occurrence in excess of the general liability limits.
(b) The Landlord shall cause the Tenant to be named as an additional insured on the aforesaid policies (or a co-insured where specified), which will be the obligation of the Landlord to pay any and all premiums and maintain said coverages during the Term. Any deductible in any of the aforesaid policies shall be the responsibility of the Landlord to pay, including any and all claims made by the Tenant under said policies.
ARTICLE 13 - DAMAGE OR DESTRUCTION
13.1. (a) If the Demised Premises shall be damaged or destroyed by fire or
other cause, whether or not covered by insurance, Tenant, at its sole cost and
expense, shall proceed with reasonable diligence (subject to a reasonable time
allowance for the purpose of adjusting such loss) to repair, restore, replace or
rebuild the Improvements in a manner as nearly as reasonably possible to the
Improvements value, condition, and character immediately prior to such damage or
destruction, subject to such Alterations as Tenant may elect to make in
compliance with Article 10 hereof, and subject to any impositions or limitations
imposed by any then existing Legal Requirement. If Tenant repairs, restores,
replaces or rebuilds the Improvements, all insurance proceeds, subject to
Section 13.5 hereof, shall be paid to, and be the sole property of, Tenant.
However if such damage or destruction occurs within thirty (30) months of the
end of the Term Tenant, within ninety (90) days of such event, may elect to
terminate this Lease by notice to Landlord, which notice shall specify a
termination date for this Lease which shall be no less than sixty (60) days and
no more than one hundred eighty (180) days from the date of the delivery of such
notice, in which event this Lease shall expire on such date as if it was the
stated Expiration Date set forth herein. In such event, Tenant shall have no
repair, restoration,
replacement, or rebuilding obligation, but all insurance proceeds shall be paid to, and be the sole property of, Landlord and Tenant shall pay to Landlord the amount of any applicable deductible.
13.2. Except as expressly provided herein to the contrary, the provisions of this Lease shall be unaffected by any damage or destruction by fire or other cause, whether or not covered by insurance, and Tenant shall remain and continue to be liable throughout the Term for the payment of all Fixed Annual Rent, Additional Rent and other charges payable by Tenant hereunder. Tenant shall not be entitled to any abatement, allowance, reduction or suspension of Rent because part or all of the Demised Premises shall be untenantable owing to the partial or total destruction thereof, provided, however, Landlord shall credit against any Rent obligation payable by Tenant to Landlord hereunder the amount of any proceeds of the insurance carried by Tenant pursuant to Section 12.1(g) hereof paid to Landlord.
13.3. Landlord and Tenant shall cooperate with each other, to such extent as such other party may reasonably require, in connection with the prosecution or defense of any action or proceeding arising out of, or for the collection of, any insurance proceeds that may be due in the event of any loss, and each party will execute, acknowledge and deliver to the other such instruments as may be required to facilitate the recovery of any insurance proceeds. This Section 13.3 shall survive the Expiration Date or earlier termination of this Lease.
13.4. Tenant shall give prompt notice to Landlord of all fires and other occurrences in, on or about the Demised Premises which result in any personal injury or death or in any damage or destruction to the Demised Premises or any part thereof.
13.5. Absent the occurrence and then continuance of an Event of Default, if the amount of the relevant insurance proceeds referenced in Section 13.1 is less than One Million Dollars ($1,000,000) such amount shall be paid directly to Tenant. If the insurance proceeds exceed that amount, or there is a then existing uncured Event of Default, such proceeds, at Landlord's option, shall be paid directly to Tenant or shall be delivered in trust to, at Landlord's election, either Citibank, N.A. or Chase Manhattan Bank, N.A. or their respective successors. Such proceeds shall be disbursed by such institution to Tenant from time to time in the nature of a construction loan as the repair, restoration, replacement or rebuilding of the Improvements by Tenant progresses. All proceeds held by such institution shall be held in an interest bearing account or accounts as selected by Tenant. All interest earned shall be Tenant's sole property and shall be disbursed to Tenant simultaneously with the final disbursement of proceeds to Tenant. Any and all costs incurred in connection with the procedure set forth in this Section 13.5 shall be Landlord's sole responsibility including, without limitation, any fees charged by the financial institution which holds and disburses the proceeds, any fees of such institution's counsel, and any fees of any architects, engineers, or other consultants used by such institution in monitoring the construction of Tenant's progress and in determining the appropriateness of any construction draws, and any title charges or premiums. Any proceeds which remain after the completion of the repair, restoration, replacement or rebuilding of the Improvements by Tenant shall be disbursed to, and be the sole property of, the Tenant. The existence of a then continuing Event of Default shall entitle Landlord to elect to utilize a financial institution as a disbursement agent in accordance with this Section, but shall not afford Landlord any rights in the relevant insurance proceeds Landlord would not otherwise have pursuant to the terms of this Lease other than this
Section 13.5, or entitle Landlord to object to the disbursement of the relevant insurance proceeds to Tenant in accordance with this Section.
ARTICLE 14 - CONDEMNATION
14.1. (a) If all or substantially all of the Demised Premises shall be
taken during the initial Term by exercise of the right of condemnation or
eminent domain, or by agreement between Landlord and those authorized to
exercise such right (either of which being herein called a "Taking"), (a) this
Lease shall terminate on the date of vesting of title under such Taking, (b) the
Fixed Annual Rent and Additional Rent payable by Tenant hereunder shall be
apportioned and paid to the date of vesting of title under such Taking
(including, without limitation, if appropriate, reimbursement of the first
month's Fixed Annual Rent), and (c) the total award or payment made in respect
of the Demised Premises shall be paid to Landlord to be apportioned as
hereinafter provided. For the purposes of this Article 14, substantially all of
the Demised Premises shall be deemed to have been taken if the untaken portion
of the Demised Premises, in Tenant's reasonable opinion, cannot be economically
used for a building with a footprint of at least 250,000 square feet; or if
ingress and egress to and from the Demised Premises, in Tenant's reasonable
opinion, has been materially impaired. The net award or payment, after
reimbursement out of such amounts for any costs and expenses reasonably incurred
by either party (excluding each party's attorney's fees, for which that party
shall be solely responsible) for obtaining same, shall be divided between
Landlord and Tenant as follows: (i) Landlord shall first be entitled to the then
fair market value of the Land as encumbered by this Lease or, if a separate
award is made for the Land, Landlord shall be entitled to such separate award
and (ii) Tenant shall be entitled to "Tenant's Fraction" (as defined in this
Section 14.1), and Landlord shall be entitled to "Landlord's Fraction" (as
defined in this Section 14.1), of the remaining funds, if any. Tenant's Fraction
shall equal a fraction the numerator of which is the number of years (including
partial years) remaining in the initial Term and the denominator of which is
thirty (30). Landlord's Fraction shall equal a fraction the numerator of which
is the number of years (including partial years) which have passed since the
Rent Commencement Date, and the denominator of which is thirty (30).
Additionally, Tenant shall have the right to any separate award which does not
reduce any amount otherwise available to Landlord, for (x) any damage to
Tenant's business, or Tenant's personal property, (y) any moving or business
disruption costs Tenant incurs; or (z) any other separate award Tenant can
receive.
(b) If all or substantially all of the Demised Premises shall be taken during the Extension Term by exercise of the right of condemnation or eminent domain, or by agreement between Landlord and those authorized to exercise such right (either of which being herein called a "Taking"), (a) this Lease shall terminate on the date of vesting of title under such Taking, (b) the Fixed Annual Rent and Additional Rent payable by Tenant hereunder shall be apportioned and paid to the date of vesting of title under such Taking, and (c) the total award or payment made in respect of the Demised Premises shall be paid to Landlord. Tenant hereby assigns any right it may have to any such award, provided, however, Tenant shall have the right to any separate award which does not reduce any amount otherwise available to Landlord, for (x) any damage to Tenant's business, or Tenant's personal property, (y) any moving or business disruption costs Tenant incurs; or (z) any other separate award Tenant can receive.
14.2. In the event of a Taking of less than substantially all of the
Demised Premises during the initial or Extension Term, the net award or payment,
if any, shall be paid to Tenant, excepting only that Landlord shall be entitled
to compensation in respect of the impact of the condemnation on the reversionary
interest of Landlord, if any. If the net award or payment exceeds One Million
($1,000,000) Dollars, or there is a then continuing Event of Default, Landlord
may opt to have the net award or payment paid directly to Tenant or to a
financial institution meeting the requirements set forth in Section 13.5, to be
disbursed to Tenant as restoration progresses, in the manner set forth in
Section 13.5. Tenant, at Tenant's sole cost and expense, shall restore the
Improvements to the condition existing prior to such Taking, or as close thereto
as is reasonably practicable under the circumstances, subject to such
Alterations as Tenant may elect to make in compliance with Article 10 hereof,
and subject to any impositions or limitations imposed by any then existing Legal
Requirement. Other than in respect of the impact on the reversionary interest of
Landlord, if any, Landlord is not entitled to any compensation because Rent will
continue unabated. Tenant shall not be entitled to any abatement, allowance,
reduction or suspension of Rent because part or all of the Demised Premises
shall be untenantable owing to the partial or total taking thereof, provided,
however, Landlord shall credit against any Rent obligation payable by Tenant to
Landlord hereunder the amount of any proceeds of the insurance carried by Tenant
pursuant to Section 12.1(g) hereof paid to Landlord.
14.3. Subject to the provisions of Section 14.2, in the event of a Taking of less than substantially all of the Demised Premises, this Lease shall continue unaffected.
14.4. Any dispute arising under this Article, including, without limitation, any dispute as to the fair market value of the Land maybe submitted to arbitration in accordance with the provisions of Section 30.1.
14.5. In the event of a Taking of all or any part of Tenant's interest
under this Lease during the Term for temporary use or occupancy, (a) this Lease
shall not terminate by reason thereof, (b) Tenant shall continue to pay, in the
manner and at the time herein specified, the full amount of the Fixed Annual
Rent and Additional Rent payable by Tenant hereunder, (c) except to the extent
that Tenant may be prevented from so doing pursuant to the terms of any order of
the condemning authority, Tenant shall perform and observe all of the other
obligations of Tenant hereunder as though such Taking had not occurred, and (d)
Tenant shall be entitled, subject to the following provisions, to the entire
amount of any award or payment made for such Taking, whether paid by way of
damages, rent or otherwise, to be disbursed to Tenant as set forth in Section
14.2. If such period of temporary use or occupancy shall extend beyond the
expiration of the Term, Landlord shall be entitled to receive and retain the
amount of the net award or payment attributable to the period of time subsequent
to the expiration of the Term. Upon the termination of any such period of
temporary use or occupancy during the Term, Tenant, at Tenant's sole cost and
expense, shall restore the Demised Premises to the condition existing
immediately before such Taking.
ARTICLE 15 - LANDLORD'S RIGHT TO CURE TENANT'S DEFAULTS
15.1. If Tenant shall at any time fail to make any payment or perform any other obligation of Tenant hereunder, and such failure shall constitute an Event of Default, then
Landlord shall have the right, but not the obligation, and without waiving or releasing Tenant from any obligations of Tenant hereunder, to make such payment or perform such other obligation of Tenant in such manner and to such extent as Landlord shall deem necessary, and in exercising any such right, to pay any reasonable incidental costs and expenses, employ attorneys, and incur and pay reasonable attorneys' fees. Tenant shall pay to Landlord upon demand as Additional Rent all sums so paid by Landlord and all incidental costs and expenses of Landlord in connection therewith, together with interest thereon at the Late Payment Rate. If Landlord, pursuant to this paragraph, needs to enter upon the Demised Premises or perform work at the Demised Premises the provisions of Section 8.2 relevant to Landlord entering upon the Demised Premises and performing work shall govern Landlord's rights and obligations pursuant to this paragraph.
ARTICLE 16 - CONDITIONAL LIMITATIONS - DEFAULT PROVISIONS
16.1. If at any time prior to or during the Term any one or more of the following events (each of which being called an "Event of Default") shall occur:
(a) if Tenant shall make an assignment for the benefit of its creditors, admit in writing its inability to pay its debts as they become due or file in any court, pursuant to any statute of the United States or of any state, any petition in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceeding;
(b) if any petition shall be filed against Tenant in any court, pursuant to any statute of the United States or of any state or other jurisdiction, in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceeding, and such person shall thereafter be adjudicated a bankrupt, or such petition shall be approved by the court, or the court shall assume jurisdiction of the subject matter, and if any such proceeding shall not be dismissed within one hundred eighty (180) days after the institution thereof;
(c) if in any proceeding a receiver or trustee shall be appointed for all or any portion of the property of Tenant, and such receivership or trusteeship shall not be vacated or set aside within one hundred eighty (180) days after the appointment of such receiver or trustee;
(d) if Tenant shall assign, mortgage or encumber this Lease, or sublet the whole or any part of the Demised Premises, other than as expressly permitted hereunder;
(e) if Tenant shall fail to pay when due any Fixed Annual Rent, or, after being invoiced, any Additional Rent or any other charge payable by Tenant hereunder, and such failure shall continue for fifteen (15) days after notice thereof from Landlord to Tenant; or
(f) if Tenant shall fail to perform or observe any other material obligation on the part of Tenant to be performed or observed, and such
failure shall continue for thirty (30) days after notice thereof from Landlord to Tenant, or in any case where the non-performance or non-observance cannot with due diligence be cured within a period of thirty (30) days, if Tenant shall not commence within such thirty (30) day period and thereafter, with due diligence and in good faith, prosecute to completion all action required to remedy same;
then any time during the continuance of an Event of Default (whether prior to or
during the Term), and prior to Tenant tendering cure of such Event of Default,
in addition to any other rights Landlord may have at law or in equity for
Tenant's default, Landlord shall have the right to give to Tenant notice (herein
called "Notice of Termination") terminating this Lease on the date specified
therefor in such Notice of Termination, which date shall be not less than thirty
(30) days after the date on which such Notice of Termination shall have been
given, and at midnight of the date so designated therefor this Lease and all of
the right, title and interest of Tenant hereunder shall wholly cease and
terminate in the same manner and with the same force and effect as if said date
were the date originally specified herein for the expiration of the Term,
without any right on the part of Tenant to prevent the forfeiture by curing any
default hereunder, and if Tenant shall have taken possession of the Demised
Premises prior to said date Tenant shall then quit and surrender the Demised
Premises to Landlord, but in any event Tenant shall remain liable as hereinafter
provided.
16.2. Upon the occurrence of an Event of Default, or if this Lease shall terminate as provided in this Article 16, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any Person therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises. The words "reenter" and "reentry" as used herein are not restricted to their technical legal meaning. If this Lease is terminated under the provisions of Section 16.1, or if Landlord shall re-enter the Demised Premises under the provisions of this Section 16.2, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceedings or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the Rent payable up to the time of such termination of this Lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in this Article below.
16.3. If this Lease shall terminate under the provisions of Section 16.1,
or if Landlord shall re-enter the Demised Premises under the provisions of
Section 16.2, or in the event of the termination of this Lease, or of re-entry,
by or under any summary dispossess or other proceeding or action or any
provision of law by reason of default hereunder on the part of Tenant, Landlord
shall be entitled to retain all monies, if any, paid by Tenant to Landlord,
whether as advance rent, security or otherwise, but such monies shall be
credited by Landlord against any Rent due from Tenant at the time of such
termination or re-entry or, at Landlord's option, against any damages payable by
Tenant under this Article 16 as set forth below or pursuant to law.
16.4. (a) If this Lease is terminated under the provisions of Section
16.1, or if Landlord shall re-enter the Demised Premises under the provisions of
Section 16.2, or in the event of the termination of this Lease, or of re-entry,
by or under any summary dispossess or other proceeding or action or any
provision of law by reason of default hereunder on the part of Tenant, Tenant
shall pay as Additional Rent to Landlord, at the election of Landlord, the
amount set forth in subparagraph (i) or (ii):
(i) a sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, represents the sum of: (A) the then net present value, discounted at a per annum rate equal to the rate then paid on U.S. Treasuries with a ten (10) year maturity ("Discounted Rate"), of the excess, if any, of (I) the aggregate amount of the Fixed Rent and Additional Rent which would have been payable by Tenant (conclusively presuming the average monthly Additional Rent to be the same as were the average monthly Additional Rent payable for the year, or if less than 365 days have then elapsed since the Rent Commencement Date, the partial year, immediately preceding such termination or re-entry) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, over (II) the aggregate fair market rental value of the Demised Premises for the same period, and (B) if Tenant shall not have performed any obligation Tenant, at the time of the termination, is then obligated to perform pursuant to Articles 13, 14, or 19 hereof, the amounts reasonably required to perform such obligations; or
(ii) the sum of: (A) the Fixed Rent and the Additional Rent which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting applicable to the period that should otherwise have constituted the Term of this Lease, after deduction for Landlord's expenses of altering and preparing the Demised Premises for new tenants, brokers' commissions, legal fees, or other expenses, such expenses to be allocated on a straight line basis over the life of the relevant lease, it being understood that any such reletting may be for a period shorter or longer than the period ending on the Expiration Date; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this subdivision (ii) to a credit in respect of any rents from a reletting, except to the extent that such net rents are actually received by Landlord, and (B) if Tenant shall not have performed any obligation Tenant, at the time of the termination, is then obligated to perform pursuant to Articles 13, 14, or 19 hereof, the amounts reasonably required to perform such obligations. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting.
Landlord acknowledges that during the initial Term Tenant is only paying Rent on the value of the Land, but that subsequent to an Event of Default by Tenant, if Landlord re-leases the Demised Premises for all or a portion of the initial Term (as well as during the Extension Term), Landlord will be receiving Rent on the value of the Improvements and Land. Accordingly, during the initial Term, unless the then rental value of the Improvements and Land
is less than the Rent paid hereunder for just the Land and the other amounts due and unpaid to Landlord by reason of Tenant's default, no damages will be due to Landlord pursuant to this Section 16.4 except, potentially, those described in Sections 16.4(a)(i)(B) or 16.4(a)(ii)(B).
(c) If the Demised Premises or any part thereof should be relet by Landlord before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so relet during the term of the reletting. Landlord shall employ reasonable efforts to re-let the Demised Premises and to mitigate its damages.
16.5. Suit or suits for the recovery of such damages or, any installments thereof, may be brought by Landlord at any time and from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Section 16.1, or under any provision of law, or had Landlord not re-entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as damages by reason of the termination of this Lease or re-entry of the Demised Premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time, whether or not such amount be greater than, equal to, or less than any of the sums referred to in Section 16.4.
16.6 Landlord may restrain any breach or threatened breach of any of Tenant's obligations hereunder, but the mention herein of any particular remedy shall not preclude Landlord from any other remedy it might have either in law or in equity. The failure of Landlord to insist upon the strict performance of any one of Tenant's obligations hereunder or to exercise any right, remedy or election herein contained or permitted by law shall not constitute or be construed as a waiver or relinquishment for the future for such obligation, right, remedy or election, but the same shall continue and remain in full force and effect. Any right or remedy of Landlord in this Lease specified and any other right or remedy that Landlord may have at law, in equity or otherwise upon breach of any of Tenant' obligations hereunder shall be distinct, separate and cumulative rights or remedies, and no one of them, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. The consent of Landlord to any act or matter shall apply only with respect to the particular act or matter to which such consent is given and shall not relieve Tenant from the obligation wherever required under this Lease to obtain the consent of Landlord to any other act or matter.
16.7 No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the Demised Premises prior to the termination of this Lease. The delivery of the keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this Lease or a surrender of the Demised Premises. In the event Tenant at any time desires to have Landlord sublet the Demised Premises for Tenant's account, Landlord or Landlord's agents are authorized to receive said keys for such
purpose without releasing Tenant from any of the obligations under this Lease, and Tenant hereby relieves Landlord of any liability for loss of or damage to any of Tenant's effects in connection with such subletting.
16.8 The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease shall not prevent a subsequent act, which would have originally constituted a violation of the provisions of this Lease, from having all of the force and effect of an original violation of the provisions of this Lease. The receipt by Landlord of Fixed Rent or any other item of Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver is in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Fixed Rent or other item of Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Fixed Rent or other item of Rent, or as Landlord may elect to apply same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Fixed Rent or other item of Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Fixed Rent or other item of Rent or to pursue any other remedy provided in this Lease.
ARTICLE 17 - WAIVER OF TRIAL BY
JURY/NO WAIVER OF COUNTERCLAIM
17.1. (a) Tenant hereby waives all right to trial by jury in any summary or other action, proceeding or counterclaim arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, the Demised Premises and the use and occupancy thereof, and any claim of injury or damages.
(b) Tenant may assert or interpose any legally compulsory counterclaim in any summary proceeding or other action or proceeding to recover or obtain possession of the Demised Premises or to enforce any rights hereunder, including, without limitation, any counterclaim which must be raised due to the so-called "entire controversy" doctrine .
ARTICLE 18 - QUIET ENJOYMENT
18.1. Tenant, upon paying the Fixed Rent and Additional Rent payable by Tenant hereunder, and performing and observing all of the other obligations of Tenant hereunder, shall and may peaceably hold and enjoy the Demised Premises during the Term, without any interruption or disturbance subject, however, to the provisions of this Lease.
ARTICLE 19 - SURRENDER OF PREMISES AND TITLE TO PROPERTY
19.1. Title to the Improvements shall remain in Tenant until the expiration of the Term or earlier termination of the Lease, subject, nevertheless to the terms and conditions of this Lease, at which time title thereto, including without limitation to all Alterations, shall automatically vest in Landlord. Tenant agrees to execute and deliver to Landlord such quit claim deeds, quit claim assignments or other instruments of quit claim conveyance (collectively, the "Instruments of Conveyance") as Landlord reasonably may deem necessary to evidence such transfer of title to Landlord, together with, to the extent assignable, whatever warranties,
guaranties, performance bonds, or similar items relating to such Improvements which then exist. The Instruments of Conveyance shall include an assignment by Tenant of all of Tenant's right, title and interest as Landlord in and to all subleases affecting the Demised Premises if so requested by Landlord.
19.2. Tenant shall, upon the expiration or earlier termination of this Lease for any reason whatsoever, surrender the Demised Premises to Landlord broom clean and in compliance with Tenant's express obligations set forth herein.
19.3. Title to all personal property of Tenant shall remain in Tenant and upon expiration of the Term Tenant may, but need not, remove such personal property. If Tenant elects to remove same Tenant shall promptly repair any resultant damage to the Demised Premises. The provisions of this Section shall survive the expiration or earlier termination of this Lease .
19.4. Any personal property of Tenant which shall remain in, at or upon the Demised Premises for the period of sixty (60) days after the expiration or earlier termination of this Lease may, at the option of Landlord, be retained by Landlord as its sole property or disposed of by Landlord in such manner as Landlord may see fit, without accountability therefor. However, Landlord shall also have the right, by written notice to Tenant, to require Tenant to remove Tenant's personal property at any such time at Tenant's own cost and expense. From and after the termination of the Lease, Landlord shall not be responsible for any loss or damage to any of Tenant's property. This Article 19 shall survive the expiration or earlier termination of the Lease.
ARTICLE 20 - HOLDING OVER
20.1. Tenant acknowledges that this Section 20.1 in no way abrogates Tenant's obligation to deliver possession of the Demised Premises to Landlord in accordance with the terms hereof on the Expiration Date or earlier termination of this Lease. Should Tenant nonetheless hold over in possession after the expiration or earlier termination of this Lease , such holding over shall not be deemed to extend the Term or renew this Lease, and Landlord shall have all of its rights at law and in equity to cause Tenant to be removed from the Demised Premises by summary dispossess action or otherwise; but until such removal is effectuated the tenancy thereafter shall be deemed to continue as a tenancy from month to month at the sufferance of Landlord pursuant to the provisions herein contained and, as Landlord's sole and exclusive benefit for such holding over, at 150% of the Fixed Annual Rent in effect immediately preceding the expiration of the Term for the first six (6) months Tenant holds over, and 200% thereafter plus, in either case, all Additional Rent due hereunder. In no event shall Tenant be liable for damages for such holding over, except for the payment of Rent in the amounts specified in this Section 20.1. This Article 20 shall survive the expiration or earlier termination of the Lease.
ARTICLE 21 - ASSIGNMENT AND SUBLETTING
21.1. (a) Tenant, except as set forth in Section 21.1(b) or Section 21.4, shall not assign this Lease without the prior consent of Landlord, which consent may be withheld in Landlord's sole discretion.
(b) As long as Tenant named herein or a successor permitted pursuant to this subsection (b) is Tenant, Tenant shall have the right, subject to the terms and conditions hereinafter set forth, without the consent of Landlord, to assign its interest in this Lease to any entity which is a successor to Tenant either by merger or consolidation, or which acquires substantially all of the assets of Tenant .
(c) Any assignment described in subsections (a) or (b) may only be
made provided that (i) any such assignee shall continue to use the Demised
Premises in accordance with Section 6.1 hereof, (ii) the principal purpose of
such assignment is not the acquisition of Tenant's interest in this Lease, and
(iii) Tenant, within ten (10) days after execution thereof, shall deliver to
Landlord a duplicate original instrument of assignment in form and substance
reasonably satisfactory to Landlord, duly executed by Tenant and assignee, in
which such assignee shall assume observance and performance of, and agree to be
personally bound by, all of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed.
21.2. (a) Tenant may sublet all or any part or parts of the Demised Premises without the consent of Landlord, provided that (i) each sublease and every renewal, extension or modification thereof shall be in writing and an executed and acknowledged duplicate original thereof shall be delivered to Landlord within ten (10) days after the execution thereof, and (ii) each sublease shall expressly provide that (A) it is subject and subordinate to this Lease, and (B) in the event of termination, reentry or dispossess by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant (as sublessor) under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the provisions of such sublease provided, however, Landlord, except to the extent obligated pursuant to this Lease, shall not be:
(I) liable for any act or omission of Tenant under such sublease, or
(II) subject to any defense or offsets which such subtenant may have against Tenant, or
(III) bound by any previous payment which such subtenant may have made to Tenant more than thirty (30) days in advance of the date upon which such payment was due, unless previously approved by Landlord, or
(IV) bound by any obligation to make any payment to or on behalf of such subtenant, or
(V) bound by any obligation to perform any work or to make improvements to the Demised Premises, or
(VI) bound by any amendment or modification of such sublease prior to Landlord receiving notice of same, or
(VII) bound to return such subtenant's security deposit, if any, until such deposit has come into its actual possession and such subtenant would be entitled to such security deposit pursuant to the terms of such sublease.
(b) In connection with any subletting of the Demised Premises during the Extension Term, if any, but not during the initial Term, Tenant shall pay to Landlord an amount equal to fifty percent (50%) of all Sublease Profit derived therefrom and received by Tenant. All sums payable hereunder by Tenant shall be calculated on an annualized basis, but shall be paid to Landlord, as Additional Rent, within ten (10) days after receipt thereof by Tenant.
(c) For purposes of this Lease:
(i) "Sublease Profit" shall mean the excess of (x) the Sublease Rent over (y) the then Fixed Annual Rent.
(ii) "Sublease Rent" shall mean any rent or other consideration paid to Tenant directly or indirectly by any subtenant or any other amount received by Tenant from or in connection with any subletting (including, but not limited to, sums paid for the sale or rental, or consideration received on account of any contribution, of Tenant's Property or sums paid in connection with the supply of electricity or HVAC) less the Sublease Expenses.
(iii) "Sublease Expenses" shall mean (without duplication):
(v) in the event of a sale of Tenant's personal property, the annual amount of
the then unamortized or undepreciated cost thereof determined on the basis of
Tenant's federal income tax returns, (w) the reasonable out-of-pocket costs and
expenses of Tenant in making such sublease, such as brokers' fees, attorneys'
fees, and advertising fees paid to unrelated third parties, (x) the annual
amount of the cost of improvements or alterations made by Tenant, expressly and
solely for the purpose of preparing the Demised Premises for such subtenancy if
not used by Tenant subsequent to the expiration of the term of the sublease, and
(y) the annual amount of the unamortized or undepreciated cost of any Tenant's
personal property leased to and used by such subtenant. In determining Sublease
Rent, the costs set forth in clauses (w), and (x) shall be amortized on a
straight-line basis over the term of such sublease and the costs set forth in
clauses (v) and (y) shall be amortized on a straight line basis over the
remaining term of this Lease.
(iv) Sublease Profit shall be recalculated from time to time to reflect any corrections in the prior calculation thereof due to (x) subsequent payments received or made by Tenant, (y) the final adjustment of payments to be made by or to Tenant, and (z) mistake. Promptly after receipt or final adjustment of any such payments or discovery of any such mistake, Tenant shall submit to Landlord a recalculation of the Sublease Profit, and an adjustment shall be made between Landlord and Tenant on account of prior payments made or credits received pursuant to this Section 21.2.
21.3. Notwithstanding any assignment or sublease, including, without limitation, any assignment or sublease permitted under this Article, with or without Landlord consent, the original Tenant named herein (or its successor by merger or consolidation) shall remain fully
liable for the payment and performance of all terms, covenants and conditions of this Lease. If this Lease shall be assigned or if the Demised Premises or any part thereof shall be sublet or occupied by any person or persons other than the original Tenant named herein (or its successor by merger or consolidation), Landlord, after the occurrence and during the continuance of an Event of Default, may collect rent from any assignees, subtenants and/or occupants and apply net amounts collected to the Fixed Annual Rent, Additional Rent and other charges payable by Tenant hereunder, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of this Article, or the acceptance of the assignee, subtenant or occupant as Tenant, or a release of any person from the further performance and observance by such person of the obligations hereunder on the part of Tenant to be performed. Any violation of any provision of this Lease, whether by act or omission, by any assignee, subtenant or other occupant, shall be deemed a violation of such provision by both the original Tenant named herein (or its successor by merger or consolidation) and the then Tenant, it being the intention and meaning of the parties hereto that both the original Tenant named herein (or its successor by merger or consolidation) and the then Tenant shall be liable to Landlord for any and all acts and omissions of any and all assignees, subtenants and other occupants of the Demised Premises.
21.4. (a) Any person to which this Lease is assigned pursuant to the provisions of 11 U.S.C. Section 1.01, et seq., as amended from time to time ("Bankruptcy Code"), shall be deemed without further act or deed to have assumed all of the Tenant's obligations arising under this Lease on and after the date of such assignment. Any such assignee shall execute and deliver to Landlord upon demand an instrument confirming such assumption.
(b) If Tenant assumes this Lease and proposes to assign the same
pursuant to the provisions of the Bankruptcy Code to any person who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to Tenant, then notice of such proposed assignment shall be given to Landlord by
Tenant no later than twenty (20) days after receipt by Tenant, but in any event
no later than ten (10) days prior to the date that Tenant shall make application
to a court of competent jurisdiction for authority and approval to enter into
such assignment and assumption. Such notice shall set forth (i) the name and
address of such person, (ii) all of the terms and conditions of such offer, and
(iii) adequate assurance of future performance by such person under the Lease as
referred to in Section 365(b)(3) of the Bankruptcy Code. Landlord shall have the
prior right and option, to be exercised by notice to Tenant given at any time
prior to the effective date of such proposed assignment, to accept an assignment
of this Lease upon the same terms and conditions and for the same consideration,
if any, as the bona fide offer made by such person, less any brokerage
commissions which would otherwise be payable by Tenant out of the consideration
to be paid by such person in connection with the assignment of this Lease,
unless such commissions shall also be payable upon the assignment to Landlord.
21.5 At any time that Tenant named herein or a successor tenant pursuant to Section 21.1(b) shall not be the holder of the tenant's interest under this Lease, a transfer (including the issuance of treasury stock or the creation and issuance of new stock or a new class of stock) of a controlling interest in the shares of Tenant or in any entity which holds an interest in Tenant through one or more intermediaries (if Tenant or such entity is a corporation or trust) or a transfer of a majority of the total interest in Tenant or any entity which holds an interest in
Tenant through one or more intermediaries (if Tenant or such entity is a partnership or other entity) at any one time or over a period of time through a series of transfers shall be deemed an assignment of this Lease and shall be subject to all of the provisions of this Article 21, including, without limitation, the requirement, if applicable, that Tenant obtain Landlord's prior consent thereto. The transfer of shares of Tenant or of any corporation which holds an interest in Tenant through one or more intermediaries for purposes of this Section 21.5 shall not include the sale of shares registered and listed through the "over-the-counter market" or through any recognized stock exchange.
ARTICLE 22 - TENANT REPRESENTATION
22.1 Tenant has leased the Demised Premises after a full and complete examination thereof, as well as the title thereto and its present uses and non- uses, and, subject to the completion of Landlord's work as set forth in Article 11, Tenant accepts the same "as is" without any representation or warranty, express or implied in fact or by law, by Landlord, and without recourse to Landlord as to the title thereto, or the use or uses to which the Demised Premises or any part thereof may be put. Landlord shall not be required to furnish any services or facilities or to make any repairs or alterations in or to the Demised Premises, throughout the Term of this Lease except as expressly set forth in this Lease. In making and executing this Lease, Tenant has relied solely on such investigations, examinations and inspections of the Demised Premises as Tenant has chosen to make or has made and is not relying on any representations, warranties or promises of Landlord. Tenant acknowledges that it has had the opportunity for full and complete investigations, examinations and inspections of the Demised Premises.
ARTICLE 23 - ESTOPPEL CERTIFICATES
23.1. Either party hereto shall, within ten (10) days after each and every request by the other party, execute, acknowledge and deliver to requesting party a statement in writing (a) certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified, and stating the modifications), (b) attaching a true and complete copy of the Lease (as modified), (c) specifying the dates to which the Fixed Annual Rent and Additional Rent payable by Tenant hereunder have been paid, (d) stating whether or not, to the best knowledge of the party executing such statement, the other party is in default in performance or observance of its obligations under this Lease, and, if so, specifying each such default, (e) stating whether or not, to the best knowledge of the party executing such statement, any event has occurred which with the giving of notice or passage of time, or both, would constitute a default by the other party under this Lease, and, if so, specifying each such event, and (f) certifying to such other matters as may be reasonably requested. Any such statement delivered pursuant to this Section may be relied upon by any current or prospective purchaser of the Demised Premises or any current or prospective assignee of Tenant's leasehold estate or any current or prospective Fee Mortgagee or any current or prospective Leasehold Mortgagee.
ARTICLE 24 - INVALIDITY OF PARTICULAR PROVISIONS
24.1. If any provision of this Lease or the application thereof to any person or circumstance shall be to any extent invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.
ARTICLE 25 - SUBORDINATION
25.1. Landlord represents and warrants there is no mortgage encumbering the Demised Premises. Subject to Section 25.5, this Lease is and shall be subject and subordinate to any Fee Mortgage hereafter in effect, and to all renewals, additions, modifications, consolidations, replacements and extensions of all such mortgages, provided and upon condition that in any case the Fee Mortgagee shall agree, by separate nondisturbance agreement in recordable form reasonably acceptable to Tenant and any then existing Leasehold Mortgagee, with due regard for the very substantial investment being made by Tenant at the Demised Premises, that so long as no Event of Default shall be continuing, such Fee Mortgagee shall not disturb the possession or adversely affect the rights of Tenant or any subtenant of Tenant in the Demised Premises in the enforcement of any rights given to such Fee Mortgagee under its Fee Mortgage. Without limiting the general nature of this Section 25.1, any such nondisturbance agreement shall specifically provide that the Fee Mortgagee shall make all insurance proceeds and condemnation awards available to Tenant on the terms set forth in this Lease. Landlord shall deliver to Tenant a true copy of any Fee Mortgage to which this Lease is or shall be subordinate and the separate nondisturbance agreement, if any.
25.2. If any Fee Mortgagee or any other person claiming by or through any
such Fee Mortgagee, or by or through any foreclosure proceeding, sale in lieu of
foreclosure, or otherwise, shall succeed to the rights of Landlord under this
Lease, Tenant shall, at Landlord's request, attorn to and recognize such
successor as the Landlord of Tenant under this Lease, and Tenant shall promptly
execute, acknowledge and deliver at any time any instruments requested by such
person or persons to evidence such attornment. Upon such attornment, this Lease
shall continue as a direct lease from such successor Landlord to Tenant, upon
and subject to all of the provisions of this Lease for the remainder of the
Term, except that the new Landlord shall not be (a) liable to Tenant for any act
or omission, neglect or default on the part of Landlord prior to the date on
which the Fee Mortgagee or other person succeeded to the interest of Landlord,
(b) responsible for any monies owing by or on deposit with Landlord to the
credit of Tenant whether in the nature of security or otherwise, except to the
extent such monies are delivered to the Fee Mortgagee or such other person, (c)
subject to any counterclaim or set-off which theretofore accrued to Tenant
against Landlord, or (d) subject to defense or offsets which Tenant may have
against any prior landlord (including, without limitation, the then defaulting
landlord), or (e) bound by any payment of Rent which Tenant may have made to any
prior landlord (including, without limitation, the then defaulting landlord)
more than thirty (30) days in advance of the date upon which such payment was
due, or bound by any obligation to make any payment to or on behalf of Tenant,
or (f) bound by any obligation to perform any work or to make Improvements to
the Demised Premises, or (g) bound by any amendment or modification of this
Lease made
without its consent or (h) bound by any obligation to perform any work or to make Improvements to the Demised Premises.
25.3. The subordination and attornment provisions of this Article shall be self-operative, and no further instrument of subordination or of attornment shall be required or needed therefor. In confirmation of any such subordination and agreement to attorn on the part of Tenant, Tenant, at the request of Landlord or any Fee Mortgagee, without charge, shall promptly execute, acknowledge and deliver such further reasonable instruments as shall be requested.
25.4. Landlord's reversion or other estate and the leasehold estate of Tenant under this Lease shall not merge, but shall always remain separate and distinct, notwithstanding that both interests shall come into the same person, unless such merger shall have been expressly consented to in writing by any Fee Mortgagee and any Leasehold Mortgagee, whether the Fee Mortgage or Leasehold Mortgage is now or hereafter in effect.
25.5. Tenant acknowledges that in the event of a default by Landlord Tenant's rights against Landlord are limited by Section 34.9(b) hereof to Landlord's equity in the Demised Premises (subject to the exception to such limitation set forth in Section 34.9(b)). In order to avoid the possibility that Landlord might not have any equity in the Demised Premises, Landlord may not encumber the Demised Premises with any mortgage such that the aggregate outstanding principal balances of all Fee Mortgages exceed eighty - five (85%) percent of the fair market value of Landlord's estate in the Demised Premises at the time of the making of such mortgage. Further, every Fee Mortgage shall mandate that all interest which accrues on the outstanding principal balance is payable in full no less frequently than monthly. If Landlord enters into any mortgage which violates this Section 25.5 it shall not be a "Fee Mortgage" for purposes of this Lease and the lien thereof shall be subject and subordinate to this Lease. 25.6 If, in connection with the financing of the Demised Premises, any Fee Mortgagee requests reasonable modifications of this Lease that do not increase Tenant's monetary obligations under this Lease, or adversely affect or diminish the rights (other than to a de minimis extent), or increase the other obligations (other than to a de minimis extent), of Tenant under this Lease, then Tenant shall not unreasonably withhold or delay its consent to the making of such modifications. Moreover, if in connection with any financing of the Demised Premises, any rating agency retained to rate the debt shall request modifications of this Lease in order to improve the proposed rating of such debt, then Tenant shall not unreasonably withhold or delay its consent to the making of such modifications so long as they do not increase the Fixed Rent hereunder. There shall be no cancellation, surrender or material modification of this Lease by joint action of Landlord and Tenant without the prior consent in writing of the Fee Mortgagee.
25.7 If Landlord shall default in the performance or observance of any of the terms, conditions or agreements in this Lease, then Tenant shall simultaneously give written notice thereof to each Fee Mortgagee as to which Landlord shall have notified Tenant, whose address has been provided to Tenant in writing, and to Landlord, and such Fee Mortgagee shall have the right (but not the obligation) to cure such default, provided that such Fee Mortgagee undertakes such cure by written notice to Tenant and Landlord within thirty (30) days after receipt of Tenant's notice. Tenant shall not take any action with respect to such default under this Lease,
including, without limitation, any action to terminate, rescind or void this Lease or to withhold any Rent hereunder, until the earlier of the expiration of such thirty (30) day period or receipt of such notice from such Fee Mortgagee, and if such Fee Mortgagee gives such notice, for a period of twenty (20) business days after Tenant's receipt of such notice from such Fee Mortgagee with respect to any such default capable of being cured by the payment of money and for a period of sixty (60) days after Tenant's receipt of such notice from such Fee Mortgagee with respect to any other such default (provided, that in the case of any default which cannot be cured by the payment of money and cannot with diligence be cured within such sixty (60) day period because of the nature of such default or because such Fee Mortgagee requires time to obtain possession of the Demised Premises or through a receiver in order to cure or cause the cure of the default, if within such sixty (60) day period such Fee Mortgagee shall commence such cure, or proceed to attempt to obtain possession of the Demised Premises or appointment of a receiver, where possession is required to cure such default, and thereafter shall prosecute or cause the receiver to prosecute the curing of such default with diligence and continuity, then the time within which such default may be cured shall be extended for such period as may be reasonably necessary to complete the curing of the same with diligence and continuity).
ARTICLE 26 - BROKER
26.1. Tenant represents to Landlord that no broker or other person had any part, or was instrumental in any way, in bringing about this Lease other than Julien J. Studley, Inc., which Landlord shall pay a commission pursuant to separate agreement. Landlord and Tenant each shall indemnify and hold harmless the other from and against, any claims made by any other broker or other person for a brokerage commission, finder's fee, or similar compensation, by reason of or in connection with this Lease, and any loss, liability, damage, cost and expense (including, without limitation, reasonable attorneys' fees) in connection with such a claim, if such other broker or other person claims to have had dealings with Landlord or Tenant, as appropriate .
ARTICLE 27 - NOTICES
27.1. All bills, statements, notices, consents, approvals, demands and requests which are required or desired to be given by either party to the other hereunder shall be in writing and shall be sent by United States registered or certified mail and deposited in a United States post office, return receipt requested and postage prepaid or by independent overnight courier, e.g., Federal Express. Notices, consents, approvals, demands and requests which are served upon Landlord or Tenant in the manner provided herein shall be deemed to have been given or served for all purposes hereunder on the fifth business day next following a mailing or the first business day next following use of an independent overnight courier.
27.2. All notices, consents, approvals, demands and requests given to Tenant shall be addressed to Tenant at its address set forth in this Lease, Attention: General Counsel, or to such other person or at such other place as Tenant may from time to time designate in a written notice.
27.3. All notices, consents, approvals, demands and requests given to Landlord shall be addressed to Landlord at its address set forth in this Lease, Attention : President, or to such other
person or at such other place as Tenant may from time to time designate in a written notice, with a copy simultaneously delivered to Chris M. Smith, Esq., Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022.
27.4 Counsel to a party may deliver notice on behalf of that party.
ARTICLE 28 - TITLE
28.1. Other than Fee Mortgages, which Landlord may only deliver in accordance with Article 25 hereof, and matters resulting from the permits contemplated in Section 11.3(a)(iii) and 11.3(b), Landlord shall not enter into or suffer the creation of any additional encumbrances of the Land, other than encumbrances to utility providers to the Improvements which Tenant reasonably desires in connection with the completion of Tenant's Work, which encumbrances Landlord shall execute and deliver promptly upon Tenant's request therefor.
ARTICLE 29 - MEMORANDUM OF LEASE
29.1. Either party shall, at the request of the other, execute, acknowledge and deliver, at any time after the date of this Lease, a short form lease prepared by the requesting party in recordable form setting forth a description of the Demised Premises, the duration of the Term (including any renewal term) and any other provisions of this Lease which either party may request, except that the provisions relating to rent shall not be set forth therein unless required by law for the recording of said short form lease. Either party may record said short form lease. Such short form lease shall not change the rights and obligations of the parties under this Lease. Tenant agrees to remove the same of record following the expiration of or termination of this Lease. This Section 29.1 shall survive the expiration or earlier termination of this Lease .
ARTICLE 30 - ARBITRATION
30.1. Either Tenant or Landlord may at any time request arbitration of any matter in dispute but only where arbitration is expressly provided for in this Lease. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in said notice the nature of the dispute, and said dispute shall be determined in Newark, New Jersey, by a single arbitrator, in accordance with the rules then obtaining of the American Arbitration Association or its successor (or any comparable organization agreed to by Landlord and Tenant). The award in such arbitration may be enforced on the application of either party by the order or judgment of a court of competent jurisdiction. The fees and expenses of any arbitration shall be borne by the parties equally, but each party shall bear the expense of its own attorneys and experts and the additional expenses of presenting its own proof.
ARTICLE 31 - EXHIBITION OF PREMISES
31.1. Tenant shall permit Landlord to enter the Demised Premises during usual business hours to exhibit the same for purposes of sale, mortgage or lease provided Tenant is provided at least two (2) business days prior notice, and provided further that a representative of Tenant accompany Landlord and Landlord's guests at all times. Tenant shall make a representative available to Landlord.
ARTICLE 32 - LEASEHOLD MORTGAGES
32.1. Notwithstanding any provision to the contrary, Tenant shall have the right, in addition to any other rights herein granted, to create from time to time a security interest or mortgage covering Tenant's leasehold estate under this Lease and any subleases under a Leasehold Mortgage to an Institutional Lender, and assign this Lease and any subleases as collateral security for such Leasehold Mortgage provided that no Event of Default shall have occurred and be continuing on the date of execution of such Leasehold Mortgage.
32.2. If Tenant shall mortgage its leasehold estate pursuant to Section 32.1, and if the Leasehold Mortgagee shall, within thirty (30) days after execution of the Leasehold Mortgage, send to Landlord notice thereof together with notice specifying the name and address of the Leasehold Mortgagee Landlord agrees that so long as such Leasehold Mortgage shall remain unsatisfied of record or until written notice of satisfaction is given by the Leasehold Mortgagee to Landlord, the following provisions shall apply:
(a) There shall be no cancellation, surrender or material modification of this Lease by joint action of Landlord and Tenant without the prior consent in writing of the Leasehold Mortgagee.
(b) Landlord shall, on serving Tenant with any notice in respect of any default, simultaneously serve a copy of such notice upon the Leasehold Mortgagee at the address for such Leasehold Mortgagee provided to Landlord. The Leasehold Mortgagee shall thereupon have the same period, after service of such notice on it, plus an additional thirty (30) days, to remedy or cause to be remedied the defaults complained of, and Landlord shall accept such performance by or at the instigation of the Leasehold Mortgagee as if the same had been done by Tenant.
(c) Anything herein contained notwithstanding, while the Leasehold Mortgage remains unsatisfied of record, or until written notice of satisfaction is given by the Leasehold Mortgagee to Landlord, if any default shall occur which, pursuant to any provision of this Lease, entitles Landlord to terminate this Lease, and if before the expiration of ten (10) days from the date of service of notice of termination upon the Leasehold Mortgagee the Leasehold Mortgagee shall have notified Landlord of its desire to nullify such notice and shall have paid to Landlord all Fixed Rent and Additional Rent and other charges herein provided for, and then in default, and shall have complied or shall commence the work of complying with all of the other obligations under this Lease, if any are in default, and shall prosecute the same to completion with due diligence, then Landlord shall not be entitled to terminate this Lease, and any notice of termination theretofore given shall be void and of no effect.
(d) Landlord agrees that in the event of termination of this Lease by reason of any default by Tenant other than for nonpayment of Fixed Rent or Additional Rent or other charges herein provided for, that Landlord will upon request of the Leasehold Mortgagee reinstate this Lease for the remainder of the Term with the Leasehold Mortgagee or its nominee substituted as Tenant hereunder, such reinstatement to be effective as of the date of such termination, subject only to the conditions of title as the Demised Premises are subject to on the date of execution of such new lease, and to the rights, if any, of any parties then in possession of
any part of the Demised Premises, provided: (i) the Leasehold Mortgagee or its nominee shall make written request upon Landlord for such reinstatement of this Lease within thirty (30) days after the date on which the Leasehold Mortgagee receives notice of such termination (which notice shall also set forth the sums then due to Landlord under this Lease), and such written request is accompanied by payment to Landlord of sums then due to Landlord under this Lease; (ii) the Leasehold Mortgagee or its nominee shall pay to Landlord at the time of the execution and delivery of said reinstatement of this Lease any and all sums which at the time of the execution and delivery thereof would be due pursuant to this Lease but for such termination and of which Landlord shall have notified the Leasehold Mortgagee, and in addition thereto, any expenses, including reasonable attorneys' fees, to which Landlord shall have been subjected by reason of such default and of which Landlord shall have notified the Leasehold Mortgagee; (iii) the Leasehold Mortgagee or its nominee shall agree to cure any defaults that are capable of being cured by such Leasehold Mortgagee and of Tenant under the terminated lease of which Landlord shall have notified the Leasehold Mortgagee; and upon execution and delivery of such reinstatement of this Lease, any subleases which may have theretofore been assigned and transferred by Tenant to Landlord as security under this Lease shall thereupon be deemed to be held by Landlord as security for the performance of all of the obligations of the tenant under the reinstatement of this Lease; (iv) Landlord shall not warrant possession of the Demised Premises to Tenant under the reinstatement of this Lease; (v) such reinstatement of this Lease shall be expressly made subject to the rights, if any, of Tenant under the terminated lease; and (vi) the tenant under such reinstatement of this Lease shall have the same right, title and interest in and to the Demised Premises as Tenant had under the terminated lease.
(e) Landlord shall, on request, execute, acknowledge and deliver to each Leasehold Mortgagee an agreement, prepared at the sole cost and expense of Tenant, in form reasonably satisfactory to such Leasehold Mortgagee and Landlord, between Landlord, Tenant and such Leasehold Mortgagee, agreeing to all of the provisions of this Section 32.2. For the purposes of this Article 32, Landlord shall and need only recognize such Leasehold Mortgagee whose mortgage is prior in lien to any other Leasehold Mortgage. Landlord without liability to Tenant or any Leasehold Mortgagee with an adverse claim, may rely upon a mortgage title insurance policy or commitment issued by a title insurance company doing business in New Jersey as the basis for determining the appropriate Leasehold Mortgagee who is entitled to the protections of this Article 32.
ARTICLE 33 - RIGHT OF FIRST OFFER
33.1 (a) If, at any time during the Term, Landlord desires to ground lease or sell the Demised Premises , Landlord shall notify Tenant of all of the material terms on which Landlord is willing to enter into any such transaction including, without limitation, price, financing terms (if any), representations Landlord will make (if any), the length of time representations will survive after closing (if any), the indemnifications Landlord will provide (if any), and repairs the or improvements Landlord will make (if any). Tenant shall have thirty (30) days from the receipt of Landlord's notice to elect, by notice to Landlord, to enter into the described transaction. If Tenant so elects, Landlord and Tenant shall proceed with such transaction on the terms and conditions as set forth in Landlord's notice to Tenant. If Tenant fails to timely respond to Landlord Tenant will be deemed to have elected to not enter in to such transaction in which event Landlord shall have one hundred eighty (180) days to enter in to such a transaction
on substantially the same material terms described to Tenant with a third party, including, without limitation, aggregate rent or a purchase price equal to at least ninety five (95%) of the rent or price set forth in Landlord's notice to Tenant. If the transaction with the third party is not fully documented pursuant to executed and delivered contracts within such one hundred eighty (180) day period, or if any material term of the transaction changes in any material manner, Landlord shall be obligated to again offer such transaction to Tenant pursuant to the terms of this Article prior to entering in to same with the third party.
(b) Tenant's rights as described in this Article shall apply each time the named Landlord herein or any affiliated successor landlord desires to enter into any of the described transactions. Upon transfer of the Demised Premises by the named Landlord herein or any affiliated successor landlord to any unaffiliated third party ( and on the condition that such transfer was made in compliance with Tenant's rights pursuant to this Article 33) Tenant's rights pursuant to this Article 33 shall cease and be of no further force or effect.
(c) Except as expressly set forth in Section 33.1(b), Tenant's failure to elect to enter into any transaction offered to it pursuant to this Article 33 shall in no way impact or impair Tenant's rights as set forth in this Lease.
ARTICLE 34 - MISCELLANEOUS
34.1. This Lease constitutes the entire agreement of the parties. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease or in any other written agreement(s) which may be made between the parties concurrently with the execution and delivery of this Lease. All understandings and agreements heretofore had between the parties are merged in this Lease and any other written agreement(s) made concurrently herewith, which alone fully and completely express the agreement of the parties and which are entered into after full investigation. Neither party has relied upon any statement or representation not embodied in this Lease or in any other written agreement(s) made concurrently herewith. The submission of this Lease to Tenant does not constitute by Landlord a reservation of, or an option to Tenant for, the Demised Premises, or an offer to lease on the terms set forth herein and this Lease shall become effective as a lease agreement only upon execution and delivery thereof by Landlord and Tenant.
34.2. No agreement shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, termination or effectuation of abandonment is sought.
34.3. Except as otherwise expressly provided in this Lease, the obligations under this Lease shall bind and benefit the successors and assigns of the parties hereto.
34.4. Exclusive of Tenant's obligations to pay Rent, the time for Landlord or Tenant, as the case may be, to perform any of its respective obligations hereunder shall be extended if and
to the extent that the performance thereof shall be prevented due to any Unavoidable Delay. Except as expressly provided to the contrary, the obligations of Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord have any liability whatsoever to Tenant, (a) because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease due to any of the matters set forth in the first sentence of this Section 34.4, or (b) because of any failure or defect in the supply, quality or character of electricity, water or any other utility or service furnished to the Demised Premises for any reason beyond Landlord's reasonable control.
34.5. Any liability for payments hereunder (including, without limitation, Additional Rent) shall survive the expiration or earlier termination of this Lease.
34.6. This Lease shall be governed by and construed in accordance with the laws of the State of New Jersey. Tenant hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Lease may be brought in the courts of the State of New Jersey, or the Federal District Court for the District of New Jersey, as Landlord may elect. By execution and delivery of this Lease, Tenant hereby irrevocably accepts and submits generally and unconditionally for itself and with respect to its properties, to the jurisdiction of any such court in any such action or proceeding, and hereby waives in the case of any such action or proceeding brought in the courts of the State of New Jersey, or Federal District Court for the District of New Jersey, any defenses based on jurisdiction, venue or forum non conveniens. If any provision of this Lease shall, be invalid or unenforceable, the remainder of this Lease shall not be affected and shall be enforced to the extent permitted by law. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. Tenant specifically agrees to pay all of Landlord's reasonable costs, charges and expenses, including attorneys' fees, incurred in connection with any document review requested by Tenant and upon submission of bills therefor. In the event Landlord permits Tenant to examine Landlord's books and records with respect to any Additional Rent imposed under this Lease, such examination shall be conducted at Tenant's sole cost and expense and shall be conditioned upon Tenant retaining an independent accounting firm for such purposes which shall not be compensated on any type of contingent fee basis with respect to such examination. Wherever in this Lease or by law Landlord is authorized to charge or recover costs and expenses for legal services or attorneys' fees, same shall include, without limitation, the costs and expenses for in-house or staff legal counsel or outside counsel at rates not to exceed the reasonable and customary charges for any such services as would be imposed in an arms length third party agreement for such services.
34.7. (a) Landlord and Tenant represent and warrant to each other that they have full right, power and authority to enter into and form all their respective obligations under this Lease,
without the consent or approval of any other entity or person and make these representations knowing that the other party will rely thereon.
(b) The signatory on behalf of Landlord and Tenant further represent and warrant that they have full right, power and authority to act for and on behalf of Landlord and Tenant entering into this Lease.
34.8. (a) It is expressly understood and agreed that the term "Landlord", as used in this Lease, means only the owner for the time being of the Demised Premises, and in the event of the sale, assignment or transfer by such owner of its or their interest in the Demised Premises and in this Lease, such owner shall thereupon be released and discharged from all of Landlord's obligations thereafter accruing; but such obligations shall be binding upon each new owner for the time being of the Demised Premises. Without limiting the foregoing, Tenant agrees to execute such instrument as any such owner may reasonably require in order to effectuate the foregoing.
(b) The members, managers, partners, shareholders, directors, officers and principals, direct and indirect, comprising Landlord (collectively, the "Parties") shall not be personally liable for the performance of Landlord's obligations under this Lease. Tenant shall look solely to Landlord to enforce Landlord's obligations hereunder and shall not seek any damages against any of the Parties. The liability of Landlord for Landlord's obligations under this Lease, except as expressly stated herein to the contrary in Section 11.3 shall be limited to Landlord's interest in the Demised Premises and Tenant shall not look to any other property or assets of Landlord or the property or assets of any of the Parties in seeking either to enforce Landlord's obligations under this Lease or to satisfy a judgment for Landlord's failure to perform such obligations.
34.9 In the event Landlord or Tenant institutes legal or arbitration proceedings against the other for breach of or interpretation of any of the terms, conditions or covenants of this Lease or any action relating to the Demised Premises, the party against whom a judgment is entered shall pay all reasonable costs and expenses relative thereto, including reasonable attorneys' fees and other costs of prosecution or defense of the prevailing party. The provisions of this Section 34.10 shall survive the expiration or earlier termination of this Lease.
34.10 Prior to the expiration or earlier termination of this Lease Tenant shall not, and shall not permit any of its affiliates to, nor shall Tenant or such affiliates retain any broker or other third party to, solicit information concerning, or conduct negotiations for, any site which site, if obtained by Tenant, would in any manner act as an alternative location to the Demised Premises.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed the day and year first above written.
ATTEST: RIVER PARK BUSINESS CENTER, INC.
Landlord
By: /s/ Amy Neu
-------------------------------------
Amy Neu, President
ATTEST:
Tenant
TIFFANY AND COMPANY
/s/ Tarz F. Palomba By: /s/ James N. Fernandez
-------------------- -------------------------------------
Assistant Secretary James N. Fernandez, Ex. V.P. and CFO
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EXHIBITS
A. DEMISED PREMISES
B. INITIAL IMPROVEMENTS/UTILITY LOCATIONS
C. GRADING
D. FILL SPECIFICATIONS
E. INTENTIONALLY OMITTED
F. SAMPLE ENVIRONMENTAL INSURANCE POLICY
G. EXCLUDED OFF-SITES
EXHIBIT G
COSTS EXCLUDED FROM "OFF-SITE COSTS"
1) Traffic lights at an entrance to the Demised Premises.
2) General overhead items attributable to Tenant's work generally, e.g. insurance and the cost of maintaining a construction trailer on site. (Any item directly attributable to any off-site work or off-tract work, e.g. the application fee for that specific work, is not excluded from Off-Site Costs.)
3) The repair of any damage to streets done by contractors retained by Tenant which is beyond the damage contemplated as part of the ordinary course in the process of the relevant job, the repair cost of which was not part of the budget for the relevant job. 4) Landlord need not lend its credit or worth to any application of Tenant to obtain any bond or similar device. However, if the necessity of the bond or similar device is directly attributable to any off-site work or off-tract work the cost of obtaining and maintaining the bond or similar device is not excluded from Off-Site Costs.
Exhibit 10.145a Tiffany & Co.
Report on Form 10-K
FIRST ADDENDUM TO GROUND LEASE
This FIRST ADDENDUM TO GROUND LEASE ("Addendum") made as of the 29th day of November, 2000, between RIVER PARK BUSINESS CENTER, INC., a Delaware corporation, having an office at 47 Parsippany Road, Whippany, New Jersey 07981 (herein called "Landlord") and TIFFANY AND COMPANY, a New York corporation having an office at 727 Fifth Avenue, New York, New York 10022 (herein called "Tenant").
WITNESSETH:
A. Contemporaneously with delivery of this Addendum, Landlord and Tenant are delivering that certain Ground Lease (herein called "Lease") of even date herewith for Block 8901, Lots 3 and 11. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terns in the Lease.
B. Landlord and Tenant desire to substitute a new Exhibit B, Exhibit C, and Exhibit F for the Exhibits originally attached to the Lease.
C. Landlord and Tenant desire to clarify certain issues concerning the subdivision of Lot 11.
D. Landlord and Tenant desire to modify sections 4.3. 113, 12.7(a)(i), and 34.10 of the Lease.
NOW, THEREFORE, the parties, intending to be legally bound, do hereby agree as follows:
1. Substitution of Exhibits. Exhibit B, Exhibit C and Exhibit F annexed to the Lease are deemed deleted therefrom. Substituted for such Exhibits are the Exhibits attached hereto and incorporated herein by reference. Landlord and Tenant, by mutual written agreement, if each party so elects in its sole discretion, may modify the grading requirements as shown on the new Exhibit C to facilitate the receipt of the "Approvals" (as defined in Section 11.7 of the Lease) or the development of the Initial Improvements.
2. Subdivision of Lot 11. The legal description of the Land set forth on Exhibit A to the Lease includes only part of what is currently Lot 11 (such part of Lot 11, herein called "Tenant's Tract"). The balance of what is currently Lot 11 not included in the legal description set forth on Exhibit A to the Lease (such balance herein called "Landlord's Tract"), i.e., not included in Tenant's Tract, is hereby included in the Demised Premises for the sole purpose of Tenant causing Landlord's Tract to be subdivided from Tenant's Tract. Tenant shall include as part of the "Application" (as defined in Section 11.2 of the Lease) a request for such subdivision and seek approval of same simultaneously with seeking the Approvals in accordance with the terms of the Lease. Upon receipt of final approval of the subdivision described above and the expiration of any applicable appeal period Landlord's Tract shall be excluded from the Demised Premises and Tenant shall have no estate therein.
3. Modification to Section 4.3. The following is added at the end of Section 4.3 of the Lease:
Notwithstanding the foregoing, and without implying that such matters fall within the scope of the foregoing indemnity, Tenant shall not seek indemnification from Landlord pursuant to this Section 4.3 for matters insured under the insurance policy described in
Section 12.7(a)(i), but nothing herein shall relieve Landlord of any obligation it has pursuant to this Lease, nor limit the rights or remedies of Tenant in the event Landlord breaches any such obligation.
4. Modification of Section 11.3(b)(ii)(A)(y). The reference in Section 11.3(b)(ii)(A)(y) to "$250,000" is deleted and substituted therefor is a reference to "$550,000".
5. New Section 11.3(f ). A new Section 11.3(f) is added to the Lease as follows:
Landlord and Tenant acknowledge that the Township of Hanover is going to hire independent consultants to oversee the work to be performed by Landlord pursuant to Section 11.3(b) of this Lease, and the cost of such consultants is going to be imposed by the Township on Landlord or Tenant. Landlord and Tenant agree to share this cost evenly, regardless of the entity on which the Township imposes such cost. Landlord and Tenant shall each find its respective half of any such amounts due as such amounts are payable to the Township or third party consultants.
6. Substitution of Section 12.7 (a)(i). Section 12.7(a)(i) of the Lease is deleted and substituted therefor is the following:
(i) insurance in the form of the sample policy annexed hereto as Exhibit F (hereinafter "the Policy") and made a part hereof, inclusive of coverages set forth therein. Landlord acknowledges that the initial premium due shall cause the insurance to be in place for twenty (20) years. The Policy has renewal provisions and the Landlord agrees to pay premium or premiums being due so that such policy continues in full force and effect throughout the first thirty (30) years of the Term. In the event that the current carrier does not renew the Policy, it is the obligation of the Landlord to secure in favor of Tenant commercially equivalent insurance, or insurance which is as close to commercially equivalent as is reasonably possible, through another carrier for the balance of the Term, unless the current carrier specifies as its reason for nonrenewal claims arising by reason of Tenant's willful misconduct or negligence. Any deductible in the attached Policy will be the obligation of Landlord to pay as to any claim or loss by Tenant falling within the insuring agreement or as to any claim within the insuring agreement filed against Tiffany by any third party until the deductible is satisfied, within thirty (30) days of Tenant's demand therefor, except that Landlord shall not be responsible for payment of the deductible for losses as defined in the Policy caused by the sole negligence or willful misconduct of Tenant. The deductible allows Landlord to be self insured for the deductible but to be primarily responsible to Tenant for any loss within the deductible. If Landlord fills to cause the premium or premiums required to be paid so as to cause such Policy to be maintained throughout the Term or to obtain an alternate policy as provided above, Tenant, immediately upon receipt of a notice of non-payment either from Landlord or the insurance company or a notice of cancellation of the Policy or nonrenewal of the Policy for any reason or in the event of Landlord's failure to procure the alternate policy as above provided, without notice to Landlord, may make such payment or payments to the insurance company (or other appropriate payee) or procure such alternate policy and make the payments required therefor and, in either case, deduct the amount of any such payment or payments from next payments of Fixed Rent due until Tenant has been reimbursed for the full amount of such payment or payments together with interest thereon at the Late Payment Rate from the date advanced by Tenant until the date on which Tenant reduces Fixed Rent then payable, due to the making of such payment or payments by Tenant. Similarly, if Landlord does not reimburse Tenant for the amount of any deductible
demanded as above provided. Tenant may deduct the amount of any such deductible from next payments of Fixed Rent due, until Tenant has been reimbursed for the full amount of such deductible together with interest thereon at the Late Payment Rate from the date such deductible was due from Landlord until the date on which Tenant reduces Fixed Rent then payable, due to Landlord's failure to timely make such payment to Tenant. If any amount due Tenant hereunder exceeds the remaining Fixed Rent payable pursuant to this Lease, Landlord's obligation to Tenant shall survive the expiration or earlier termination of this Lease. If Tenant sustains a loss to which the Landlord's agent or contractor's policy of insurance would respond to cover such loss, then Tenant will submit such claim first against the agent or contractor's policy and not against the Policy until the end of the date Tenant in good faith determines that the other policy of insurance will not respond to the loss or failure to claim against the Policy would prejudice Tenant's ability to recover on the same.
Tenant acknowledges that if it obtains an additional disruption permit for the Demised Premises that such additional permit would be an exclusion to the Policy. If the Tenant desires coverage for such additional disruption permit, it is the Tenant's obligation to secure same at its cost.
5. Alternative Locations. The phrase "or earlier termination of this Lease" on the first line of Section 34.10 is deleted and substituted therefor is the phrase "of all rights of Landlord and Tenant to terminate this Lease pursuant to Article 11 hereof."
6. Ratification. Except as expressly set forth in this Addendum the Lease remains in full force and effect pursuant to its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed as of the day and year first above written.
Landlord:
RIVER PARK BUSINESS CENTER, INC.
By: /s/ Amy Neu
-------------------------------------
Amy Neu, President
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Tenant:
TIFFANY AND COMPANY
By: /s/ James N. Fernandez
-------------------------------------
James N. Fernandez, Ex. V.P. and CFO
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EXHIBIT B
INITIAL IMPROVEMENTS/UTILITY LOCATIONS
As shown on "Preliminary & Final Site Plan Tiffany & Co., Block 8901, Lots 3 & 11, Township of Hanover, Morris County, New Jersey" prepared by Schoor Depalma, dated November 30, 2000, Revised February 19.2001, Project No. B99148D, incorporated herein by reference.
EXHIBIT C
GRADING
As shown on "Section Location Plan Tiffany & Co., Township of Hanover, Morris County, New Jersey" prepared by Schoor Depalma, dated December 22, 2000, Revised February 9, 2001, Project No. B99148D, incorporated herein by reference.
EXHIBIT F
SEE ANNEXED POLICY
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY INSURANCE POLICY DECLARATIONS
CHUBB GROUP OF INSURANCE COMPANIES
15 MOUNTAIN VIEW ROAD
WARREN, NJ 07059
Producer No. 93581 Policy Number 3725-35-05
Effective Date June 15, 2001
Producer Marsh USA Risk and Insurance Services, Inc.
One California Street, 7th Floor Issued by the stock insurance company
San Francisco, CA 94111 indicated below herein called the company
FEDERAL INSURANCE COMPANY
Incorporated under the laws of Indiana
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ITEM 1. NAMED INSURED
RIVER PARK BUSINESS CENTER, INC.
47 PARSIPPANY ROAD
WHIPPANY, NJ 07981
ITEM 2. POLICY PERIOD
From: June 15, 2001 To: June 15, 2001
12:01 A.M. standard time at the name insured's mailing address shown above.
ITEM 3. LIMITS OF INSURANCE
$20 million Each Pollution Incident Loss Unit $20 million Each Physical Damage to Landfill Containment System Incident Limit. $30 million Total Aggregate Limit |
ITEM 4. DEDUCTIBLE
$100,000 Each Pollution Incident - Insuring Agreements A, B, C and D
$100,000 Each Damage to the Landfill Containment System Incident - Insuring
Agreement E
$500,000 Total Aggregate Deductible
$ 25,000 Each and Every Maintenance Deductible
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ITEM 5. INSURED SITE(S) AND ADDRESS(ES)
Block 8901, Lots 3 and 11, Township of Hanover, County of Morris, State of New Jersey
Authorization:
In witness whereof, the Company issuing this policy has caused this policy to be signed by its authorized officers, but this policy shall not be valid unless also signed by a duly Authorized Representative of the Company.
CHUBB CUSTOM INSURANCE COMPANY
President Secretary
Authorized Representative
Date
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
Words and phrases that appear in BOLD print have special meanings and are defined in the Definitions section of this contract. The descriptions in any titles or headings of this policy or in any endorsements are inserted solely for convenience or reference and do not in any way limit or affect the provision to which they relate.
Throughout this contract the words "you" and "your" refer to the NAMED INSURED shown in the Declarations of this policy and any other person or organization qualifying as a NAMED INSURED under this contract. The words "we," "us" and "our" refer to the company providing this insurance.
SECTION I. COVERAGE
1. INSURING AGREEMENTS
A. BODILY INJURY AND PROPERTY DAMAGE - PRE-EXISTING AND NEW POLLUTION
INCIDENT
We will pay LOSS that the insured becomes legally obligated to pay as a result of claims for bodily injury or property damage, resulting from a POLLUTION INCIDENT, that is on, under or migrating beyond the boundaries from the INSURED SITE, provided such CLAIMS are first made against the insured and reported to us in writing during the POLICY PERIOD, or during the EXTENDED REPORTING PERIOD if applicable.
B. ON-SITE REMEDIATION COSTS AFTER LANDFILL DISRUPTION IS COMPLETE
We will pay REMEDIATION COSTS resulting from the discovery of a POLLUTION INCIDENT, that is on or under the INSURED SITE, provided that such POLLUTION INCIDENT is reported to us in writing as soon as possible after DISCOVERY and in any event during the POLICY PERIOD, and provided that such discovery takes place after the DELINEATION DATE.
C. THIRD-PARTY CLANS FOR OFF-SITE REMEDIATION COSTS
We will pay LOSS that the insured becomes legally obligated to pay as a result of CLAIMS for REMEDIATION COSTS, resulting from a POLLUTION INCIDENT that is migrating beyond the boundaries from the INSURED SITE, provided such CLAIMS are first made against the insured and reported to us in writing during the POLICY PERIOD, or during the EXTENDED REPORTING PERIOD if applicable.
D. THIRD-PARTY CLAIMS FAR ON-SITE REMEDIATION COSTS-TIFFANY AND COMPANY ONLY
We will pay LOSS, that Tiffany and Company becomes legally obligated to pay as a result of CLAIMS for REMEDIATION COSTS resulting from a POLLUTION INCIDENT that is on or under the INSURED SITE, provided such CLAIMS are first made against Tiffany and Company and reported to us in writing during the POLICY PERIOD, or during the EXTENDED REPORTED PERIOD if applicable.
E. LANDFILL DAMAGE
We will pay LANDFILL RESTORATION COSTS arising from the discovery of physical damage to the LANDFILL CONTAINMENT SYSTEM provided be physical damage commences after the DELINEATION DATE and provided that such physical damage to the LANDFILL CONTAINMENT SYSTEM is reported to us in writing as soon as possible after DISCOVERY and in any event during the POLICY PERIOD.
2. DEFENSE AND SETTLEMENT
We will have the right to defend the insured against a CLAIM to which this insurance applies, provided however, that such duty to defend or continue defending such CLAIM ends once the Limits Of Insurance are exhausted. LEGAL EXPENSES are included in LOSS, reduce the Limits Of Insurance, and are included within the Deductible shown in Item 4 of the Declarations.
3. EXCLUSIONS
This insurance does not apply to any loss or LANDFILL RESTORATION COSTS:
A. Asbestos and Lead
due to or arising from asbestos or any asbestos-containing materials or lead-based paint installed or applied in, on or to any building or other structure.
B. Contractual Liability
for which the INSURED is legally obligated to pay by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability:
- Arising from the final executed lease agreement between NAMED INSUREDS to be submitted;
- Arising from the Tiffany and company contract with Jeffrey M. Brown Associates, Inc. dated April 6, 2001 for the construction of the Tiffany and Company Customer Fulfillment Center; or
- that the INSURED would have in the absence of such contract or agreement.
C. Damage to Property Owned
due to or arising from PROPERTY DAMAGE to property owned or leased by an
INSURED.
D. Employer's Liability
for BODILY INJURY to the INSURED or an employee of its parent, subsidiary or affiliate arising out of and in the course of employment by the INSURED or its parent, subsidiary or affiliate. This exclusion applies:
- whether the INSURED may be liable as an employer or in any other capacity; and
- to any obligation to share damages with or repay someone else who must pay damages because of such BODILY INJURY.
E. Fines, Penalties Or Assessments
due to or arising from any criminal fines, penalties or assessments.
F. Insured vs. Insured
by any INSURED against any other person or entity who is also an INSURED under this insurance. This exclusion does not apply to CLAIMS initiated by third parties against Tiffany and Company and subsequently brought, made or tendered by Tiffany and Company against or to any other INSURED under the policy.
G. Internal Expenses
for costs charges, or expenses incurred by the INSURED for goods supplied or services performed by the staff or salaried employees of the INSURED or its parent, subsidiary or affiliate, unless such costs, charges or expenses are EMERGENCY EXPENSES or are incurred with our consent.
H. Known Pollution Incident/Non-Disclosure
due to or arising from a POLLUTION INCIDENT existing prior to the INCEPTION DATE and known to exist by the responsible insured. This exclusion does not apply to any POLLUTION INCIDENT disclosed in the application for this policy.
I. Known Underground Storage Tank
due to or arising from an UNDERGROUND STORAGE TANK at the INSURED SITE that is known by the RESPONSIBLE INSURED as of the INCEPTION DATE. This exclusion does not apply to an UNDERGROUND STORAGE TANK that is designated in a "Scheduled Underground Storage Tank Endorsement" if we attach such an endorsement to the policy.
J. Landfill Containment System
arising from physical damage to the LANDFILL CONTAINMENT SYSTEM resulting from an intentional or illegal act or omission of an INSURED, if he or she knew or reasonably would have expected that disruption or damage to the LANDFILL CONTAINMENT SYSTEM would occur.
K. Material Change in Use:
due to or arising from a POLLUTION INCIDENT existing prior to the INCEPTION DATE and known to exist by the responsible insured. This exclusion does not apply to any POLLUTION INCIDENT disclosed in the application for this policy.
L. Naturally Occurring Substances
due or arising from naturally occurring substances. However, this exclusion shall not apply where such substances are detected at the INSURED SITE in levels or concentrations in excess of those naturally present at the INSURED SITE and in the immediately surrounding area.
M. Non-Compliance
due to or arising from a RESPONSIBLE INSURED'S intentional, willful or deliberate non-compliance with any statute, regulation, ordinance, administrative complaint, notice of violation, notice letter, executive order, or instruction of any governmental agency or body.
N. Transportation
due to or arising from the maintenance, use, operation, loading or unloading of any conveyance beyond the boundaries of the INSURED SITE.
SECTION II. DUTIES OF THE INSURED IN THE EVENT OF A CLAIM, POLLUTION INCIDENT OR DAMAGE TO LANDFILL CONTAINMENT SYSTEM
1. REPORTING A CLAIM, POLLUTION INCIDENT OR DAMAGE TO LANDFILL CONTAINMENT SYSTEM
A. You must report a CLAIM, POLLUTION INCIDENT or damage to the LANDFILL CONTAINMENT SYSTEM as soon as possible and in any event during the POLICY PERIOD, or during the EXTENDED REPORTING PERIOD, if applicable. To the extent possible such notification should include:
1. how, when and where the POLLUTION INCIDENT or damage to the LANDFILL CONTAINMENT SYSTEM took place;
2. the names and addresses of any injured persons and witnesses;
3. the nature and location of any injury or damage arising out of the POLLUTION INCIDENT or damage to the LANDFILL CONTAINMENT SYSTEM; and
4. the date a CLAIM was received by you.
B. You and any other involved INSURED must:
1. immediately send us copies of any demands, notices, summonses or any other process or legal papers received in connection with a CLAIM; and
2. authorize us to obtain records and other information.
2. REPORTING A POTENTIAL CLAIM
A. If during the POLICY PERIOD, the insured first becomes aware of a POTENTIAL CLAIM, the INSURED may provide written notice to us during the POLICY PERIOD containing all the information required in paragraph B., below. A POTENTIAL CLAIM which subsequently becomes a CLAIM made against the INSURED and reported to us within five (5) years after the end of the POLICY PERIOD of this policy or any continuous, uninterrupted renewal thereof, shall be deemed to have been first made and reported during the POLICY PERIOD of this policy and shall be subject to its terms, conditions, and Limits Of Insurance.
B. It is a condition precedent to the coverage afforded by this provision that written notice under paragraph A, above contain all of the following information: 1. the cause of the POLLUTION INCIDENT; 2. the INSURED SITE or other location where the POLLUTION INCIDENT took place; 3. the BODILY INJURY, PROPERTY DAMAGE or REMEDIATION COSTS which have resulted or may result from the POLLUTION INCIDENT; 4. the INSURED(S) who may be subject to the CLAIM and any potential claimant(s); 5. all engineering information available regarding the POLLUTION INCIDENT and any other information that we deem reasonably necessary; and 6. the circumstances by which and the date the INSURED first became aware of the POTENTIAL CLAIM.
3. DUTY TO REMEDIATE OR MITIGATE A POLLUTION INCIDENT OR DAMAGE TO THE LANDFILL CONTAINMENT SYSTEM
In the event of a POLLUTION INCIDENT or damage to the LANDFILL CONTAINMENT SYSTEM, you must take all actions necessary to comply with ENVIRONMENTAL LAWS including, but not limited to, retaining competent contractors and other professionals. In addition, we have the right, but not the duty, to participate in decisions regarding REMEDIATION COSTS or LANDFILL RESTORATION COSTS and take all actions necessary to comply with ENVIRONMENTAL LAWS. Any sums expended by us in taking such action shall be deemed incurred by the INSURED and shall reduce the Limits Of Insurance.
4. COOPERATION
You agree to cooperate and otherwise offer us reasonable assistance in the defense, investigation or settlement of a CLAIM for LOSS. Such cooperation or assistance shall include, but not be limited to, participating at meetings, testifying at hearings, depositions, and trials, and securing evidence.
SECTION III. LIMITS OF INSURANCE AND DEDUCTIBLE
The Limits Of Insurance shown in Item 3 of the Declarations and the rules below fix the most we will pay regardless of the number of INSUREDS, INSURED SITES, POLLUTION INCIDENTS, CLAIMS or claimants.
1. LIMITS OF INSURANCE
A. Total Aggregate Limit
The Total Aggregate Limit is the most we will pay for all LOSS and
LANDFILL RESTORATION COSTS.
B. Each Pollution Incident or Physical Damage to Landfill Containment System Incident Loss Limit
1. Subject to the Total Aggregate Limit, the most we will pay for all LOSS arising from the same, continuous, repeated or related POLLUTION INCIDENT is the Each Pollution Incident Loss Limit.
2. Subject to the Total Aggregate Limit, the most we will pay for LANDFILL RESTORATION COSTS arising from the same, continuous repeated or related physical damage to the LANDFILL CONTAINMENT SYSTEM is the Each Damage to the Landfill Containment System Incident Limit.
3. If we, or an affiliate, have issued claims-made pollution liability coverage for the INSURED SITE in one or more policy periods and:
a. the DISCOVERY of a POLLUTION INCIDENT is reported to us in accordance with Section II., paragraph 1, all of the same, continuous, repeated or related pollution incidents reported to us under a subsequent pollution liability policy shall be treated as a DISCOVERY during the POLICY PERIOD; or
b. a CLAIM for BODILY INJURY, PROPERTY DAMAGE, or REMEDIATION COSTS is first made against you and reported to us in writing in accordance with Section II., paragraph 1, all CLAIMS arising out of the same, continuous, repeated or related POLLUTION INCIDENTS shall be deemed to have been first made and reported during the POLICY PERIOD.
Provided that you have maintained pollution liability coverage with us or an affiliate on a continuous, uninterrupted basis since the DISCOVERY of such POLLUTION INCIDENT or the first such CLAIM was made against you, and reported to us.
2. DEDUCTIBLE
A. Insuring Agreements A, B, C and D
Subject to the Limits Of Insurance, we will pay covered LOSS in excess of the Each Pollution Incident deductible amount stated in Item 4 of the Declarations. The deductible applies to all LOSS arising from the same, continuous, repeated or related POLLUTION INCIDENT. Sums paid within the Deductible do not reduce the Limits Of Insurance.
B. Insuring Agreement E
Subject to the Limits Of Insurance, we will pay covered LANDFILL RESTORATION COSTS in excess of the Each Damage to the Landfill Containment System Incident deductible amount stated in Item 4 of the Declarations. The deductible applies to all LANDFILL RESTORATION COSTS arising from the same, continuous, repeated or related physical damage to the LANDFILL CONTAINMENT SYSTEM. Sums paid within the deductible do not reduce the Limits Of Insurance.
C. Aggregate Deductible
Once the NAMED INSURED pays deductible amounts which in the aggregate total the amount shown in Item 4 of the Declarations as Total Aggregate Deductible, the Each Pollution Incident, Each Claim and Each Damage to the Landfill Containment System Incident deductibles will no longer apply, but each incident or CLAIM will be subject to the "Each and Every Maintenance" deductible as shown in Item 4 of the Declarations.
If, at the INSURED'S request, we advance any element of LOSS falling within the deductible, the INSURED shall promptly reimburse us for such amount as soon as possible.
SECTION IV. CONDITIONS
1. ACCESS TO INFORMATION - The NAMED INSURED agrees to permit us to have access to any information concerning LOSS or LANDFILL RESTORATION COSTS.
2. ACKNOWLEDGMENT OF SHARED LIMITS - By acceptance of this policy, all NAMED INSUREDS understand, agree, and acknowledge that the policy contains a Total Aggregate Limit that is applicable to, and will be shared by, all NAMED INSUREDS and all other INSUREDS who are or may become insured hereunder. As such, all NAMED INSUREDS and all other INSUREDS understand and agree that the Total Aggregate Limit may be exhausted or reduced by prior payments for other CLAIMS under the policy.
3. ASSIGNMENT OF POLICY - The NAMED INSURED may assign this policy with our consent, which shall not be unreasonably withheld or delayed, however, such assignment shall not bind us until such consent is endorsed hereon.
4. BANKRUPTCY - Bankruptcy or insolvency of the INSURED or the INSURED'S estate will not relieve us of any obligation to which this insurance applies.
5. CANCELLATION - The first NAMED INSURED may cancel this policy at any time by sending us a written request or by returning this policy and stating when thereafter cancellation is to take effect.
We may cancel this policy only for the following reasons:
- Material misrepresentation by the INSURED;
- The INSURED'S failure to comply with the material terms, conditions or contractual obligations under this policy, including failure to pay any premium or deductible when due;
- With the exception of the development plans identified in the document titled Disruption Closure Plan dated March 12, 1001, a change in operations at the INSURED SITE during the POLICY PERIOD that materially increases a risk covered under this policy:
by sending to the first NAMED INSURED and Tiffany and Company a notice sixty
(60) days (20 days in the event of non-payment of premium) in advances of
the cancellation date. Our notice of cancellation will be mailed to:
- The first NAMED INSURED'S last known address; and
- Corporate Attorney Tiffany and Company 600 Madison Avenue New York, NY 10022;
and will indicate the date on which coverage is terminated. If notice of cancellation is mailed, proof of mailing will be sufficient proof of notice.
The earned premium will be computed on a pro rata basis. Any unearned premium will be returned as soon as practicable.
6. CHANGES - This policy can only be changed by a written endorsement that becomes part of this policy. The endorsement must be signed by one of our authorized representatives.
7. ENTIRE AGREEMENT - The NAMED INSURED agrees that this policy, including any endorsements attached to and forming part of this policy, and including the application and any material submitted in connection with such application, which are on file with us and are a part of this policy as if physically attached, constitutes the entire agreement existing between the NAMED INSURED and us or any of our agents to this insurance.
8. FIRST NAMED INSURED - The NAMED INSURED first listed in the Declarations is responsible for the payment of all premiums. The first NAMED INSURED will act on behalf of all other INSUREDS for the payment of any deductible, receipt of acceptance of any endorsement issued to form a part of this policy, giving and receiving notice of cancellation, the exercise of the rights provided in the EXTENDED REPORTING PERIOD, and the receiving of any return premiums that become payable under this policy.
9. INTERVIEW, INSPECTION AND SURVEYS - With reasonable notice we may:
- interview persons employed by the INSURED;
- make inspections, take samples, and conduct surveys of the INSURED SITE.
Any such inspection, samples, and surveys and any conclusions we may draw therefrom, relate only to the insurability and the premiums to be charged. We do not make safety inspections. We do not undertake to perform the duty of any person or organization to provide for the healthy or safety of workers or the public. And, we do not warrant that conditions:
- are safe or healthful; or
- comply with laws, regulations, codes or standards, his condition applies not only to us, but also to any rating, advisory, rate service or similar organization which makes insurance inspections, samples, and surveys for us.
10. LEGAL ACTION AGAINST US - No person or organization has a right under this insurance:
- To join us as a party or otherwise bring us into a CLAIM or suit seeking LOSS from an INSURED; or
- To sue us on this insurance unless all of its terms have been fully complied with.
A person or organization may sue us to recover on a fully executed settlement agreement or on a final judgment against the INSURED obtained after an:
- actual trial in a civil proceeding;
- arbitration proceeding; or
- alternative resolution proceeding;
but we will not be liable for LOSS that is not payable under the terms of this insurance or that is in excess of the applicable Limits Of Insurance.
11. OTHER INSURANCE - If other valid and collectible insurance is available to the INSURED for LOSS or LANDFILL RESTORATION COSTS covered by this policy, our obligations are limited as follows:
- This insurance is primary, and our obligations are not affected unless any of the other insurance is also primary. In that case, we will share with all such other insurance by the method described immediately below.
- If all of the other insurance permits contribution by equal shares, we will also follow this method. In such a circumstance, each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first. If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. In this case, each insurer's share is based on the ratio its applicable limit of insurance bears to the total applicable limits of insurance of all insurers.
12. REPRESENTATIONS AND STATEMENTS - We have issued this policy specifically in reliance upon the statements, representations and information in the application for this insurance, all required attachments to the application, and your certification in the application that those statements, representations, and information were made or provided by you in order to induce us to issue this policy.
13. SEPARATION OF INSUREDS - Except with respect to the Limits Of Insurance,
Section I. Paragraph 3.F., Insured vs. Insured exclusion, and any rights or
duties specifically assigned to the first NAMED INSURED, this insurance
applies:
- As if each NAMED INSURED were the only NAMED INSURED; and
- Separately to each NAMED INSURED against whom a CLAIM is made.
Misrepresentation, concealment, breach of a term or condition, or violation of any duty under this policy by one NAMED INSURED shall not prejudice another NAMED INSURED under this policy. Notwithstanding the foregoing, this condition shall not apply to any NAMED INSURED that is a parent, subsidiary or affiliate of the first NAMED INSURED.
14. SUBROGATION - In the event of the full payment of a CLAIM under this Policy, we shall be subrogated to all the INSURED'S rights of recovery therefor against any person or organization and the INSURED shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights including without limitation, assignment of the INSURED'S rights against any person or organization who caused POLLUTION INCIDENTS on account of which we made any payment under this Policy. The INSURED shall do nothing to prejudice or our rights under this paragraph subsequent to LOSS or LANDFILL RESTORATION COSTS. Any recovery as a result of subrogation proceedings arising out of the payment of LOSS or LANDFILL RESTORATION COSTS covered under this policy shall accrue to the Company. Expenses incurred in such subrogation proceedings shall be borne by us.
15. VOLUNTARY PAYMENTS - Except for EMERGENCY EXPENSES, the INSURED shall not voluntarily enter into any settlement, or make any payment or assume any obligation with respect to this insurance without our consent, which shall not be unreasonably withheld.
SECTION V. EXTENDED REPORTING PERIOD FOR CLAIMS
The NAMED INSURED shall be entitled to a basic EXTENDED REPORTING PERIOD, and, if you purchase it, a supplemental EXTENDED REPORTING PERIOD, following Termination of Coverage as described below. A CLAIM first made and reported to us within the basic EXTENDED REPORTING PERIOD or supplemental EXTENDED REPORTING PERIOD, whichever is applicable, will be deemed to have been made on the last day
of the policy period. Neither the basic EXTENDED REPORTING PERIOD or the supplemental EXTENDED REPORTING PERIOD shall reinstate or increase any of the Limits Of Insurance of this policy.
1. BASIC EXTENDED REPORTING PERIOD
Provided that the NAMED INSURED has not purchased any other insurance to replace this insurance, the NAMED INSURED shall have a sixty (60) day basic EXTENDED REPORTING PERIOD.
2. SUPPLEMENTAL EXTENDED REPORTING PERIOD
The named insured shall be entitled to purchase a supplemental EXTENDED REPORTING PERIOD of up to forty-eight (48) months for not more than 200% of the full policy premium stated in the Declarations. Such supplemental EXTENDED REPORTING PERIOD starts when the basic EXTENDED REPORTING PERIOD ends. We will issue an endorsement providing a supplemental EXTENDED REPORTING PERIOD provided that the named insured:
A. makes a written request for such endorsement which we receive within thirty (30) days after Termination of Coverage; and
B. pays the additional premium when due. If that additional premium is paid when due, the supplemental EXTENDED REPORTING PERIOD may not be cancelled, provided that all other terms and conditions of the policy are met.
3. TERMINATION OF COVERAGE
Termination of Coverage occurs:
A. at the time of cancellation of this policy by the NAMED INSURED or by us, other than for nonpayment of premium, provided that our offer to renew this insurance at different rates or with a different form will not constitute cancellation or non-renewal by us; or
B. at the time of the deletion of a location, which previously was an INSURED SITE, at the NAMED INSURED'S written request.
SECTION VI. DEFINITIONS
1. BODILY INJURY means physical injury, sickness, disease, mental anguish, emotional distress or shock, sustained by any person, including death resulting therefrom.
2. CLAIM means a written demand received by the INSURED seeking a remedy or asserting liability or responsibility on the part of the INSURED for LOSS. CLAIM does not include a POTENTIAL CLAIM that was reported under a prior policy as described in Section II, Paragraph 2, but which has become a CLAIM during the POLICY PERIOD.
3. DELINEATION DATE means the date the New Jersey Licensed Professional Engineer with authority over the LANDFILL DISRUPTION has certified and submitted in writing to the government agency or body with authority over LANDFILL DISRUPTION that the LANDFILL DISRUPTION has been complete in compliance with the Disruption/Closure Plan dated March 12, 2001. Additionally, this certification shall include sealed "as built" drawings by such New Jersey Licensed Professional Engineer documenting that the LANDFILL DISRUPTION has been so completed.
4. DISCOVERY means those circumstances whereby a RESPONSIBLE INSURED becomes aware of a POLLUTION INCIDENT or physical damage to the LANDFILL CONTAINMENT SYSTEM during the POLICY PERIOD, provided
that where required, such POLLUTION INCIDENT or physical damage to the LANDFILL CONTAINMENT SYSTEM has been reported to the appropriate governmental agency in material compliance with applicable ENVIRONMENTAL LAWS in effect as of the date of DISCOVERY.
5. EMERGENCY EXPENSES means reasonable and necessary costs incurred to respond to any emergency or pursuant to ENVIRONMENTAL LAWS which required the immediate remediation of a POLLUTION INCIDENT.
6. ENVIRONMENTAL LAWS means any federal, state, provincial or local laws (including, but not limited to, statutes, rules, regulations, ordinances, guidance documents, and governmental, judicial or administrative orders and directives) that are applicable to a POLLUTION INCIDENT.
7. EXTENDED REPORTING PERIOD means either the basis additional period of time or the supplemental additional period of time, in which to report CLAIMS first made against the INSURED subsequent to Termination of Coverage, as described in Section IV, Paragraph 3, arising from a POLLUTION INCIDENT that commenced before the end of the POLICY PERIOD and otherwise covered by this insurance.
8. INCEPTION DATE means the first date of the POLICY PERIOD as set forth in the Declarations.
9. INSURED means the NAMED INSURED, and any past or present director, officer, partner or employee of the named insured, including a temporary or leased employee, which acting within the scope of his or her duties as such.
10. INSURED SITE means the location(s) set forth in Item 5 of the Declarations.
11. LANDFILL CONTAINMENT SYSTEM means the landfill cap, landfill cell liners and any soil or natural material containing or encapsulating waste approved by the New Jersey Department of Environmental Protection in the Disruption Closure Plan of March 12, 2001, or any modifications thereto submitted to, and approved by us in writing.
12. LANDFILL DISRUPTION means any disruption, relocation, capping intrusive investigation, construction, of any ingress or egress, or excavating of the Landfill or Landfill Cells at the INSURED SITE pursuant to the Disruption Closure Plan of March 12, 2001.
13. LANDFILL RESTORATION COSTS means reasonable and necessary costs incurred by the INSURED to repair, replace or restore the LANDFILL CONTAINMENT SYSTEM to substantially the same condition it was in prior to physical damage to the LANDFILL CONTAINMENT SYSTEM. LANDFILL RESTORATION COSTS shall also include reasonable and necessary costs incurred by Tiffany and Company with our written consent, which consent shall not be unreasonably withheld or delayed, to repair, replace or restore real or personal property to substantially the same condition it was in prior to being damaged, provided such damage arises from physical damage to the LANDFILL CONTAINMENT SYSTEM which results in LANDFILL RESTORATION COSTS and provided that such costs shall not exceed the net present value of such property prior incurring LANDFILL RESTORATION COSTS. LANDFILL RESTORATION COSTS do not include costs to maintain, restore or replace LANDFILL CONTAINMENT SYSTEM vegetation, or costs for regular operations, monitoring, maintenance, betterments or improvements to the LANDFILL CONTAINMENT SYSTEM but shall include such costs to repair, replace or restore the LANDFILL CONTAINMENT SYSTEM to the condition required by the applicable ENVIRONMENTAL LAWS at the time of repair, restoration or replacement.
14. LEGAL EXPENSES mean reasonable and necessary costs, charges and expenses incurred in the defense, investigation or adjustment of claims for BODILY INJURY, PROPERTY DAMAGE OR REMEDIATION COSTS, or in connection with REMEDIATION COSTS.
15. LOSS means:
- monetary awards or settlements of compensatory damages for BODILY INJURY AND PROPERTY DAMAGE including civil fines, penalties, and assessments, and where allowable by law, punitive, exemplary, or multiple damages for such BODILY INJURY and PROPERTY DAMAGE;
- LEGAL EXPENSES;
- REMEDIATION COSTS; or
- EMERGENCY EXPENSES.
16. NAMED INSURED means the person or entity named in Item 1 of the Declarations and any past, present or future SUBSIDIARY.
Allentown Commerce Park Corporation
Eden Wood Corporation
Eden Wood Properties, Inc.
Neu Holdings Corporation
Neu Investment Corporation
Neu Logistics Services, a Division of Allentown Commerce Park Corporation
River Park Business Center, LLC
River Park Technology Center, Inc.
Tiffany and Company
Tiffany & Co.
The fist named insured identified in Item 1 of the Declaration shall be solely responsible for all obligations of named insured under the policy.
17. NATURAL RESOURCES means land, fish, wildlife, biota, air, surface water, ground water, drinking water supplies and other such resources belonging to, managed by, held in trust by, appertaining to, or otherwise controlled by the United States, any state or local government, any foreign government, any Indian tribe, or, if such resources are subject to a trust restriction on alienation, any member of an Indian tribe.
18. POLICY PERIOD means the period set forth in Item 2 of the Declarations, or any shorten period arising as a result of:
- Cancellation of this policy; or
- With respect to a particular INSURED SITE(S) designated in the Declarations, the deletion of such site(s) from this policy by us at the NAMED INSURED'S written request, but solely with respect to such insureds site.
19. POLLUTION INCIDENT means a discharge, dispersal, seepage, migration, release or escape of any solid, liquid, gaseous or thermal ________ or contamination, including, but not limited to, smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, medical waste and waste materials, into or upon land, or any structure on land, the atmosphere or any watercourse or body of water, including groundwater.
20. POTENTIAL CLAIMS means a POLLUTION INCIDENT that commenced on or after the INCEPTION DATE that the INSUREDS reasonably expects may result in a claim.
21. PROPERTY DAMAGE means:
- Physical injury to or destruction of NATURAL RESOURCES and other tangible property, including the resulting loss of use, and, in the case of property located beyond the boundaries of the INSUREDS SITE, diminution in value of such property; or
- Loss of use of NATURAL RESOURCES and other tangible property that has not been physically injured or destroyed, but not diminution in value of such property;
PROPERTY DAMAGES does not include REMEDIATION COSTS or LANDFILL RESTORATION
COSTS.
22. RESPONSIBLE INSURED means the manager of the NAMED INSURED responsible for environmental affairs, control or compliance, or any manager of the insured site, or any officer, director or partner of the NAMED INSURED.
23. REMEDIATION COSTS means:
- reasonable and necessary costs to investigate, neutralize, remove, remediate (including associated monitoring) or dispose of soil, surfacewater, groundwater or other contamination to the extent required by ENVIRONMENTAL LAWS or that have been actually incurred by the government or any political subdivision of the United States of America or any state thereof or Canada or any province thereof, or by third parties;
- RESTORATION COSTS; and
- LEGAL EXPENSE incurred with our consent.
24. RESTORATION COSTS means reasonable and necessary costs incurred by the INSURED with our consent, which shall not be unreasonably withheld or delayed, to restore, repair or replace or personal property to substantially the same condition it was in prior to being damaged during work performed in the course of incurring REMEDIATION COSTS. However, such RESTORATION COSTS shall not exceed the net present value of such property immediately prior to incurring REMEDIATION COSTS or include costs associated with improvements or betterments.
25. SUBSIDIARY means any entity of which the NAMED INSURED holds, either legally or beneficially, more than a 50% ownership interest in such entity.
26. UNDERGROUND STORAGE TANK means any tank, including associated underground piping connected to the tank, in existence as of the INCEPTION DATE or installation thereafter, that has at least ten (10) percent of its volume below ground.
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 1
ON SITE BODILY INJURY AND It is hereby agreed that the foregoing is added to
PROPERTY DAMAGE DUE TO Section I, paragraph 3, Exclusion:
LANDFILL DISRUPTION
This insurance shall not apply to CLAIMS for BODILY
INJURY to persons for PROPERTY DAMAGE to property on
or AT AN INSURED SITE caused by LANDFILL DISRUPTION
prior to the delineation date.
However this exclusion shall not apply with respect
to Tiffany and Company.
All other terms and conditions remain unchanged.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 2
EACH CLAIM LIMIT AND EACH It is hereby agreed that the foregoing is added to
DEDUCTIBLE FOR OFF-SITE Section I, paragraph 3, Exclusion:
BODILY INJURY AND PROPERTY
DAMAGE CLAIMS DUE TO 1. The Each Pollution Incident Loss Limit in
LANDFILL DISRUPTION Item 3 of the Declaration is deleted and
ENDORSEMENT replaced with the following:
$20 million Each Claim Limit
2. The Each Pollution Incident deductible amount
set forth in Item 4 of the Declarations is
replaced with the following:
$25,000 Each Claim
3. Section III, Paragraph B.1 is deleted in its
entirety and replaced with the following:
B. Each Claim Limit
1. Subject to the Total Aggregate Limit, the
most we will pay for each claim arising from
the same, continuous, repeated or related
POLLUTION INCIDENT is the Each Claim Limit
set forth in Item 3 of the Declarations as
amended by paragraph 1 above.
All other terms and conditions remain unchanged.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 3
ADDITIONAL INSURED It is hereby agreed that the entity(s) designated below
is (are) included as an additional insured(s), but
solely with respect to such additional insured's
liability arising out of the NAMED INSURED'S ownership,
operation, maintenance or use of the INSURED SITE.
ADDITIONAL INSURED(S)
Jeffrey M. Brown Associates, Inc.
All other terms and conditions remain unchanged.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 4
DISCLOSED DOCUMENT ENDORSEMENT
It is herby agreed that for purposes of Section I, paragraph 3, Exclusions, paragraph H, Known Pollution Incident Non-Disclosure, Pollution Incidents identified in these documents are deemed disclosed to the Company.
1. June 5, 1992 ESE to NJDEP re: Sampling and Analytical Results (Fourth Quarter, Third Year).
2. June 5, 1992 ESE correspondence to Mr. F.D. Kobola re: Groundwater Analysis.
3. June 30, 1994 EWMA to River Terminal Development Corp. re: Quarterly Monitoring.
4. June 30, 1994 EWMA correspondence to NJDEP re: Quarterly Monitoring.
5. October 1994 Trace Technologies, Inc. to Eden Wood Corporation re: Report of Analysis.
6. April 1995 Trace Technologies, Inc. to Eden Wood Corporation re: Report of Analysis.
7. May 28, 1992 ESE data pages from June 5, 1992 ESE document noted above.
8. undated, MPI Test Pit Logs unbound.
9. Whippany Landfill Redevelopment Closure/Post Closure Plan dated January 2000 by Malcolm Pirnie, Inc. including Section 3.2.4 Well Search.
10. River Terminal Development Corp. Whippany Sanitary Landfill Closure Plan Major Modification to Solid Waste Facility Permit dated November 4, 1993 by Environmental Waste Management Associates, Inc.
11. MPI engineering worksheets noting "Tasks Necessary to Complete Closure plan" undated.
12. Request by RPBCI to EWMA for information and documentation on landfill closure work done by EMWA dated June 23, 1999.
13. EMWA response to RBBCI request for closure info basically asking RPBCI to settle balance due EWMA prior to EWMA sending RPBCI any info dated July 26, 1999.
14. EcolSciences letter to Eden Wood Realty (aka? RPBCI) re: "Wetland Investigation and Permit Compliance Inspection dated July 28, 1999.
15. MPI letter to Eden Wood re: Update No. 3 on Site Environmental Activities dated August 3, 1999.
16. MPI letter to NJDEP re: Addendum to Whippany Landfill Redevelopment Closure/Post-Closure Plan dated April 6, 2000.
17. MPI interoffice correspondence re: NJDEP meeting and file review for 40-acre landfill dated August 13, 1999.
18. MPI fax to Eden Wood re: Landfill Closure Plan dated Jan. 4, 2000.
19. MPI letter Eden Wood realty/RPBCI re: Ground water analytical results for the 40 acre landfill dated Jan. 4, 2000.
20. MPI letter to NJDEP re: Whippany Landfill Redevelopment Closure/Post-Closure Plan NJDEP Request for clarification dated May 8,
2000.
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 4
DISCLOSED DOCUMENT ENDORSEMENT
21. NJDEP letter to EWMA re: Whippany Paperboard Sanitary Landfill application for a major modification to the closure plan dated Sep 26, 1994.
22. NJDEP letter to RPBCI re: Disruption/Closure Plan Approval dated Jun 7, 2000.
23. Whippany Landfill Redevelopment Closure/Post Closure Plan, River Park Business Center, Inc., Whippany, NJ dated January 2000.
24. Addendum to Whippany Landfill Redevelopment Closure/Post Closure Plan submitted to NJDEP under cover letter dated April 6, 2000.
25. Malcolm Pirnie letter by Joseph C. Barbagallo, PE to NJDEP dated May 8, 2000.
26. Updated Whippany Landfill Redevelopment Closure/Post Closure Plan River Park Business Center, Inc., Whippany, NJ dated February 2001.
27. Addendum to Whippany Landfill Redevelopment Closure/Post Closure Plan submitted to NJDEP under cover letter dated May 14, 2001 by Joseph C. Barbagallo, PE Associate, Malcolm Pirnie, Inc. Addendum includes Updated Whippany Landfill Redevelopment Closure/Post Closure Plan-Appendix A, River Park Business Center, Inc., Whippany, New Jersey Sheets 1 through 8, dated March 2001 prepared by Malcolm Pirnie, Inc. signed and sealed by Robert J. Schneider on May 11, 2001, a New Jersey PE Licensor No. 22779.
28. Malcolm Pirnie letter by Joseph C. Barbagallo, PE to NJDEP dated May 25, 2001.
All other terms and conditions remain unchanged.
Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 5
EARNED PREMIUM ENDORSEMENT
EARNED PREMIUM It is hereby agreed that the foregoing is added to Section
ENDORSEMENT I, paragraph 3, Exclusion:
4. CANCELLATION The first NAMED INSURED may cancel this policy at any time
by sending us a written request or by returning this policy
and stating when thereafter cancellation is to take effect.
We may cancel this policy only for the following reasons:
A. Material misrepresentation by the INSURED;
B. The INSURED'S failure to comply with the material terms,
conditions or contractual obligations under this policy,
including failure to pay any premium or deductible when
due; or
C. With the exception of the development plans identified in
the document titled Disruption/Closure Plan dated Mach
12, 2001, a change in operations at the INSURED SITE
during the POLICY PERIOD that materially increases a risk
covered under this policy.
by sending to the first NAMED INSURED and Tiffany and
Company a notice 60 days (20 days in the event of
non-payment of premium) in advance of the cancellation date.
Our notice of cancellation will be mailed to:
- the first NAMED INSURED'S last known address;
- Corporate Attorney
Tiffany and Company
600 Madison Avenue
New York, New York 10022;
and will indicate the date on which coverage is terminated.
If notice of cancellation is mailed, proof of mailing will
be sufficient proof of notice.
The premium will be eared as follows:
- 25% at the INCEPTION DATE;
- 61% at the end of the fist year of the POLICY PERIOD;
- 85% at the end of the second year of the POLICY PERIOD;
and
- 100% earned at the end of the third year of the POLICY
PERIOD.
In the event of cancellation, any unearned premium will be
returned as soon as practicable.
All other terms and conditions remain unchanged.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 6
DISCLOSED DOCUMENT ENDORSEMENT
INTEND TO EXTEND Under Section IV. Conditions, the following is added:
Section IV. Conditions Upon expiration of the policy, we will extend this
policy for an additional ten (10) years provided we
continue to offer insurance substantially similar to
the insurance provided by this policy, AND THE
INSURED has complied, at the time of expiration of
the policy, with all of the following conditions:
- All terms and conditions of the policy have
been completely satisfied, including payment of
premiums, by our sole judgment;
- The NAMED INSURED provides us with a properly
completed and signed renewal application not
more than 120 days and not less than 30 days
prior to the expiration date of this policy;
- Use of the INSURED SITE has not materially
changed from the use described in the
application, which forms pat of this policy.
For purposes of this endorsement, a material
change in use shall be deemed to have occurred
only if a further disruption permit is granted
by the New Jersey Department of Environmental
Protection or other applicable government
entity;
- At the time of policy expiration INCURRED LOSS
shall not exceed 5% of the Total Aggregate
Limit stated in the Declarations;
- Satisfactory engineering, loss control and
underwriting review;
- Compliance to all engineering recommendations;
and
- Reinsurance is available to cover policies with
coverage similar to this policy.
With respect to the extension above, we reserve the
right to reasonably modify the terms and conditions
of any policy extension. The extension premium shall
be in accordance with our rates in effect at the time
of the extension shall not exceed $900,000. The
INSURED AGREES that in our taking such action we
shall not be considered in violation of the agreement
to extend this policy pursuant to the conditions set
forth above.
For purposes of this endorsement only, the foregoing
definition shall apply.
INCURRED LOSS means paid losses and outstanding loss
reserves for LOSS, and LANDFILL RESTORATION COSTS
covered under this policy.
All other terms and conditions remain unchanged. This
endorsement shall not be deemed or construed to
increase or reinstate the "Each Pollution Loss
Limit." Each Physical Damage to the Landfill
Containment System Incident Limit" or Total Aggregate
Limit" shown in the Declarations.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 7
ADDITIONAL INSURED It is hereby agreed that any party which lends money to
the NAMED INSURED is (are) included as an additional
insured(s), but solely with respect to such additional
insured's liability arising out of the NAMED INSURED'S
ownership, maintenance or use of the INSURED SITE.
All other terms and conditions remain unchanged.
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Authorized Representative
RIVER PARK BUSINESS CENTER, INC. ENVIRONMENTAL SITE LIABILITY POLICY
ENDORSEMENT NO. 8
It is hereby agreed that solely with respect of Tiffany and Company, Section 3, Exclusion C, Damage to Property Owned, is deleted in its entirety.
For purposes of this Endorsement only, Section IV, paragraph 21 PROPERTY DAMAGE is deleted in its entirety and replaced with the following:
PROPERTY DAMAGE means:
- Physical injury to or destruction of tangible property, including the resulting loss of use.
- Loss of use of tangible property that has not been physically injured or destroyed.
However, such PROPERTY DAMAGE shall not exceed the net present value of such property immediately prior to being damaged by A POLLUTION INCIDENT or include costs associated with improvements or betterments.
PROPERTY DAMAGE does not include REMEDIATION COSTS or
LANDFILL RESTORATION COSTS.
All other terms and conditions remain unchanged.
Authorized Representative
EXHIBIT 13.1
Selected Financial Data Tiffany & Co.
Report on form 10-K
The following table sets forth selected financial data, certain of which have been derived from the Company's audited financial statements for 2000-2004. Financial data for 2004 includes the effect of the Company's sale of its equity investment in Aber Diamond Corporation (see Note D to the consolidated financial statements). Certain reclassifications were made to prior years' financial data to conform with the current year's presentation. All references to years relate to the fiscal year that ends on January 31 of the following calendar year.
(in thousands, except per share amounts, percentages, ratios,
retail locations and employees) 2004 2003 2002 2001 2000
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EARNINGS DATA
Net sales $2,204,831 $2,000,045 $1,706,602 $1,606,535 $1,668,056
Gross profit 1,230,573 1,157,382 1,011,448 943,477 948,414
Earnings from operations 294,529 355,519 319,197 309,897 327,396
Net earnings 304,299 215,517 189,894 173,587 190,584
Net earnings per diluted share 2.05 1.45 1.28 1.15 1.26
Weighted-average number of
diluted common shares 148,093 148,472 148,591 150,517 151,816
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BALANCE SHEET AND CASH FLOW DATA
Total assets $2,666,118 $2,391,088 $1,923,586 $1,631,074 $1,568,340
Cash and cash equivalents 187,681 248,665 156,197 173,675 195,613
Short-term investments 139,200 27,450 - - -
Inventories, net 1,057,245 871,251 732,088 611,653 651,717
Working capital 1,208,068 952,923 770,481 638,709 695,548
Cash flows from operating activities 130,853 283,842 221,441 241,506 110,696
Capital expenditures 142,321 272,900 219,717 170,806 108,382
Short-term borrowings and long-term debt
(including current portion) 440,563 486,859 349,659 270,967 270,935
Stockholders' equity 1,701,160 1,468,200 1,208,049 1,036,945 925,483
Stockholders' equity per share 11.77 10.01 8.34 7.15 6.34
Cash dividends paid per share 0.23 0.19 0.16 0.16 0.15
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RATIO ANALYSIS AND OTHER DATA
As a percentage of net sales:
Gross profit 55.8% 57.9% 59.3% 58.7% 56.9%
Earnings from operations 13.4% 17.8% 18.7% 19.3% 19.6%
Net earnings 13.8% 10.8% 11.1% 10.8% 11.4%
Capital expenditures 6.5% 13.6% 12.9% 10.6% 6.5%
Return on average assets 12.0% 10.0% 10.7% 10.9% 13.1%
Return on average stockholders' equity 19.2% 16.1% 16.9% 17.7% 22.7%
Total debt-to-equity ratio 25.9% 33.2% 28.9% 26.1% 29.3%
Company-operated TIFFANY & CO.
stores and boutiques 151 141 131 126 119
Number of employees 7,341 6,862 6,431 5,938 5,960
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18 TIFFANY & CO. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Tiffany & Co. is a holding company that operates through its subsidiary companies ("Company"). The Company's principal subsidiary, Tiffany and Company, is a jeweler and specialty retailer whose merchandise offerings include an extensive selection of fine jewelry, as well as timepieces, sterling silverware, china, crystal, stationery, fragrances and accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.
The Company's channels of distribution are as follows:
- U.S. Retail - sales in TIFFANY & CO. stores in the U.S.
- International Retail - sales in TIFFANY & CO. stores and department store boutiques outside the U.S. (also includes a limited amount of business-to-business sales, Internet sales and wholesale sales of TIFFANY & CO. products outside the U.S.).
- Direct Marketing - Internet, catalog and business-to-business sales of TIFFANY & CO. products in the U.S.
- Other - worldwide sales of businesses operated under non-TIFFANY & CO. trademarks or trade names ("specialty retail"), as well as sales associated with the Company's diamond sourcing and manufacturing operations.
The Company's key growth strategies are: to selectively expand its channels of distribution in important markets around the world without compromising the long-term value of the TIFFANY & CO. trademark; to increase sales in existing stores by developing new products; to increase its control over product supply and achieve improved profit margins through direct diamond sourcing and internal jewelry manufacturing; to enhance customer awareness through marketing and public relations programs; and to provide customer service that ensures a superior shopping experience.
All references to years relate to the fiscal year that ends on January 31 of the following calendar year.
2004 HIGHLIGHTS
- Net sales rose 10% to $2.2 billion and worldwide comparable store sales on a constant-exchange-rate basis (see Non-GAAP Measures) rose 4%.
- Company-operated square footage of TIFFANY & CO. stores increased 8%. The Company added a net of 10 retail locations-four in the U.S., three in Japan, and one each in Shanghai, Taipei and London.
- Many new jewelry and watch collections were introduced, along with new designs in tableware and accessories.
- Net earnings rose 41% to $304 million, which includes a pre-tax gain of $194 million from the Company's sale of its equity investment in Aber Diamond Corporation ("Aber"). The Company will continue to purchase rough diamonds from Aber under a long-term purchase agreement.
- The Company contributed $25 million to The Tiffany & Co. Foundation (a non-profit organization) to advance its charitable giving strategy.
- Costs of precious metals and diamonds rose substantially, which negatively affected gross margin.
- The Company entered into additional direct diamond sourcing arrangements.
- The Company early adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which requires fair-value measurement and recognition of stock-based compensation. The adoption resulted in a pre-tax charge of $22 million.
- Two IRIDESSE stores were opened that focus exclusively on pearl jewelry.
- The Board of Directors increased the annual dividend rate by 20%.
- The Company repurchased 2.7 million shares of its Common Stock.
- The Company successfully completed its compliance with Section 404 of Sarbanes-Oxley legislation.
CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from those estimates. Periodically, the Company reviews all significant estimates
TIFFANY & CO. AND SUBSIDIARIES 19
and assumptions affecting the financial statements and records the effect of any necessary adjustments.
The development and selection of critical accounting estimates and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors. The following critical accounting policies that rely on assumptions and estimates were used in the preparation of the Company's consolidated financial statements:
Inventory: The Company writes down its inventory for discontinued and slow-moving products. This write-down is equal to the difference between the cost of inventory and its estimated market value, and is based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs might be required. At January 31,2005, a 10% change in the reserve for discontinued and slow-moving products would have resulted in a change of $2,093,000 in inventory and cost of sales. The Company's domestic and foreign branch inventories, excluding Japan, are valued using the last-in, first-out (LIFO) method, and inventories held by foreign subsidiaries and Japan are valued using the average cost method. Fluctuation in inventory levels, along with the costs of raw materials, could affect the carrying value of the Company's inventory.
Long-lived assets: The Company's long-lived assets are primarily property, plant and equipment. The Company reviews its long-lived assets for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of long-lived assets is evaluated by comparing the carrying value of the asset with estimated future undiscounted cash flows. If the comparisons indicate that the value of the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period. In 2004, the Company recorded impairment charges (see Results of Operations) and did not record any significant impairment charges in 2003 and 2002.
Income taxes: Foreign and domestic tax authorities periodically audit the Company's income tax returns. These audits often examine and test the factual and legal basis for positions the Company has taken in its tax filings with respect to its tax liabilities, including the timing and amount of deductions and the allocation of income among various tax jurisdictions ("tax filing positions"). Management believes that its tax filing positions are reasonable and legally supportable. However, in specific cases, various tax authorities may take a contrary position and insist upon an adjustment. In evaluating the exposures associated with the Company's various tax filing positions, management records reserves for probable exposures. Earnings could be affected to the extent the Company prevails in matters for which reserves have been established or is required to pay amounts in excess of established reserves. The Company also records valuation allowances when management determines it is more likely than not that deferred tax assets will not be realized in the future. An adjustment to deferred tax assets would be charged to earnings in the period such determination was made.
Employee benefit plans: The Company maintains several pension and retirement plans, as well as providing certain postretirement health-care and life insurance benefits for current and retired employees. The Company makes certain assumptions that affect the underlying estimates related to pension and other postretirement costs. Significant changes in interest rates, the market value of securities and projected health-care costs would require the Company to revise key assumptions and could result in a higher or lower charge to earnings.
The Company used a discount rate of 6.25% to determine its 2004 pension and postretirement expense. Holding all other assumptions constant, a 0.5% increase in the discount rate would have decreased 2004 pension and postretirement expenses by $2,908,000 and $230,000. A decrease of 0.5% in the discount rate would have increased the 2004 pension and postretirement expenses by $3,264,000 and $249,000. The discount rate is subject to change each year, consistent with changes in the yield on applicable high-quality, long-term corporate bonds. Management selects a discount rate at which pension and postretirement benefits could be effectively settled based on analyzing expected benefit payments and appropriate yields related to such cash flows, taking into consideration indices of high-quality corporate bond yields.
The Company used an expected long-term rate of return of 7.50% to determine its 2004 pension expense. Holding
20 TIFFANY & CO. AND SUBSIDIARIES
all other assumptions constant, a 0.5% change in the long-term rate of return would have changed the 2004 pension expense by $554,000. The expected long-term rate of return on pension plan assets is selected by taking into account the expected duration of the projected benefit obligation, the expected rates of return (including reinvestment asset return rates) given the plan's asset mix and the historical performance of plan assets. To establish the expected rate of return, management takes into consideration that the plan's assets are actively managed to mitigate downside risk.
For postretirement benefit measurement purposes, the following annual rates of increase in the per capita cost of covered health care were assumed for 2005:10% (for pre-age 65 retirees) and 11% (for post-age 65 retirees). The rate was assumed to decrease gradually to 5% for both groups by 2017 and remain at that level thereafter. A one-percentage-point increase in the assumed health-care cost trend rate would have increased the aggregate service and interest cost components of the 2004 postretirement expense by $567,000. Decreasing the assumed health-care cost trend rate by one-percentage-point would have decreased the aggregate service and interest cost components of the 2004 postretirement expense by $439,000.
Stock Compensation Plans: The Company has two stock compensation plans: the 1998 Employee Incentive Plan and the Directors Option Plan. Until January 2005, the Company granted only stock options under both plans. In January 2005, the Company, in addition to stock options, granted performance share units to executive officers of the Company and restricted stock units to other management employees. Additionally, in the fourth quarter of 2004, the Company early adopted SFAS No. 123R that requires new, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock, be measured at fair value and recognized as compensation expense over the vesting period (see New Accounting Standards). The fair value of each option award is estimated using a Black-Scholes option valuation model that requires the Company to develop estimates for assumptions used in the model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of the option, risk-free interest rate and dividend yield. Expected volatility estimates developed by the Company are based on the historical volatility of the Company's stock. The Company uses historical data to estimate the expected term of the option; i.e. the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date. The dividend yield represents the expected dividends on the Company stock for the expected term of the option.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R. This Statement replaces SFAS No. 123, "Accounting for Stock Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In the fourth quarter of 2004, the Company early adopted SFAS No. 123R which requires that new, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock, be measured at fair value and recognized as compensation expense over the vesting period. The Company adopted SFAS No. 123R, retroactive to February 1,2004, using the modified retrospective method of transition. This method allows for restatement of interim financial statements in the year of adoption based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123. The adoption of SFAS No. 123R in 2004 resulted in a reduction in earnings from operations of $22,100,000, a reduction in net earnings of $13,448,000, and a reduction in basic and diluted earnings per share of $0.09. At January 31,2005, there was $64,116,000 of total unrecognized compensation expense related to non-vested share-based compensation arrangements (options and restricted stock units) granted under the Employee Incentive Plan and Directors Option Plan. The expense is expected to be recognized over a weighted-average period of 3.1 years. Prior to 2004, share-based payment transactions with employees were accounted for under the intrinsic value method in accordance with APB Opinion No. 25. Such compensation expense was not recorded in 2003 and 2002, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant.
TIFFANY & CO. AND SUBSIDIARIES 21
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that those items be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15,2005. Management is currently evaluating the effect that the adoption of this Statement will have on the Company's financial position, earnings and cash flows.
In May 2004, the FASB issued Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and. Modernization Act of 2003" ("FSP No. 106-2"). FSP No. 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Act") that was signed into law in December 2003. The Medicare Act provides subsidies to plan sponsors who provide prescription benefits that are at least actuarially equivalent to prescription benefits under regulations issued by the Centers for Medicare & Medicaid Services. The Company adopted FSP No. 106-2 in the third quarter of 2004 and its effect was not significant on the Company's financial position, earnings or cash flows.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaced the same titled FIN 46 that was issued in January 2003. FIN 46R requires that a variable interest entity be consolidated by its primary beneficiary, if any, if the entity's equity investors at risk do not have the characteristics of a controlling financial interest or the equity investors do not have sufficient equity at risk for the entity to finance its activities without additional financial support. The provisions of FIN 46 were effective immediately for all entities created after January 31,2003 and the provisions of FIN 46R were effective for those entities in the first quarter of 2004. For those entities created prior to February 1,2003, the Company was required to adopt the provisions of FIN 46R by the end of the first quarter of 2004. The adoption of FIN 46 and FIN 46R did not have an effect on the Company's financial position, earnings or cash flows.
NON-GAAP MEASURES
The Company reports information in accordance with US. Generally Accepted Accounting Principles ("GAAP"). Internally, management monitors the sales performance of its international subsidiaries on a non-GAAP basis that excludes, from GAAP reported sales, the positive or negative effects that result from translating sales of its international subsidiaries into U.S. dollars (constant-exchange-rate basis). Management uses this constant-exchange-rate measure because it believes it is a more representative assessment of the sales performance of its international subsidiaries and provides for better comparability between reporting periods.
The Company's management does not, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate the Company's operating results.
The following tables reconcile net sales percentage increases (decreases) measured and reported in accordance with GAAP to the non-GAAP constant-exchange-rate basis:
2004
---------------------------------
Constant-
GAAP Translation Exchange-
Net Sales: Reported Effect Rate Basis
----------------------------------------------------------
Worldwide 10% 2% 8%
U.S. Retail 12% - 12%
International Retail 10% 6% 4%
Japan Retail 1% 6% (5)%
Other Asia-Pacific 27% 4% 23%
Europe 23% 11% 12%
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2004
---------------------------------
Constant-
Comparable GAAP Translation Exchange-
Store Sales: Reported Effect Rate Basis
----------------------------------------------------------
Worldwide 7% 3% 4%
U.S. Retail 9% - 9%
International Retail 3% 6% (3)%
Japan Retail (2)% 6% (8)%
Other Asia-Pacific 15% 4% 11%
Europe 13% 10% 3%
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22 TIFFANY & CO. AND SUBSIDIARIES
2003
----------------------------------
Constant-
GAAP Translation Exchange-
Net Sales: Reported Effect Rate Basis
------------------------------------------------------------
Worldwide 17% 3% 14%
U.S. Retail 16% - 16%
International Retail 14% 8% 6%
Japan Retail 10% 9% 1%
Other Asia-Pacific 19% 4% 15%
Europe 30% 13% 17%
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2003
-----------------------------------
Constant-
Comparable GAAP Translation Exchange-
Store Sales: Reported Effect Rate Basis
--------------------------------------------------------------
Worldwide 11% 3% 8%
US. Retail 12% - 12%
International Retail 10% 8% 2%
Japan Retail 6% 9% (3)%
Other Asia-Pacific 18% 5% 13%
Europe 25% 13% 12%
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RESULTS OF OPERATIONS
Certain operating data as a percentage of net sales were as follows:
2004 2003 2002
---------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 44.2 42.1 40.7
---------------------------
Gross profit 55.8 57.9 59.3
Selling, general and
administrative expenses 42.4 40.1 40.6
---------------------------
Earnings from operations 13.4 17.8 18.7
Interest, financing and
other (income) expenses, net 0.8 0.7 1.2
Gain on sale of equity
investment 8.8 - -
---------------------------
Earnings before income taxes 21.4 17.1 17.5
Provision for income taxes 7.6 6.3 6.4
---------------------------
Net earnings 13.8% 10.8% 11.1%
---------------------------
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NET SALES
Net sales by channel of distribution were as follows:
(in thousands) 2004 2003 2002
-----------------------------------------------------------------
U.S. Retail $1,063,892 $ 948,891 $ 819,814
International Retail 857,360 781,572 683,489
Direct Marketing 195,461 197,397 179,175
Other 88,118 72,185 24,124
----------------------------------------
$2,204,831 $2,000,045 $1,706,602
========================================
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In the discussion that fallows, a store's sales are included in "comparable store sales" when the store has been open for more than 12 months. The results of relocated stores remain in comparable store sales if the relocation occurs within the same geographical market. The results of a store in which the square footage has been expanded or reduced remain in the comparable store base.
U.S. Retail sales increased 12% in 2004 and 16% in 2003, primarily due to 9% and 12% comparable store sales growth. The Company opened four new stores in both 2004 and 2003, consistent with its ongoing strategy to open 3-5 new stores each year. Sales in the New York flagship store rose 14% in 2004 and 10% in 2003, and represented 10%, 9% and 10% of net sales in 2004, 2003 and 2002. Sales in comparable branch stores increased 8% in 2004 and 12% in 2003. Comparable store sales growth in both years resulted from increases in the average sales amount per transaction. Management attributes the increased amount per transaction to sales of higher-priced merchandise, and management's decision to reposition the Company's silver jewelry category toward higher-priced offerings, as well as generally favorable conditions for consumers. In both years, there were increased sales to U.S. customers, which account for the vast majority of U.S. Retail sales, and to foreign tourists, especially in the New York flagship store.
International Retail sales increased 10% in 2004 and 14% in 2003. When compared with the prior year, the weighted-average U.S. dollar exchange rate was weaker in 2004 and 2003. Therefore, on a constant-exchange-rate basis, International Retail sales increased 4% in 2004 and 6% in 2003.
Japan represented 22% of net sales in 2004, compared with 24% in 2003 and 26% in 2002. In 2004, on a constant-exchange-rate basis, total retail sales declined 5%, due to a decline in comparable store sales of 8%. In 2003, on a
TIFFANY & CO. AND SUBSIDIARIES 23
constant-exchange-rate basis, total retail sales rose 1%, primarily due to new store openings partially offset by a 3% decline in comparable store sales. The Company added a net of three new locations in 2004 and two in 2003. Management believes that Japan sales have been affected by generally weak consumer spending on jewelry, decreased traffic through department stores where many of the Company's boutiques are located, increased jewelry and other "luxury-goods" competition and shifts in consumer demand, particularly for silver jewelry. In addition, management has, in recent years, increased average price points in the silver jewelry category, which adversely affected sales. Sales of silver jewelry declined in 2004 and 2003; these sales represented 23% and 25% of Japan's total retail sales in those years. However, sales in engagement and other fine jewelry increased in 2004 and 2003. Management continues to focus on product introductions, supported by publicity and targeted marketing initiatives, as well as enhancing current retail locations, in order to stimulate consumer demand in Japan.
In 2001, the Company signed new distribution agreements with Mitsukoshi, Ltd. of Japan ("Mitsukoshi"), whereby TIFFANY & CO. boutiques will continue to operate within Mitsukoshi's stores in Japan until at least January 31, 2007. Under the agreements, the Company is no longer restricted from further expansion of its Tokyo operations. Sales recorded in retail locations operated in connection with Mitsukoshi accounted for 55%, 59% and 61% of total Japan retail sales in 2004, 2003 and 2002. Mitsukoshi has announced that in 2005 it will close three department stores that house TIFFANY & CO. boutiques, but the Company does not expect such closings to materially affect its results.
In non-U.S. markets outside of Japan, the Asia-Pacific region represented 7%, 6% and 6% of net sales in 2004, 2003 and 2002; comparable store sales on a constant-exchange-rate basis increased 11% in 2004 and 13% in 2003 due to growth in most markets. Europe represented 6%, 6% and 5% of net sales in 2004, 2003 and 2002; comparable store sales on a constant-exchange-rate basis increased 3% in 2004 and 12% in 2003 due to growth in most markets.
Gross square feet of company-operated TIFFANY & CO. stores increased 8% to 725,000 in 2004, following a 5% increase to 672,000 in 2003. Sales per gross square foot generated by those stores were $2,540 in 2004, $2,477 in 2003 and $2,255 in 2002. Management expects further improvements in sales per square foot primarily due to comparable store sales growth. In addition, the Company's newer U.S. stores use a smaller footprint and, therefore, are more productive. The following table provides a reconciliation of Company-operated TIFFANY & CO. stores and department store boutiques:
Other
United States Japan Countries
---------------------------------------
2004 2003 2004 2003 2004 2003
---------------------------------------
Beginning
of year 51 47 50 48 40 36
Opened, net of
relocations 4 4 4 3 3 5
Closed - - (1) (1) - (1)
--------------------------------------
End of year 55 51 53 50 43 40
--------------------------------------
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The Company's ongoing worldwide growth strategy is to add 6-10 Company-operated TIFFANY & CO. stores and boutiques annually. Plans in the U.S. for 2005 include opening a store in Naples, Florida, a store in San Antonio, Texas and two stores in California - Carmel and Pasadena. International plans include new stores in Japan and Australia.
Direct Marketing sales decreased 1% in 2004 and increased 10% in 2003. The decline in Direct Marketing sales in 2004 was due to a decline in Business sales. Combined Internet and catalog sales increased 7% in 2004 and 23% in 2003; these sales represented 72%, 67% and 60% of Direct Marketing sales in 2004, 2003 and 2002. Management attributes increases in the average size of both Internet and catalog orders to a favorable consumer environment, selective price increases and new product introductions. The sales increase in Direct Marketing in 2003 primarily resulted from a higher number of Internet orders. The Company continues to experience increased website traffic, as well as shifts by consumers from catalog to e-commerce. While the number of catalog orders declined in both years, catalogs remain an effective marketing tool for both retail and Internet sales. The Company mails approximately 24-26 million catalogs annually. In the Business Sales division, management discontinued service-award program sales in 2003. As a result of that decision, sales in the Business Sales division declined 17% in 2004 and 9% in 2003. The Business Sales
24 TIFFANY & CO. AND SUBSIDIARIES
division continues to offer a range of business gifts, event-related trophies and other awards and those sales increased 3% in 2004 and 14% in 2003.
Other sales in 2004 increased primarily due to sales of rough diamonds that were purchased as part of larger assortments from certain producers but were determined, in the normal course of business, to be unsuitable for the Company's production (such rough-diamond sales commenced in 2004's third quarter and will continue periodically); and sales growth in LITTLE SWITZERLAND stores, which represented 88% and 98% of Other sales in 2004 and 2003. The Company launched its IRIDESSE retail concept that focuses exclusively on pearl jewelry with the opening of two stores in 2004.
GROSS PROFIT
Gross profit as a percentage of net sales ("gross margin") declined in 2004 by 2.1 points and declined in 2003 by 1.4 points. The decline in 2004 was primarily attributable to higher inventory costs due to increases in diamond and precious metal prices (1.0 point); changes in geographic and product sales mix away from Japan and silver jewelry and toward higher-priced, lower-margin diamond jewelry (0.6 point); the early adoption, retroactive to February 1, 2004, of SFAS No. 123R (0.2 point); and costs incurred to expand product distribution and sourcing/ manufacturing capacity. The decline of 1.4 points in 2003 was primarily attributable to changes in sales mix (0.6 point); higher inventory costs due to an increase in precious metal prices (0.5 point); and the consolidation of Little Switzerland (full year consolidation in 2003), which retails goods manufactured by others and achieves a gross margin below the Company's average (0.5 point).
The Company's hedging program (see Note M to the consolidated financial statements) uses yen put options to stabilize product costs in Japan over the short-term despite exchange rate fluctuations. The Company adjusts its retail prices in Japan from time to time to address longer-term changes in the yen/dollar relationship and local competitive pricing.
Management's long-term strategy and objectives include achieving product sourcing/manufacturing efficiencies (including direct rough-diamond sourcing and increased internal manufacturing), controlling costs and implementing selective price adjustments in order to maintain the Company's gross margin at, or above, prior year levels. Management expects adverse factors to gradually abate and, therefore, expects gross margin in 2005 to increase slightly over 2004.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
SG&A expenses increased 17% in 2004, which included the following charges, representing approximately half of the increase:
- $25,000,000 contribution to The Tiffany & Co. Foundation. The contribution was made from the proceeds received from the Company's sale of its equity investment in Aber. The Tiffany & Co. Foundation is a non-profit organization that provides grants to other non-profit organizations;
- $19,006,000 due to the early adoption, retroactive to February 1, 2004, of SFAS No. 123R;
- $12,193,000 impairment charge. In accordance with its policy on impairment of goodwill and long-lived assets, the Company identified impairment losses in one of its international retail markets and in one of its specialty retail businesses as a result of store performance and cash flow projections; and
- $2,932,000 of exit costs associated with discontinuing a specialty retail concept that the Company decided not to pursue.
In addition, the Company had higher labor and benefit costs in 2004 (representing approximately 20% of the increase), depreciation and occupancy expenses (representing approximately 15% of the increase) and marketing expenses (representing approximately 10% of the increase).
SG&A expenses increased 16% in 2003 due to the following reasons: increase in labor and benefit costs (representing approximately 30% of the increase); a full year effect of consolidating Little Switzerland in 2003 (representing approximately 20% of the increase); increased marketing (representing approximately 15% of the increase); and increased occupancy and depreciation costs (representing approximately 10% of the increase).
Management's long-term objective is to reduce the ratio of SG&A expenses to net sales by controlling expenses so that sales growth will result in a higher rate of earnings growth. Management expects this ratio to improve in 2005.
TIFFANY & CO. AND SUBSIDIARIES 25
EARNINGS FROM OPERATIONS
(in thousands) 2004 2003 2002
------------------------------------------------------------
Earnings (losses)
from operations:
U.S. Retail $ 233,647 $ 224,710 $ 190,644
International Retail 202,260 213,666 189,254
Direct Marketing 41,221 46,252 42,609
Other (23,290) (8,460) (1,184)
-----------------------------------
453,838 476,168 421,323
Unallocated corporate
expenses (159,309) (120,649) (102,126)
-----------------------------------
Earnings from
operations $ 294,529 $ 355,519 $ 319,197
===================================
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RECLASSIFICATIONS WERE MADE TO PRIOR YEARS' EARNINGS (LOSSES) FROM OPERATIONS BY SEGMENTS TO CONFORM TO THE CURRENT YEAR PRESENTATION AND THE REVISED MANNER IN WHICH MANAGEMENT EVALUATES THE PERFORMANCE OF SEGMENTS. THE RECLASSIFICATIONS RESULTED IN LIFO COSTS BEING INCLUDED IN SEGMENT RESULTS, AS OPPOSED TO UNALLOCATED CORPORATE EXPENSES WHERE IT WAS PREVIOUSLY REPORTED.
Earnings from operations (before unallocated corporate expenses) declined 5% in 2004. On a segment basis, the ratios of earnings (losses) from operations to each segment's net sales in 2004 compared with 2003 were as follows:
- U.S. Retail: 22% in 2004, compared with 24% in 2003 (decrease was primarily due to product sales mix toward higher-priced, lower margin diamond jewelry and higher inventory costs);
- International Retail: 24% in 2004, compared with 27% in 2003 (decrease was primarily due to product sales mix, higher inventory costs, increased import tariffs on U.S. manufactured products shipped to Europe and increased SG&A expenses);
- Direct Marketing: 21% in 2004, compared with 23% in 2003 (decrease was primarily due to lower sales and higher fixed expenses; in particular, incremental expenses associated with the Customer Fulfillment Center ("CFC") which opened in September 2003 and primarily supports the Company's Direct Marketing Segment);
- Other: (26)% in 2004, compared with (12)% in 2003 (the greater loss was primarily due to impairment and exit costs incurred in 2004, expenses associated with the start-up and development of new specialty retail concepts and sales of rough diamonds unsuitable for the Company's production, which earn a minimal gross margin).
Each segment's earnings (losses) from operations in 2004 were affected by an allocation of the expense associated with the adoption of SFAS No. 123R.
Earnings from operations (before unallocated corporate expenses) rose 13% in 2003. On a segment basis, the ratios of earnings (losses) from operations to each segment's net sales in 2003 compared with 2002 were as follows:
- U.S. Retail: 24% in 2003, compared with 23% in 2002 (increase was primarily due to strong sales growth that more than absorbed the rate of increase in fixed expenses);
- International Retail: 27% in 2003, compared with 28% in 2002 (decrease was primarily due to a lower gross margin as a result of product sales mix, partly offset by sales growth that absorbed the rate of increase in fixed expenses);
- Direct Marketing: 23% in 2003, compared with 24% in 2002 (decrease was primarily due to expenses associated with the CFC, partly offset by sales growth that absorbed the rate of increase in fixed expenses);
- Other: (12)% in 2003, compared with (5)% in 2002 (the greater loss was primarily due to a full year impact of consolidating Little Switzerland in 2003 and expenses associated with the start-up and development of new specialty retail concepts).
Unallocated corporate expenses include costs related to the Company's administrative support functions, such as information technology, finance, legal and human resources. Unallocated corporate expenses increased 32% in 2004 and 18% in 2003. The 32% increase in 2004 was primarily due to the Company's $25,000,000 contribution to The Tiffany & Co. Foundation, as well as incremental labor and benefit costs. The 18% increase in 2003 was primarily due to increases in information technology infrastructure costs, as well as increases in other administrative support costs.
INTEREST EXPENSE AND FINANCING COSTS
Interest expense rose in 2004 due to a higher level of average borrowings, a higher weighted-average interest rate and lower capitalized interest on capital expenditures. Interest expense declined in 2003 primarily due to a lower weighted-average interest rate, partially offset by interest on the yen-denominated long-term debt issuance entered into in September 2003 and lower capitalized interest for capital expenditures.
26 TIFFANY & CO. AND SUBSIDIARIES
OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net includes interest income, (gains) losses on investment activities and foreign currency transactions, and minority interest (income) expense. Other (income) expenses, net increased in 2004 and 2003. The increase in 2004 was primarily due to increased interest income resulting from an increased average investment level and more favorable interest rates, as well as increased minority interest income. In 2003, other (income) expenses, net increased primarily due to decreased losses on investments accounted for under the equity method.
GAIN ON SALE OF EQUITY INVESTMENT
In December 2004, the Company sold its entire investment holdings of eight million shares in Aber, which had been acquired in July 1999, and recorded a pre-tax gain of $193,597,000 (see Liquidity and Capital Resources).
PROVISION FOR INCOME TAXES
The effective income tax rate was 35.6% in 2004, compared with 37.1% in 2003 and 36.6% in 2002. The decrease in 2004's tax rate from 2003 was primarily due to the effect of the American Jobs Creation Act of 2004 ("AJCA") and the favorable state tax treatment on the gain from the Company's sale of its equity investment in Aber, partly offset by a favorable reserve adjustment in 2003 related to the elimination of certain tax exposures. The AJCA, which was signed into law on October 22, 2004, creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. This incentive will effectively reduce the amount of U.S. Federal income tax due on the repatriation. During the year ending January 31, 2006, the Company plans to repatriate approximately $100,000,000 of accumulated foreign earnings in the form of extraordinary dividends, as defined in the AJCA. The Company had previously accrued income taxes on these earnings at historical statutory rates. Therefore, an income tax benefit of $8,600,000 has been recorded as of January 31, 2005, pursuant to the Company's repatriation plans and the provisions of the AJCA.
The increase in the tax rate in 2003 was largely due to the Company's recognition in 2002 of the cumulative effect of prior periods' tax benefits provided by the Extraterritorial Income Exclusion Act of 2000 ("ETI"). Tax benefits related to the ETI were not recognized until the third quarter of 2002 when the Company determined the ETI was applicable to its operations and recorded a nonrecurring, cumulative tax benefit. The ETI provides for the exclusion from United States taxable income of certain "extraterritorial" income earned from the sale or license of qualified property. The 2003 income tax rate also benefited from a favorable reserve adjustment related to the elimination of certain tax exposures.
The AJCA also provides a deduction for income from qualified domestic production activities ("manufacturing deduction"), which will be phased in from 2005 through 2010. Pursuant to FASB Staff Position No. 109-1, "Application of SFAS No. 109 (Accounting for Income Taxes), to the Tax Deduction on Qualified Production Activities provided by the AJCA," the effect of this deduction will be reported in the period in which the deduction is claimed on the Company's tax return beginning in 2005. As regulations are still pending, management has been unable to quantify this effect.
In return for this manufacturing deduction, the AJCA provides for a two-year phase out of the existing ETI exclusion tax benefit for foreign sales which the World Trade Organization ("WTO") ruled was an illegal export subsidy. The European Union believes that the AJCA fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these transitional provisions are in compliance with their prior ruling. Pending the final resolution of this matter, management is currently unable to predict what effect this issue will have on future earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been, and are expected to remain, primarily a function of its seasonal working capital requirements and capital expenditure needs, which have increased due to the Company's expansion. The Company had net cash inflows from operating activities of $130,853,000 in 2004, $283,842,000 in 2003 and $221,441,000 in 2002. The decrease in 2004 resulted from a decrease in net earnings, after adjustment for non-cash items, and higher inventory purchases. The improved inflow
TIFFANY & CO. AND SUBSIDIARIES 27
in 2003 was due to increased earnings and non-cash items.
WORKING CAPITAL
Working capital (current assets less current liabilities) and the corresponding current ratio (current assets divided by current liabilities) were $1,208,068,000 and 4.0 at January 31, 2005, compared with $952,923,000 and 3.4 at January 31, 2004.
Accounts receivable, less allowances, at January 31, 2005 were 1% higher than January 31, 2004. On a 12-month rolling basis, accounts receivable turnover was 18 times in 2004 and 17 times in 2003.
Inventories, net at January 31, 2005 were 21% above January 31, 2004. Raw material and work-in-process inventories increased 43% and 7%, due to increased direct rough-diamond sourcing, internal jewelry manufacturing and costs of raw materials. Finished goods inventories increased 17% largely to support new store openings, product introductions and strategic merchandising investments. The Company continually strives to manage its inventories by developing more effective systems and processes for product development, assortment planning, sales forecasting, supply-chain logistics and store replenishment. Management expects a single-digit percentage increase in inventories in 2005.
CAPITAL EXPENDITURES
Capital expenditures were $142,321,000 in 2004, $272,900,000 in 2003 and $219,717,000 in 2002, representing 6%, 14% and 13% of net sales in 2004, 2003 and 2002. In all three years, a portion of the expenditures was related to the opening, renovation and expansion of stores and distribution facilities and ongoing investments in new systems. Expenditures for store renovations were $34,398,000 in 2004, $25,253,000 in 2003 and $22,038,000 in 2002. In 2003, the Company purchased the land and building housing its Tokyo flagship store for $140,400,000 (U.S. dollar equivalent at the acquisition date). In 2002, the Company acquired the property housing its flagship store on Old Bond Street in London and an adjacent building at a total cost of $43,000,000 (U.S. dollar equivalent at the acquisition date), in order to renovate and reconfigure the interior retail selling space. Construction commenced in 2004 and is expected to be completed in 2006 at a cost of approximately $24,000,000. The Company currently does not intend to acquire any additional real estate housing its retail branch stores. Based on current plans, management estimates that capital expenditures will be approximately $175,000,000 in 2005, and expects that capital expenditures in future years will approximate 7-8% of net sales. In order to meet substantially increased customer demand for diamond and other gemstone jewelry, management intends to increase its internal jewelry manufacturing capacity in 2005 and is evaluating the establishment of an additional diamond polishing facility.
In 2000, the Company began a multi-year project to renovate and reconfigure its New York flagship store in order to increase the total sales area by approximately 25%, and to provide additional space for customer service, customer hospitality and special exhibitions. The increase in the sales area was completed in 2001 when the renovated second floor opened to provide an expanded presentation of engagement and other jewelry. The renovated sixth floor that now houses the customer service department opened in 2002. The renovated fourth floor that offers tableware merchandise opened in 2003. The renovated third floor with silver jewelry and accessories opened in 2004. In conjunction with the New York store project, the Company relocated its after-sales service functions and several of its administrative functions. The Company has spent approximately $83,000,000 to date for the New York store and related projects. Based on current plans, the Company estimates that the overall cost of these projects will be $110,000,000 when completed in 2007.
ACQUISITIONS AND INVESTMENTS
In December 2004, the Company sold its entire investment in Aber through a private offering. To gain Aber's consent to the sale, the Company paid a fee and ceded its right to representation on Aber's Board of Directors. Aber, in turn, paid the Company the present value of the right to purchase diamonds at a discount, under a purchase agreement, which obligates the Company to purchase, subject to availability and the Company's quality standards, a minimum of $50,000,000 of diamonds per year through 2013. Inclusive of the payments described above, the Company received proceeds of $278,081,000, net of investment banking and legal fees, related to the sale of its equity investment in Aber. A pre-tax gain of $193,597,000 was recognized on the sale of the stock, and $10,843,000 was
28 TIFFANY & CO. AND SUBSIDIARIES
deferred related to the present value of the discount under the purchase agreement. As the deferred amount represents the present value of the discount, interest will be recorded on the deferred amount, and the undiscounted amount will be recognized as a reduction of inventory costs. The Company used $25,000,000 of the proceeds for a charitable contribution to The Tiffany & Co. Foundation; management expects to use the balance for general corporate purposes, which will include share repurchases and additional investments to secure greater rough-diamond supply. The Company continues to maintain its commercial relationship with Aber through the diamond purchase agreement.
In December 2004, the Company made a $4,500,000 investment in a joint venture that owns and operates a diamond polishing facility. The Company's interest in, and control over, this venture are such that its results will be consolidated with those of the Company and its subsidiaries. The Company expects, through its investment, to gain access to additional supplies of diamonds that meet its quality standards. The Company also has conditional funding commitments of up to $5,500,000.
In December 2002, the Company made a $4,000,000 investment in Temple St. Clair, a privately-held company that designs and sells jewelry. In 2004 and 2003, the Company made additional investments of $2,500,000 and $4,500,000 in Temple St. Clair. At January 31, 2005, the Company also had $2,000,000 of conditional funding commitments remaining and the option to own 100% of Temple St. Clair in the future. Temple St. Clair is being consolidated in the Company's financial statements based on the Company's percentage of ownership and effective control over the direction of the operations of the business.
In November 2002, a subsidiary of the Company merged with and into Little Switzerland, following purchases of its common stock in May 2001 (which represented 45% of Little Switzerland's outstanding shares) and October 2002 (remaining outstanding shares) at a total cost of $37,076,000. The Company commenced the consolidation of Little Switzerland's operations effective October 1, 2002. Prior to the merger, the Company accounted for the investment under the equity method. The Company recorded an equity loss of $1,482,000 in 2002 for its share of Little Switzerland's results from operations in other (income) expenses, net
DIVIDENDS
Cash dividends paid were $33,569,000 in 2004, $27,700,000 in 2003 and $23,256,000 in 2002. The dividend payout ratio (dividends as a percentage of net earnings) was 11% in 2004,13% in 2003 and 12% in 2002. In May 2004, the Board of Directors declared a 20% increase in the quarterly rate on common shares, increasing it from $0.05 per share to $0.06 per share. In May 2003, the Board of Directors declared a 25% increase in the quarterly rate on common shares, increasing it from $0.04 per share to $0.05 per share.
STOCK REPURCHASES
In November 2003, the Board of Directors extended and increased the Company's stock repurchase program. That program, which was due to expire in November 2003, was extended until November 2006; the remaining authorization was increased by $100,000,000, allowing the Company at that time to repurchase up to $116,500,000 of the Company's outstanding Common Stock, in addition to shares which had already been purchased as of November 2003. The timing of purchases and the actual number of shares to be repurchased depend on a variety of discretionary factors such as price and other market conditions.
The Company's stock repurchase activity was as follows:
Years Ended January 31,
-------------------------------
(in thousands, except
per share amounts) 2005 2004 2003
----------------------------------------------------------
Cost of repurchases $ 86,732 $ 4,610 $ 37,526
Shares repurchased
and retired 2,735 200 1,350
Average cost
per share $ 31.71 $ 23.05 $ 27.80
|
In March 2005, the Board of Directors approved a new stock repurchase program and terminated the previously existing program. This new program, effective immediately, authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. Repurchases under this program in excess of $159,000,000 will be subject to lender approval under the Company's multi-bank credit facility ("Credit Facility"). The new program expires on March 30, 2007.
RECENT BORROWINGS
The Company's sources of working capital are internally-generated cash flows and borrowings available under multi-currency revolving credit facilities.
TIFFANY & CO. AND SUBSIDIARIES 29
In October 2004, the Company's obligation to repay a yen 5,500,000,000 ($51,530,000 at maturity) borrowing came due and was paid in full, primarily with proceeds from a new yen 5,000,000,000 short-term loan. The yen 5,000,000,000 ($46,845,000 at issuance) short-term loan agreement was entered into in October 2004, had an interest rate of 0.59%, came due in January 2005 and was paid in full with existing funds.
In September 2004, the Company exercised its option to increase its $200,000,000 Credit Facility to $250,000,000. The Credit Facility, originally entered into in November 2001 and expiring in November 2006, is with six participating banks and contains covenants that require maintenance of certain debt/equity and interest-coverage ratios, in addition to other requirements customary to loan facilities of this nature.
In June 2003, the Company partially financed the purchase of the land and building housing its Tokyo flagship store with a short-term yen 11,000,000,000 ($91,938,000 at issuance) bridge loan ("Bridge Loan"). The Bridge Loan had an interest rate of 0.58%, matured on September 30, 2003 and was paid in full.
In September 2003, the Company issued yen 15,000,000,000 ($145,050,000 on January 31,2005) of senior unsecured First Series Yen Bonds ("Bonds") due 2010 with principal due upon maturity and a fixed coupon rate of 2.02% payable in semi-annual installments. The Bonds were sold in a private transaction to qualified institutional investors in Japan. The proceeds from the issuance have been primarily used by the Company to repay the Bridge Loan.
The ratio of total debt (short-term borrowings and long-term debt) to stockholders' equity was 26% at January 31, 2005 and 33% at January 31, 2004.
Based on the Company's financial position at January 31, 2005, management anticipates that cash on hand, internally-generated cash flows and the funds available under the Credit Facility will be sufficient to support the Company's planned worldwide business expansion, share repurchases, debt service and seasonal working capital increases that are typically required during the third and fourth quarters of the year.
CONTRACTUAL CASH OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following is a summary of the Company's contractual cash obligations at January 31, 2005:
2006- 2008- There-
(in thousands) Total 2005 2007 2009 after
-------------------------------------------------------------------------
Operating
leases $ 550,615 $ 81,710 $ 137,060 $ 103,461 $ 228,384
Inventory
purchase
obligations 519,516 119,516 100,000 100,000 200,000
Long-term
debt 397,606 - - 101,230 296,376
Interest on
debt and
interest-rate
swap
agreements (a) 99,662 17,169 35,343 30,465 16,685
Construction-
in-progress 14,503 14,503 - - -
Non-inventory
purchase
obligations 8,233 8,233 - - -
Other
contractual
obligations (b) 18,010 11,275 6,235 500 -
--------------------------------------------------------
$ 1,608,145 $252,406 $ 278,638 $ 335,656 $ 741,445
========================================================
|
(a) Excludes interest payments on amounts outstanding under available lines of credit, as the outstanding amounts fluctuate based on the Company's working capital needs. Variable-rate interest payments were estimated based on rates at January 31, 2005. Actual payments may differ based on changes in interest rates.
(b) Other contractual obligations consist primarily of royalty and maintenance commitments and additional contingent funding commitments related to the Company's investments.
Note: The summary above does not include cash contributions for the Company's pension plan and cash payments for other postretirement obligations. The Company plans to contribute approximately $15,000,000 to the pension plan in 2005. However, this expectation is subject to change if actual asset performance is different than the assumed long-term rate of return on pension plan assets. The Company estimates cash payments for postretirement benefit obligations to be approximately $1,295,000 in 2005. In addition, the summary above does not include the credit facility that the Company is providing to Tahera Diamond Corporation ("Tahera"), see below.
30 TIFFANY & CO. AND SUBSIDIARIES
The following is a summary of the Company's commercial commitments at January 31, 2005:
Amount of commitment
expiration per period
--------------------------------
Total Less
amounts than 1-3
(in thousands) committed 1 year years
---------------------------------------------------------------
Lines of available credit* $ 265,241 $ 15,241 $250,000
Letters of credit and
financial guarantees 25,119 24,230 889
--------------------------------
$ 290,360 $ 39,471 $250,889
================================
|
* At January 31, 2005, $42,957,000 was drawn against these facilities.
In November 2004, the Company entered into an agreement with Tahera, a Canadian diamond mining and exploration company, to purchase or market all of the diamonds to be mined at the Jericho mine which is being developed and constructed by Tahera in Nunavut, Canada ("Project"). In consideration of that agreement, the Company provided a credit facility to Tahera which allows Tahera to draw up to Cdn$35,000,000 ($28,000,000 on January 31, 2005) to finance the development and construction of the Project. At January 31, 2005, there were no amounts outstanding under this credit facility.
MARKET RISK
The Company is exposed to market risk from fluctuations in foreign currency exchange rates and interest rates, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading or speculative purposes, and does not maintain such instruments that may expose the Company to significant market risk.
In Japan, the Company uses yen put options to minimize the effect of a strengthening U.S. dollar on yen-denominated transactions. To a lesser extent, the Company uses foreign-exchange forward contracts to protect against weakening local currencies. Gains or losses on these instruments substantially offset losses or gains on the assets, liabilities and transactions being hedged. Management neither foresees nor expects significant changes in foreign currency exposure in the near future.
The fair value of yen put options is sensitive to changes in yen exchange rates. If the market yen exchange rate at the time of the option's expiration is stronger than the contracted exchange rate, the Company allows the option to expire, limiting its loss to the cost of the option contract. The cost of the outstanding option contracts at January 31, 2005 and 2004 was $2,791,000 and $2,815,000. At January 31, 2005 and 2004, the fair value of outstanding yen put options was $915,000 and $762,000. The fair value of the options was determined using quoted market prices for these instruments. At January 31, 2005 and 2004, a 10% appreciation in yen exchange rates from the prevailing market rates would have resulted in a fair value of $79,000 and $70,000. At January 31, 2005 and 2004, a 10% depreciation in yen exchange rates from the prevailing market rates would have resulted in a fair value of $5,742,000 and $3,940,000.
At January 31, 2005 and 2004, the Company had $6,854,000 and $20,973,000 of outstanding forward foreign-exchange contracts, which subsequently matured by February 2005 and March 2004. Due to the short-term nature of the Company's forward foreign-exchange contracts, the book value of the underlying assets and liabilities approximates fair value.
The Company uses interest-rate swap contracts related to certain debt arrangements to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. The interest-rate swap contracts effectively convert fixed-rate obligations to floating-rate instruments. Additionally, since the fair value of the Company's fixed-rate long-term debt is sensitive to interest rate changes, the interest-rate swap contracts serve as a hedge to changes in the fair value of these debt instruments. A100 basis point increase in interest rates at January 31, 2005 and 2004 would have decreased the market value of the Company's fixed-rate long-term debt, including the effect of the interest-rate swap, by $15,459,000 and $17,213,000. A100 basis point decrease in interest rates at January 31, 2005 and 2004 would have increased the market value of the Company's fixed-rate long-term debt, including the effect of the a interest-rate swap, by $13,963,000 and $18,403,000.
Management does not expect significant changes in exposure to interest rate fluctuations, nor in market risk-management practices.
TIFFANY & CO. AND SUBSIDIARIES 31
SEASONALITY
As a jeweler and specialty retailer, the Company's business is seasonal in nature, with the fourth quarter typically representing a proportionally greater percentage of annual sales, earnings from operations and cash flow. Management expects such seasonality to continue.
RISK FACTORS
This document contains certain "forward-looking statements" concerning the
Company's objectives and expectations with respect to store openings, retail
prices, gross profit, expenses, inventory performance, capital expenditures and
cash flow. In addition, management makes other forward-looking statements from
time to time concerning objectives and expectations. As a jeweler and specialty
retailer, the Company's success in achieving its objectives and expectations is
partially dependent upon economic conditions, competitive developments and
consumer attitudes, including changes in consumer preferences for certain
jewelry styles and materials. However, certain assumptions are specific to the
Company and/or the markets in which it operates. The following assumptions,
among others, are "risk factors" which could affect the likelihood that the
Company will achieve the objectives and expectations communicated by management:
(i) that low or negative growth in the economy or in the financial markets,
particularly in the U.S. and Japan, will not occur and reduce discretionary
spending on goods that are, or are perceived to be, "luxuries"; (ii) that
consumer spending does not decline substantially during the fourth quarter of
any year; (iii) that unsettled regional and/or global conflicts or crises do not
result in military, terrorist or other conditions creating disruptions or
disincentives to, or changes in the pattern, practice or frequency of tourist
travel to the various regions where the Company operates retail stores nor to
the Company's continuing ability to operate in those regions; (iv) that sales in
Japan will not decline substantially; (v) that there will not be a substantial
adverse change in the exchange relationship between the Japanese yen and the
U.S. dollar; (vi) that Mitsukoshi and other department store operators in Japan,
in the face of declining or stagnant department store sales, will not close or
consolidate stores which have TIFFANY & CO. retail locations; (vii) that
Mitsukoshi will continue as a leading department store operator in Japan; (viii)
that existing product supply arrangements, including license arrangements with
third-party designers Elsa Peretti and Paloma Picasso, will continue; (ix) that
the wholesale and retail market for high-quality rough and cut diamonds will
provide continuity of supply and pricing; (x) that the Company's diamond
initiatives achieve their financial and strategic objectives; (xi) that the
Company's gross margins in Japan and for diamond products can be maintained in
the face of increased competition from traditional and e-commerce retailers;
(xii) that the Company is able to pass on higher costs of raw materials to
consumers through price increases; (xiii) that the sale of counterfeit products
does not significantly undermine the value of the Company's trademarks and
demand for the Company's products; (xiv) that new and existing stores and other
sales locations can be leased, re-leased or otherwise obtained on suitable terms
in desired markets and that construction can be completed on a timely basis;
(xv) that the Company can achieve satisfactory results from any current and
future businesses into which it enters that are operated under non-TIFFANY & CO.
trademarks or trade names; and (xvi) that the Company's expansion plans for
retail and direct selling operations and merchandise development, production and
management can continue to be executed without meaningfully diminishing the
distinctive appeal of the TIFFANY & CO. brand.
32 TIFFANY & CO. AND SUBSIDIARIES
REPORT OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION
The Company's consolidated financial statements were prepared by management, who are responsible for their integrity and objectivity. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on management's best estimates and judgments.
Management is further responsible for maintaining a system of internal accounting control designed to provide reasonable assurance that the Company's assets are adequately safeguarded, and that the accounting records reflect transactions executed in accordance with management's authorization. The system of internal control is continually reviewed and is augmented by written policies and procedures, the careful selection and training of qualified personnel and a program of internal audit.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report is shown on page 34.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with financial management and the independent registered public accounting firm to discuss specific accounting, financial reporting and internal control matters. Both the independent registered public accounting firm and the internal auditors have full and free access to the Audit Committee. Each year the Audit Committee selects the firm that is to perform audit services for the Company.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a - 15(f). Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management concluded that internal control over financial reporting was effective as of January 31,2005 based on criteria in internal Control - Integrated Framework issued by the COSO. Management's assessment of the effectiveness of internal control over financial reporting as of January 31,2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is shown on page 34.
/s/ Michael J. Kowalski ----------------------- Michael J. Kowalski CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER /s/ James E. Quinn ------------------ James E. Quinn PRESIDENT /s/ James N. Fernandez ---------------------- James N. Fernandez EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER |
TIFFANY & CO. AND SUBSIDIARIES 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Tiffany & Co.
We have completed an integrated audit of Tiffany & Co.'s fiscal year 2004 consolidated financial statements and of its internal control over financial reporting as of January 31, 2005, and audits of its fiscal year 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
CONSOLIDATED FINANCIAL STATEMENTS
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of stockholders' equity and comprehensive earnings, and of cash flows present fairly, in all material respects, the financial position of Tiffany & Co. and its subsidiaries (the "Company") at January 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended January 31,2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note B to the consolidated financial statements, effective February 1, 2004, the Company adopted SFAS No. 123R, "Share-Based Payment."
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, in our opinion, management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of January 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
34 TIFFANY & CO. AND SUBSIDIARIES
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP New York, New York March 31, 2005 |
TIFFANY & CO. AND SUBSIDIARIES 35
Consolidated Balance Sheets
January 31,
----------------------------------
(in thousands, except per share amount) 2005 2004
--------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 187,681 $ 248,665
Short-term investments 139,200 27,450
Accounts receivable, less allowances of $7,491 and $6,992 133,545 131,990
Inventories, net 1,057,245 871,251
Deterred income taxes 64,790 45,043
Prepaid expenses and other current assets 25,428 23,683
----------------------------------
Total current assets 1,607,889 1,348,082
Property, plant and equipment, net 917,853 885,092
Other assets, net 140,376 157,914
----------------------------------
$2,666,118 $2,391,088
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 42,957 $ 41,948
Current portion of long-term debt - 51,920
Accounts payable and accrued liabilities 186,013 209,842
Income taxes payable 118,536 45,922
Merchandise and other customer credits 52,315 45,527
----------------------------------
Total current liabilities 399,821 395,159
Long-term debt 397,606 392,991
Postretirement/employment benefit obligations 40,220 36,746
Deferred income taxes 33,175 22,397
Other long-term liabilities 94,136 75,595
Commitments and contingencies
Stockholders' equity:
Common Stock, $0.01 par value; authorized
240,000 shares, issued and outstanding
144,548 and 146,735 1,445 1,467
Additional paid-in capital 426,308 395,182
Retained earnings 1,246,331 1,058,203
Accumulated other comprehensive gain
(loss), net of tax:
Foreign currency translation adjustments 29,045 15,856
Deferred hedging losses (2,118) (2,508)
Unrealized net gain on marketable securities 149 -
----------------------------------
Total stockholders' equity 1,701,160 1,468,200
----------------------------------
$2,666,118 $2,391,088
==================================
|
See Notes to Consolidated Financial Statements.
36 TIFFANY & CO. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended January 31,
------------------------------------
(in thousands, except per share amounts) 2005 2004 2003
-------------------------------------------- ---------- ---------- ----------
Net sales $2,204,831 $2,000,045 $1,706,602
Cost of sales 974,258 842,663 695,154
------------------------------------
Gross profit 1,230,573 1,157,382 1,011,448
Selling, general and administrative expenses 936,044 801,863 692,251
------------------------------------
Earnings from operations 294,529 355,519 319,197
Interest expense and financing costs 22,003 14,906 15,129
Other (income) expenses, net (6,025) (2,072) 4,431
Gain on sale of equity investment 193,597 - -
------------------------------------
Earnings before income taxes 472,148 342,685 299,637
Provision for income taxes 167,849 127,168 109,743
------------------------------------
Net earnings $ 304,299 $ 215,517 $ 189,894
====================================
Net earnings per share:
Basic $ 2.08 $ 1.48 $ 1.31
====================================
Diluted $ 2.05 $ 1.45 $ 1.28
====================================
Weighted-average number of common shares:
Basic 145,995 145,730 145,328
Diluted 148,093 148,472 148,591
|
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES 37
Consolidated Statements of Stockholders' Equity and Comprehensive Earnings
Accumulated
Total Other Common Stock Additional
Stockholders' Retained Comprehensive ---------------- Paid-in
(in thousands) Equity Earnings (Loss)Gain Shares Amount Capital
----------------------------- ----------------- ---------- ------------- ------ ------ ----------
Balances, January 31, 2002 $ 1,036,945 $ 743,543 $ (38,791) 145,001 $ 1,450 $330,743
Exercise of stock options 10,654 - - 1,185 13 10,641
Tax benefit from exercise of
stock options 11,039 - - - - 11,039
Issuance of Common Stock
under the Employee Profit
Sharing and Retirement
Savings Plan 1,000 - - 29 - 1,000
Purchase and retirement of
Common Stock (37,526) (35,487) - (1,350) (14) (2,025)
Cash dividends on Common Stock (23,256) (23,256) - - - -
Deferred hedging losses, net of
tax (8,799) - (8,799) - - -
Foreign currency translation
adjustments 30,745 - 30,745 - - -
Minimum pension liability
adjustment, net of tax (2,647) - (2,647) - - -
Net earnings 189,894 189,894 - - - -
----------------- ---------- ----------- --------- -------- --------
Balances, January 31, 2003 1,208,049 874,694 (19,492) 144,865 1,449 351,398
Exercise of stock options 22,587 - - 1,984 19 22,568
Tax benefit from exercise of
stock options 19,517 - - - - 19,517
Issuance of Common Stock
under the Employee Profit
Sharing and Retirement
Savings Plan 2,000 - - 86 1 1,999
Purchase and retirement of
Common Stock (4,610) (4,308) - (200) (2) (300)
Cash dividends on Common Stock (27,700) (27,700) - - - -
Deferred hedging losses, net of
tax (224) - (224) - - -
Foreign currency translation
adjustments, net of tax 30,417 - 30,417 - - -
Minimum pension liability
adjustment, net of tax 2,647 - 2,647 - - -
Net earnings 215,517 215,517 - - - -
----------------- ---------- ----------- --------- -------- --------
Balances, January 31, 2004 1,468.200 1,058,203 13,348 146,735 1,467 395,182
Exercise of stock options 6,691 - - 482 4 6,687
Tax benefit from exercise of
stock options 3,818 - - - - 3,818
Share-based compensation
expense 22,100 - - - - 22,100
Issuance of Common Stock
under the Employee Profit
Sharing and Retirement
Savings Plan 2,625 - - 66 1 2,624
Purchase and retirement of
Common Stock (86,732) (82,602) - (2,735) (27) (4,103)
Cash dividends on Common Stock (33,569) (33,569) - - - -
Deferred hedging gains, net of
tax 390 - 390 - - -
Unrealized net gain on
marketable securities 149 - 149 - - -
Foreign currency translation
adjustments, net of tax 13,189 - 13,189 - - -
Net earnings 304,299 304,299 - - - -
----------------- ---------- ----------- --------- -------- --------
Balances, January 31, 2005 $ 1,701,160 $1,246,331 $ 27,076 144,548 $ 1,445 $426,308
================= ========== =========== ========= ======== ========
|
Years Ended January 31,
-------------------------------
2005 2004 2003
-------- -------- ---------
Comprehensive earnings are as follows:
Net earnings $304,299 $215,517 $ 189,894
Deferred hedging gains (losses), net of tax expense
(benefit) of $210, ($121) and ($4,738) 390 (224) (8,799)
Foreign currency translation adjustments,
net of tax expense of $5,917, $10,350 and $0 13,189 30,417 30,745
Unrealized net gain on marketable securities, net of
tax expense of $93 149 - -
Minimum pension liability adjustment, net of tax
expense (benefit) of $0, $1,863 and ($1,863) - 2,647 (2,647)
-------- -------- ---------
$318,027 $248,357 $ 209,193
======== ======== =========
|
See Notes to Consolidated Financial Statements.
38 TIFFANY & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31,
-------------------------------------
(in thousands) 2005 2004 2003
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 304,299 $ 215,517 $ 189,894
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 108,185 89,482 78,008
Gain on sale of equity investment (193,597) - -
(Earnings) loss on equity investments (181) 694 2,893
Excess tax benefits from share-based payment arrangements (2,000) - -
Provision for uncollectible accounts 1,977 2,082 829
Provision for inventories 2,433 6,533 12,258
Deferred income taxes (15,060) 18,497 (1,315)
Provision for postretirement/employment benefits 3,474 3,630 3,117
Stock compensation expense 22,100 - -
Deferred hedging losses (gains) transferred to earnings 2,883 3,088 (6,762)
Impairment charges 12,193 - -
Changes in assets and liabilities, excluding
effects of acquisitions:
Accounts receivable 2,983 (14,128) (7,987)
Inventories (175,392) (109,183) (64,460)
Prepaid expenses and other current assets (3,886) (3,554) 445
Other assets, net (17,426) 10,031 (130)
Accounts payable (17,887) 16,559 (3,527)
Accrued liabilities (5,388) 22,543 13,235
Income taxes payable 75,810 21,798 (386)
Merchandise and other customer credits 6,687 2,617 3,786
Deferred supplier discounts 10,843 - -
Other long-term liabilities 7,803 (2,364) 1,543
-------------------------------------
Net cash provided by operating activities 130,853 283,842 221,441
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equity investment 267,238 - -
Purchases of marketable securities and
short-term investments (383,989) (27,450) -
Proceeds from sales of marketable securities
and short-term investments 237,519 - -
Capital expenditures (142,321) (272,900) (219,717)
Acquisitions, net of cash acquired (4,500) - (26,499)
Purchases of other investments (4,212) - -
Other - 3,214 2,945
-------------------------------------
Net cash used in investing activities (30,265) (297,136) (243,271)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 135,105 100,000
Repayment of current portion of long-term debt (51,530) (4,000) (51,500)
Repayment of short-term borrowings, net (797) (15,225) (1,905)
Repurchase of Common Stock (86,732) (4,610) (37,526)
Proceeds from exercise of stock options 6,691 22,587 10,654
Excess tax benefits from share-based payment
arrangements 2,000 - -
Cash dividends on Common Stock (33,569) (27,700) (23,256)
-------------------------------------
Net cash (used in) provided by financing activities (163,937) 106,157 (3,533)
-------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 2,365 (395) 7,885
-------------------------------------
Net (decrease) increase in cash and cash equivalents (60,984) 92,468 (17,478)
Cash and cash equivalents at beginning of year 248,665 156,197 173,675
-------------------------------------
Cash and cash equivalents at end of year $ 187,681 $ 248,665 $ 156,197
=====================================
|
See Notes to Consolidated Financial Statements.
TIFFANY & CO. AND SUBSIDIARIES 39
Notes to Consolidated Financial Statements
A. NATURE OF BUSINESS
Tiffany & Co. is a holding company that operates through its domestic and foreign subsidiary companies ("Company"). The Company's principal subsidiary, Tiffany and Company, is an internationally-renowned jeweler and specialty retailer whose merchandise offerings include fine jewelry, timepieces, sterling silverware, china, crystal, stationery, fragrances and personal accessories. Through Tiffany and Company and other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.
The Company operates through the following channels of distribution:
- U.S. Retail includes sales in TIFFANY & CO. stores in the U.S.;
- International Retail includes sales in TIFFANY & CO. stores and department store boutiques outside the U.S., as well as a limited amount of business-to-business sales, Internet sales and wholesale sales of TIFFANY & CO. products outside the U.S.;
- Direct Marketing includes Internet, catalog and business-to-business sales in the U.S.; and
- Other includes worldwide sales of businesses operated under non-TIFFANY & CO. trademarks or trade names ("specialty retail") as well as sales associated with the Company's diamond sourcing and manufacturing operations.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on January 31 of the following calendar year. All references to years relate to fiscal years rather than calendar years.
BASIS OF REPORTING
The consolidated financial statements include the accounts of the Company and its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participating rights or in the case of variable interest entities, by majority exposure to expected losses, residual returns or both. Intercompany accounts, transactions and profits have been eliminated in consolidation. The equity method of accounting is used for investments in which the Company has significant influence, but not a controlling interest. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America; these principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates include valuation of inventories, provisions for income taxes, the recoverability of long-lived assets and obligations related to employee benefit plans. Actual results could differ from these estimates. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements relative to current conditions and records the effect of any necessary adjustments.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' consolidated financial statements and related note disclosures to conform with the current year's presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents include highly liquid investments with an original maturity of three months or less and consist of time deposits and money market fund investments with a number of U.S. and non-U.S. financial institutions with high credit ratings. The Company's policy restricts the amounts invested in any one institution.
SHORT-TERM INVESTMENTS
In 2004, management concluded that it was appropriate to classify the Company's investment in auction rate securities as short-term investments in the consolidated balance sheets. The prior year amounts have been reclassed to conform to the current year presentation. In addition, adjustments to the prior year consolidated statements of cash flows have been made to reflect the gross purchases and sales of these securities as investing activities rather than as cash and cash equivalents. This change in classification does not affect previously reported cash flows from operations or from financing activities, nor does it affect previously reported consolidated statements of earnings for any period.
RECEIVABLES AND FINANCE CHARGES
The Company's U.S. and international presence and its large, diversified customer base serve to limit overall credit
40 TIFFANY & CO. AND SUBSIDIARIES
risk. The Company maintains reserves for potential credit losses and, historically, such losses, in the aggregate, have not exceeded expectations.
Finance charges on retail revolving charge accounts are not significant and are accounted for as a reduction of selling, general and administrative expenses.
INVENTORIES
Inventories are valued at the lower of cost or market. U.S. and foreign branch inventories, excluding Japan, are valued using the last-in, first-out (LIFO) method. Inventories held by foreign subsidiaries and Japan are valued using the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives: 39 years for buildings, 5-15 years for machinery and equipment and 3-10 years for office equipment and store fixtures. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized. Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost, and any gain or loss is reflected in current earnings.
The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. The Company's capitalized interest costs were $40,000 in 2004, $2,335,000 in 2003 and $3,296,000 in 2002.
INTANGIBLE ASSETS
Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives. Intangible assets are reviewed for impairment in accordance with the Company's policy for impairment of long-lived assets (see Note E). Intangible assets amounted to $14,165,000 and $12,934,000, net of accumulated amortization of $3,766,000 and $3,493,000 at January 31, 2005 and 2004, and consist primarily of trademarks and product rights. Amortization of intangible assets for the years ended January 31, 2005, 2004 and 2003 was $886,000, $840,000 and $616,000. Amortization expense in each of the next five years is estimated to be $852,000.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets acquired
and, until February 1, 2002, was subject to amortization over 20 years using the
straight-line method. In 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized
to earnings but instead be reviewed annually for potential impairment (see Note
E). At January 31, 2005 and 2004, unamortized goodwill was included in other
assets, net and consisted of the following by segment:
January 31,
----------------------
(in thousands) 2005 2004
---------------------------------------
U.S. Retail $ 10,312 $ 10,312
International 831 831
Retail
Other 8,803 10,766
----------------------
$ 19,946 $ 21,909
======================
|
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when management determines that the carrying value of such assets may not be recoverable due to events or changes in circumstances. Recoverability of long-lived assets is evaluated by comparing the carrying value of the asset with the estimated future undiscounted cash flows. If the comparisons indicate that the asset is not recoverable, an impairment loss is calculated as the difference between the carrying value and the fair value of the asset and the loss is recognized during that period (see Note E).
HEDGING INSTRUMENTS
The Company uses a limited number of derivative financial instruments to mitigate its foreign currency and interest rate exposures. Derivative instruments are recorded on the consolidated balance sheet at their fair value, as either assets or liabilities, with an offset to current or comprehensive earnings, depending on whether a derivative is designated as part of an effective hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions, changes in fair value of the derivative and changes
TIFFANY & CO. AND SUBSIDIARIES 41
in the fair value of the item being hedged are recorded in current earnings. For cash flow hedge transactions, the effective portion of the changes in fair value of derivatives are reported as other comprehensive earnings and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Amounts excluded from the effectiveness calculation and any ineffective portions of the change in fair value of the derivative of a cash-flow hedge are recognized in current earnings. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items. The Company also documents its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in current earnings. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not use derivative financial instruments for trading or speculative purposes.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and are recorded at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are recorded in other (income) expenses, net. The marketable securities are held for an indefinite period of time, but might be sold in the future as changes in market conditions or economic factors occur. The fair value of the marketable securities is determined based on prevailing market prices.
MERCHANDISE AND OTHER CUSTOMER CREDITS
Merchandise and other customer credits represent outstanding credits issued to customers for returned merchandise. It also includes outstanding gift coins and gift certificates or cards (collectively "gift cards") sold to customers. All such outstanding items may be tendered for future merchandise purchases. A merchandise credit liability is established when a merchandise credit is issued to a customer for a returned item and the original sale is reversed. A gift card liability is established when the gift card is sold. The liabilities are relieved and revenue is recognized when merchandise is purchased and delivered to the customer and the merchandise credit or gift card is used as a form of payment.
If merchandise credits or gift cards are not redeemed over an extended period of time (approximately three-five years), the value of the merchandise credits or gift cards is remitted to the applicable state jurisdiction in accordance with unclaimed property laws.
REVENUE RECOGNITION
Sales are recognized at the "point of sale," which occurs when merchandise is taken in an "over-the-counter" transaction or upon receipt by a customer in a shipped transaction. Sales are reported net of returns. Shipping and handling fees billed to customers are included in net sales and the related costs are included in cost of sales. The Company maintains a reserve for potential product returns and it records, as a reduction to sales and cost of sales, its provision for estimated product returns, which is determined based on historical experience. In 2004, 2003 and 2002, the largest portion of the Company's sales was denominated in U.S. dollars.
COST OF SALES
Cost of sales includes costs related to merchandise, inbound freight, purchasing and receiving, inspection, warehousing, internal transfers and other costs associated with distribution. Cost of sales also includes royalty fees paid to outside designers and customer shipping and handling charges.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
SG&A expenses include costs associated with the selling and promotion of products as well as administrative expenses. The types of expenses associated with these functions are store payroll and benefits, rent and other store operating expenses, advertising and other corporate level administrative expenses.
42 TIFFANY & CO. AND SUBSIDIARIES
ADVERTISING COSTS
Media and production costs for print advertising are expensed as incurred, while catalog costs are expensed upon mailing. Advertising costs, which include media, production, catalogs, promotional events and other related costs totaled $134,963,000, $122,382,000 and $101,867,000 in 2004, 2003 and 2002.
PREOPENING COSTS
Costs associated with the opening of new retail stores are expensed in the period incurred.
STOCK-BASED COMPENSATION
In the fourth quarter of 2004, the Company adopted SFAS No. 123R, "Share-Based Payment," which requires that new, modified and unvested share-based payment transactions with employees, such as stock options and restricted stock, be measured at fair value and recognized as compensation expense over the vesting period. The Company adopted SFAS No. 123R, retroactive to February 1, 2004, using the modified retrospective method of transition. This method allows for restatement of interim financial statements in the year of adoption based on the amounts previously calculated and reported in the pro forma footnote disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation." The adoption of SFAS No. 123R in 2004 resulted in a reduction in earnings from operations of $22,100,000, a reduction in net earnings of $13,448,000, a reduction in basic and diluted earnings per share of $0.09, a reduction of $2,000,000 in cash flows from operating activities and an increase of $2,000,000 in cash flows from financing activities.
Prior to 2004, employee stock options were accounted for under the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Compensation costs were not recorded in net earnings for stock options, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation expense been determined and recorded based on the fair-value recognition provisions of SFAS No. 123, net earnings and earnings per share would have been reduced to pro forma amounts as follows:
Years Ended January 31,
------------------------
(in thousands, except per
share amounts) 2004 2003
---------------------------------------------------------------
Net earnings, as reported $ 215,517 $ 189,894
Stock-based employee
compensation expense
determined under fair-value-based
method for all awards, net of tax (13,236) (12,803)
--------------------------
Pro forma net earnings $ 202,281 $ 177,091
==========================
Earnings per basic share:
As reported $ 1.48 $ 1.31
Pro forma $ 1.39 $ 1.22
Earnings per diluted share:
As reported $ 1.45 $ 1.28
Pro forma $ 1.36 $ 1.19
|
MERCHANDISE DESIGN ACTIVITIES
Merchandise design activities consist of conceptual formulation and design of possible products and creation of pre-production prototypes and molds. Costs associated with these activities are expensed as incurred.
FOREIGN CURRENCY
The functional currency of most of the Company's foreign subsidiaries and branches is the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as a component of other comprehensive earnings within stockholders' equity. Gains and losses resulting from foreign currency transactions have not been significant and are included in other (income) expenses, net.
INCOME TAXES
Income taxes are accounted for by using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. The Company, its domestic subsidiaries and the foreign branches of its domestic subsidiaries file a consolidated Federal income tax return.
TIFFANY & CO. AND SUBSIDIARIES 43
EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the dilutive effect of the assumed conversion of stock options and restricted stock units.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that those items be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management is currently evaluating the effect that the adoption of this Statement will have on the Company's financial position, earnings and cash flows.
In May 2004, the FASB issued Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP No. 106-2"). FSP No. 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Act"). The Medicare Act provides subsidies to plan sponsors who provide prescription benefits that are at least actuarially equivalent to prescription benefits under regulations issued by the Centers for Medicare & Medicaid Services. The Company adopted FSP No. 106-2 in the third quarter of 2004 and its effect was not significant on the Company's financial position, earnings or cash flows.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R replaced the same titled FIN 46 that was issued in January 2003. FIN 46R requires that a variable interest entity be consolidated by its primary beneficiary, if any, if the entity's equity investors at risk do not have the characteristics of a controlling financial interest or the equity investors do not have significant equity at risk for the entity to finance its activities without additional financial support. The provisions of FIN 46 were effective immediately for all entities created after January 31, 2003 and the provisions of FIN 46R were effective for those entities in the first quarter of 2004. For those entities created prior to February 1, 2003, the Company was required to adopt the provisions of FIN 46R by the end of the first quarter of 2004. The adoption of FIN 46 and FIN 46R did not have an effect on the Company's financial position, earnings or cash flows.
C. ACQUISITIONS
In December 2004, the Company made a $4,500,000 investment in a joint venture that owns and operates a diamond polishing facility. The Company's interest in, and control over, this venture are such that its results will be consolidated with those of the Company and its subsidiaries. The Company expects, through its investment, to gain access to additional supplies of diamonds that meet its quality standards. The Company also has conditional funding commitments of up to $5,500,000.
In May 2001, a subsidiary of the Company purchased 45% of Little Switzerland, Inc. ("Little Switzerland") outstanding shares of common stock by means of a direct investment in newly-issued unregistered shares at a cost of $9,546,000. Little Switzerland is a specialty retailer of jewelry, watches, crystal, china and giftware, operating stores primarily on Caribbean islands, as well as in Florida and Alaska. The Company accounted for this investment under the equity method, as provided in APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock," as amended. The Company's equity share of Little Switzerland's results from operations has been included in other (income) expenses, net and amounted to a loss of $1,482,000 in 2002 (through September 30). In October 2002, the Company purchased the remaining shares of Little Switzerland at a cost of $27,530,000. The purchase price was allocated to the assets acquired and liabilities assumed according to estimated fair values. The amount assigned to intangible assets was $10,615,000 and is being amortized over 20 years. The amount assigned to goodwill
44 TIFFANY & CO. AND SUBSIDIARIES
was $8,803,000, none of which is deductible for tax purposes. The Company commenced the consolidation of Little Switzerland's operations effective October 1, 2002.
D. INVESTMENTS
In July 1999, the Company made a strategic investment in Aber Diamond Corporation ("Aber"), a publicly-traded company headquartered in Canada, by purchasing, through a subscription agreement, eight million unregistered shares of its common stock, which represented 14.7% (at the purchase date) of Aber's outstanding shares, at a cost of $70,636,000. In addition, the Company entered into a diamond purchase agreement whereby the Company has the obligation to purchase a minimum of $50,000,000 of diamonds, subject to availability and the Company's quality standards, per year for 10 years beginning in 2004. Aber holds a 40% interest in the Diavik Diamond Mine in Canada's Northwest Territories, an operation developed to mine diamonds. Production commenced in 2003. This investment was included in other assets, net and was allocated, at the time of investment, between the Company's interest in the net book value of Aber and the intangible mineral rights obtained. The amount allocated to the Company's interest in Aber was accounted for under the equity method based on the Company's significant influence, including representation on Aber's Board of Directors.
At January 31, 2004, the Company's investment in Aber was $32,256,000 and the intangible mineral rights balance was $40,305,000. The Company's equity share of Aber's results from operations amounted to gains of $3,080,000 in 2004 and $244,000 in 2003, and a loss of $1,076,000 in 2002. The mineral rights were depleted based on the projected units of production method and amounted to $2,899,000 and $938,000 in 2004 and 2003. There was no depletion recorded in 2002.
In December 2004, the Company sold its entire investment in Aber through a private offering. To gain Aber's consent to the sale, the Company paid a fee and ceded its right to representation on Aber's Board of Directors. Aber, in turn, paid the Company the present value of the right to purchase diamonds at a discount under the diamond purchase agreement. Inclusive of the payments described above, the Company received proceeds of $278,081,000, net of investment banking and legal fees, related to the sale of its equity investment in Aber. A pre-tax gain of $193,597,000 was recognized on the sale of the stock, and $10,843,000 was deferred related to the present value of the discount under the purchase agreement. As the deferred amount represents the present value of the discount, interest will be recorded on the deferred amount, and the undiscounted amount will be recognized as a reduction of inventory costs. The Company continues to maintain its commercial relationship with Aber through the diamond purchase agreement.
In December 2002, the Company made a $4,000,000 investment in Temple St. Clair, a privately-held company that designs and sells jewelry. In 2004 and 2003, the Company made additional investments of $2,500,000 and $4,500,000 in Temple St. Clair. At January 31, 2005, the Company also had $2,000,000 of conditional funding commitments remaining and the option to own 100% of Temple St. Clair in the future. Temple St. Clair is being consolidated in the Company's financial statements based on the Company's percentage of ownership and effective control over the direction of the operations of the business.
TIFFANY & CO. AND SUBSIDIARIES 45
E. ASSET IMPAIRMENTS AND EXIT COSTS
In accordance with its policy on impairment of goodwill, intangibles and long-lived assets, in 2004 the Company identified impairment losses in one of its international retail markets (included in the International Retail reportable segment) and in one of the Company's specialty retail businesses (included in a non-reportable segment - Other) as a result of store performance and cash flow projections. The Company recorded total charges of $12,193,000 in SG&A expenses related to the impairments as follows by segment:
International
(in thousands) Retail Other
-------------------------------------------
Fixed assets $ 5,572 $ 2,338
Intangibles - 2,320
Goodwill - 1,963
--------------------
$ 5,572 $ 6,621
====================
|
The impairment losses were calculated as the difference between the asset carrying values and their fair values which were determined based on the present value of estimated net cash flows.
In January 2005, management made a decision to no longer pursue one of the Company's specialty retail concepts that had been under development. As a result of this decision, the Company recorded a pre-tax charge of $2,932,000 in SG&A expenses consisting primarily of purchase commitments and severance costs.
In November 2002, the Company made a decision to discontinue offering service-award programs, which it operated through its Business Sales division. The Company fulfilled its customer commitments in 2003 without soliciting new employee service-award programs. Sales affected by this action represented less than $30,000,000 annually, or less than half of the Business Sales division's sales. As a consequence of that decision, the Company recorded a pre-tax charge of $1,400,000 in 2002, primarily related to employee separation costs and the disposal of obsolete, program-specific inventory. At January 31, 2004, all costs related to the exit of the service-award programs had been incurred and there was no reserve remaining.
F. MARKETABLE SECURITIES AND
SHORT-TERM INVESTMENTS
The following is a summary of the cost and fair value of the Company's marketable securities and short-term investments:
Year ended January 31, 2005
----------------------------------------------------
Gross Gross
Fair Unrealized Unrealized
(in thousands) Cost Value Gains Losses
-------------------------------------------------------------------------------
Mutual funds $ 35,515 $ 35,757 $ 263 $ 21
Auction rate
securities 139,200 139,200 _ _
----------------------------------------------------
$ 174,715 $ 174,957 $ 263 $ 21
====================================================
|
Year Ended January 31, 2004
----------------------------------------------------
Gross Gross
Fair Unrealized Unrealized
(in thousands) Cost Value Gains Losses
-------------------------------------------------------------------------------
Auction rate
securities $ 27,450 $ 27,450 $ - $ -
====================================================
|
Mutual funds are recorded in other assets, net while auction rate securities are classified as short-term investments.
G. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Years Ended January 31,
--------------------------------------
(in thousands) 2005 2004 2003
-------------------------------------------------------------------
Interest, net of
interest capitalization $ 19,476 $ 12,151 $ 12,562
======================================
Income taxes $ 101,178 $ 85,526 $ 100,059
======================================
|
Details of businesses acquired in purchase transactions:
Years Ended January 31,
---------------------------------------
(in thousands) 2005 2004 2003
-------------------------------------------------------------------------
Fair value of assets acquired $ 4,876 $ - $ 48,090
Liabilities assumed (376) - (20,560)
---------------------------------------
Cash paid for acquisition 4,500 - 27,530
Cash acquired - - (1,031)
---------------------------------------
Net cash paid for acquisition $ 4,500 $ - $ 26,499
=======================================
|
Supplemental noncash investing and financing activities:
Years Ended January 31,
--------------------------------
(in thousands) 2005 2004 2003
---------------------------------------------------- --------
Issuance of Common Stock
under the Employee
Profit Sharing and
Retirement Savings Plan $ 2,625 $ 2,000 $ 1,000
================================
|
46 TIFFANY & CO. AND SUBSIDIARIES
H. INVENTORIES
January 31,
-------------------------------
(in thousands) 2005 2004
--------------------------------------------------
Finished goods $ 771,192 $ 659,558
Raw materials 236,802 165,768
Work in-process 53,988 50,517
-------------------------------
1,061,982 875,843
Reserves (4,737) (4,592)
-------------------------------
$ 1,057,245 $ 871,251
===============================
|
LIFO-based inventories at January 31, 2005 and 2004 represented 66% and 69% of inventories, net, with the current cost exceeding the LIFO inventory value by $64,058,000 and $30,587,000.
I. PROPERTY, PLANT AND EQUIPMENT
January 31,
----------------------------
(in thousands) 2005 2004
--------------------------------------------------------
Land $ 238,326 $ 233,335
Buildings 188,765 188,327
Leasehold improvements 454,449 400,276
Construction-in-progress 27,192 16,479
Office equipment 335,580 292,317
Machinery and equipment 107,896 97,122
----------------------------
1,352,208 1,227,856
Accumulated depreciation
and amortization (434,355) (342,764)
----------------------------
$ 917,853 $ 885,092
============================
|
The provision for depreciation and amortization for the years ended January 31, 2005, 2004 and 2003 was $109,657,000, $91,608,000 and $79,682,000. In each of those years, the Company accelerated the depreciation of certain leasehold improvements and equipment as a result of the shortening of useful lives related to renovations and/or expansions of retail stores and office facilities. The amount of accelerated depreciation recognized was $5,274,000, $4,361,000 and $5,304,000 for the years ended January 31, 2005, 2004 and 2003.
J. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
January 31,
------------------------
(in thousands) 2005 2004
------------------------------------------------------
Accounts payable-trade $ 74,471 $ 91,010
Accrued compensation
and commissions 31,097 31,597
Accrued sales, withholding
and other taxes 40,629 42,396
Other 39,816 44,839
------------------------
$ 186,013 $ 209,842
========================
|
K. EARNINGS PER SHARE
The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings per share ("EPS") computations:
Year Ended January 3l,
--------------------------------------
(in thousands) 2005 2004 2003
---------------------------------------------------------------------------------
Net earnings for basic and diluted EPS $ 304,299 $ 215,517 $ 189,894
======================================
Weighted-average shares for basic EPS 145,995 145,730 145,328
Incremental shares from the assumed
conversion of stock options and
restricted stock units 2,098 2,742 3,263
--------------------------------------
Weighted-average shares for diluted EPS 148,093 148,472 148,591
--------------------------------------
|
For the years ended January 31, 2005, 2004 and 2003, there were 5,463,000, 1,791,000 and 4,991,000 stock options excluded from the computations of earnings per diluted share due to their antidilutive effect.
TIFFANY & CO. AND SUBSIDIARIES 47
L. DEBT
January 31,
-------------------------------------------------------
Carrying Amount Fair Value
-------------------------------------------------------
(in thousands) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------
Short-term borrowings:
Credit Facility $ 33,357 $ 32,861 $ 33,357 $ 32,861
Little Switzerland 9,600 9,087 9,600 9,087
-------------------------------------------------------
42,957 41,948 42,957 41,948
-------------------------------------------------------
Current portion of
long-term debt:
Variable-rate yen loan - 51,920 - 51,920
Long-term debt:
Senior Notes:
6.90% Series A 60,000 60,000 65,748 67,907
7.05% Series B 40,000 40,000 45,044 45,854
6.15% Series C 41,230 41,649 41,230 41,649
6.56% Series D 62,976 62,542 62,976 62,542
4.50% yen loan 48,350 47,200 58,942 58,290
First Series
Yen Bonds 145,050 141,600 155,133 150,715
-------------------------------------------------------
397,606 392,991 429,073 426,957
-------------------------------------------------------
$ 440,563 $ 486,859 $ 472,030 $ 520,825
=======================================================
|
The fair values of short-term borrowings and the variable-rate yen loan approximate carrying value due to their variable interest-rate terms. The fair values of long-term debt were determined using the quoted market prices of debt instruments with similar terms and maturities.
In October 2004, the Company's yen 5,500,000,000 ($51,530,000 at maturity) loan came due and was paid in full primarily with proceeds from a new yen 5,000,000,000 short-term loan. The yen 5,000,000,000 ($46,845,000 at issuance) short-term loan agreement was entered into in October 2004, had an interest rate of 0.59%, came due in January 2005 and was paid in full with existing funds.
In September 2004, the Company exercised its option to increase its $200,000,000 multi-bank credit facility ("Credit Facility") to $250,000,000. Borrowings are with six participating banks and are at interest rates based on a prime rate or LIBOR. The Credit Facility, which expires in November 2006, requires the payment of an annual fee based on the total amount of available credit and contains covenants that require maintenance of certain debt/equity and interest-coverage ratios, in addition to other requirements customary to loan facilities of this nature. The weighted-average interest rates for the Credit Facility were 3.58% and 3.15% at January 31, 2005 and 2004.
In September 2003, the Company issued yen 15,000,000,000 ($145,050,000 at January 31, 2005) of senior unsecured First Series Yen Bonds ("Bonds') due 2010 with principal due upon maturity and a fixed coupon rate of 2.02% payable in semi-annual installments. The Bonds were sold in a private transaction to qualified institutional investors in Japan. The proceeds from the issuance have been primarily used by the Company to repay the yen 11,000,000,000 ($91,938,000 at issuance) short-term bridge loan used to partially finance the purchase of the land and building housing its Tokyo flagship store, which was entered into in June 2003 and matured in September 2003.
In July 2002, the Company, in a private transaction with various institutional lenders, issued, at par, $40,000,000 of 6.15% Series C Senior Notes Due 2009 and $60,000,000 of 6.56% Series D Senior Notes Due 2012 with respective seven-year and 10-year lump sum repayments upon maturities. The proceeds of these issues were used by the Company for general corporate purposes, including seasonal working capital and to redeem previously issued Senior Notes which came due in January 2003. The Note Purchase Agreements require maintenance of specific financial covenants and ratios and limit certain changes to indebtedness and the general nature of the business, in addition to other requirements customary to such borrowings. Concurrently with the issuance of such debt, the Company entered into an interest-rate swap agreement to hedge the change in fair value of its fixed-rate obligation. Under the swap agreement, the Company pays variable-rate interest and receives fixed interest-rate payments periodically over the life of the instrument. The Company accounts for the interest-rate swap agreement as a fair-value hedge of the debt (see Note M), requiring the debt to be valued at fair value. As a result, the carrying value of the Series C and Series D Senior Notes equals the fair value. For the years ended January 31, 2005, 2004 and 2003, the interest-rate swap agreement had the effect of decreasing interest expense by $2,664,000, $3,965,000 and $1,999,000.
The Company had other lines of credit totaling $5,241,000, none of which were outstanding at January 31, 2005.
48 TIFFANY & CO. AND SUBSIDIARIES
In May 2003, Little Switzerland entered into an unsecured revolving credit facility ("LS Credit Facility") which allows Little Switzerland to borrow up to $10,000,000 at an interest rate of 0.80% above LIBOR or a LIBOR Market Index. The LS Credit Facility, which expires in November 2005, contains covenants that require the Company to maintain certain debt/equity and interest-coverage ratios, in addition to other requirements customary to loan facilities of this nature. The interest rate for the LS Credit Facility at January 31, 2005 and 2004 was 3.32% and 1.90%.
In October 1999, the Company entered into a yen 5,500,000,000 ($51,530,000 at maturity) five-year loan agreement, which came due and was paid in full in October 2004, bearing interest at a variable rate. The interest rate at January 31, 2004 was 0.57%, was based on the six-month Japanese LIBOR plus 50 basis points and was reset every six months ("floating rate"). Concurrently, the Company entered into a yen 5,500,000,000, five-year interest-rate swap agreement whereby the Company paid a fixed rate of interest of 1.82% and received the floating rate on the yen 5,500,000,000 notional amount. The interest-rate swap agreement had the effect of increasing interest expense by $469,000, $602,000 and $551,000 for the years ended January 31, 2005, 2004 and 2003.
In December 1998, the Company, in private transactions with various institutional lenders, issued, at par, $60,000,000 principal amount 6.90% Series A Senior Notes Due 2008 and $40,000,000 principal amount 7.05% Series B Senior Notes Due 2010. The proceeds of these issuances were used by the Company for working capital and to refinance a portion of outstanding short-term indebtedness. The Note Purchase Agreements require lump sum repayments upon maturities, maintenance of specific financial covenants and ratios and limit certain payments, investments and indebtedness, in addition to other requirements customary to such borrowings.
The Company has a yen 5,000,000,000 ($48,350,000 at January 31, 2005), 15-year term loan due 2011, bearing interest at a rate of 4.50%.
The Company had letters of credit and financial guarantees of $25,119,000 at January 31, 2005.
M. HEDGING INSTRUMENTS
In the normal course of business, the Company uses financial hedging instruments, including derivative financial instruments, for purposes other than trading. These instruments include interest-rate swap agreements, foreign currency-purchased put options and forward foreign-exchange contracts. The Company does not use derivative financial instruments for speculative purposes.
The Company's foreign subsidiaries and branches satisfy primarily all of their inventory requirements by purchasing merchandise from the Company's principal subsidiary. All inventory purchases are payable in U.S. dollars. Accordingly, the foreign subsidiaries and branches have foreign-exchange risk that may be hedged. In addition, the Company has foreign currency exchange risk related to foreign currency-denominated purchases of inventory and services from third-party vendors. To mitigate these risks, the Company manages a foreign currency hedging program intended to reduce the Company's risk in foreign currency-denominated transactions.
To minimize the potentially negative effect of a significant strengthening of the U.S. dollar against the yen, the Company purchases yen put options ("options") as hedges of forecasted purchases of merchandise. The Company accounts for its option contracts as cash-flow hedges. The Company assesses hedge effectiveness based on the total changes in the options' cash flows. The effective portion of unrealized gains and losses associated with the value of the option contracts is deferred as a component of accumulated other comprehensive gain (loss) and is recognized as a component of cost of sales on the Company's consolidated statement of earnings when the related inventory is sold There was no ineffectiveness related to the Company's option contracts in 2004, 2003 and 2002. The fair value of the options was $915,000 and $762,000 at January 31, 2005 and 2004. The fair value of the options was determined using quoted market prices for these instruments. The Company uses foreign-exchange forward contracts to hedge the settlement of foreign currency liabilities. At January 31, 2005 and 2004, the Company had $6,854,000 and $20,973,000 of outstanding
TIFFANY & CO. AND SUBSIDIARIES 49
forward foreign-exchange contracts, which subsequently matured by February 2005 and March 2004. Due to the short-term nature of the Company's forward foreign-exchange contracts, the book value of the underlying assets and liabilities approximates fair value.
As discussed in Note L, the Company uses an interest-rate swap agreement to effectively convert its fixed-rate Senior Notes Series C and Series D obligations to floating-rate obligations and used an interest-rate swap agreement to effectively convert its variable-rate yen obligation to a fixed-rate obligation. The variable-rate yen interest-rate swap expired in October 2004, concurrent with the maturity and repayment of the related hedged debt. The Company accounts for its fixed-rate Senior Notes Series C and Series D interest-rate swaps as a fair-value hedge and accounted for its variable-rate yen interest-rate swap as a cash-flow hedge. The terms of each swap agreement match the terms of the underlying debt, resulting in no ineffectiveness. The fair value of the Senior Notes' interest rate swap agreements resulted in a gain of $4,206,000 and $4,191,000 at January 31, 2005 and 2004. The fair value of the yen interest-rate swap agreement resulted in a loss of $471,000 at January 31, 2004. The fair value of the interest-rate swap agreements was based on the amounts the Company would expect to pay to terminate the agreements.
Hedging activity affected accumulated other comprehensive gain (loss), net of tax, as follows:
Years Ended January 31,
-----------------------
(in thousands) 2005 2004
----------------------------------------------------------------
Balance at beginning of period $(2,508) $(2,284)
Derivative losses transferred
to earnings 1,877 2,007
Change in fair value (1,487) (2,231)
---------------------
$(2,118) $(2,508)
=====================
|
The Company expects $1,734,000 of derivative losses included in accumulated other comprehensive income to be reclassified into earnings within the next 12 months. This amount may vary due to fluctuations in the yen exchange rate. The maximum term over which the Company is hedging its exposure to the variability of future cash flows for all forecasted transactions is 12 months.
N. COMMITMENTS AND CONTINGENCIES
The Company leases certain office, distribution, retail and manufacturing facilities. Retail store leases may require the payment of minimum rentals and contingent rent based on a percentage of sales exceeding a stipulated amount. The lease agreements, which expire at various dates through 2032, are subject, in many cases, to renewal options and provide for the payment of taxes, insurance and maintenance. Certain leases contain escalation clauses resulting from the pass-through of increases in operating costs, property taxes and the effect on costs from changes in consumer price indices.
Rent-free periods and other incentives granted under certain leases and scheduled rent increases are charged to rent expense on a straight-line basis over the related terms of such leases. Lease expense includes pre-determined rent escalations (including escalations based on the Consumer Price Index or other indices) and is recorded on a straight-line basis over the term of the lease. Adjustments to indices are treated as contingent rent and recorded in the period that such adjustments are determined. Rent expense for the Company's operating leases, including escalations, consisted of the following:
Years Ended January 31,
---------------------------------
(in thousands) 2005 2004 2003
--------------------------------------------------------------
Minimum rent for retail
locations $48,200 $41,261 $35,572
Contingent rent based
on sales 26,468 20,571 17,470
Office,distribution
and manufacturing
facilities rent 16,045 15,292 13,572
---------------------------------
$90,713 $77,124 $66,614
=================================
|
Aggregate minimum annual rental payments under noncancelable operating leases are as follows:
Minimum Annual
Rental Payments
Years Ending January 31, (in thousands)
-------------------------------------------------------
2006 $ 81,710
2007 75,364
2008 61,696
2009 54,497
2010 48,964
Thereafter 228,384
|
50 TIFFANY & CO. AND SUBSIDIARIES
At January 31, 2005, the Company's contractual cash obligations and contingent funding commitments were: inventory purchases of $519,516,000 including the obligation under the agreement with Aber (see Note D), non-inventory purchases of $8,233,000, construction-in-progress of $14,503,000 and other contractual obligations of $18,010,000, which includes additional contingent funding commitments related to the Company's investments (see Note D).
In November 2004, the Company entered into an agreement with Tahera Diamond Corporation ("Tahera"), a Canadian diamond mining and exploration company, to purchase or market all of the diamonds to be mined at the Jericho mine, which is being developed and constructed by Tahera in Nunavut, Canada. In consideration of that agreement, the Company provided a credit facility to Tahera which allows Tahera to draw up to Cdn$35,000,000 ($28,000,000 on January 31, 2005) to finance the development and construction of the Jericho mine. There were no amounts outstanding under this credit facility at January 31, 2005.
In August 2001, the Company signed new agreements with Mitsukoshi whereby TIFFANY & CO. boutiques will continue to be operated within Mitsukoshi's stores in Japan until at least January 31, 2007. The new agreements largely continue the principles on which Mitsukoshi and the Company have been cooperating since 1993, when the relationship was last renegotiated. The main agreement, which will expire on January 31, 2007, covers the continued operation of TIFFANY & CO. boutiques. A separate set of agreements covers the operation of a freestanding TIFFANY & CO. store on Tokyo's Ginza. Under the new agreements, the Company began to pay to Mitsukoshi a reduced percentage fee based on certain sales beginning in 2002, which was followed by a greater reduction in fees beginning in 2003. There are no further reductions under the current agreement. The Company also operates boutiques in other Japanese department stores. The Company pays the department stores a percentage fee based on sales generated in these locations. Fees paid to Mitsukoshi and other Japanese department stores totaled $77,850,000, $81,383,000 and $84,494,000 in 2004,2003 and 2002 and are included in SG&A expenses. Sales transacted at these retail locations are recognized at the "point of sale."
The Company is, from time to time, involved in routine litigation incidental to the conduct of its business, including proceedings to protect its trademark rights, litigation instituted by persons injured upon premises under the Company's control, litigation with present and former employees and litigation claiming infringement of the copyrights and patents of others. Management believes that such pending litigation will not have a significant effect on the Company's financial position, earnings or cash flows.
O. RELATED PARTIES
The Company's Chairman of the Board and Chief Executive Officer is a member of the Board of Directors of The Bank of New York, which serves as the Company's lead bank for its Credit Facility, provides other general banking services and serves as the trustee and an investment manager for the Company's pension plan. The Company's President is a member of the Board of Directors of BNY Hamilton Funds, Inc. Fees paid to the bank for services rendered, interest on debt and premiums on derivative contracts amounted to $2,213,000, $1,582,000 and $2,058,000 in 2004, 2003 and 2002.
The Company's Executive Vice President and Chief Financial Officer is a member of the Board of Directors of The Dun & Bradstreet Corporation. Fees paid to that company for credit information reports were less than $100,000 in each of 2004, 2003 and 2002.
A member of the Company's Board of Directors is an officer of IBM Corporation. Fees paid to that company for information technology equipment and services rendered amounted to $10,645,000, $11,837,000 and $12,218,000 in 2004,2003 and 2002.
A member of the Company's Board of Directors was an officer of Lehman Brothers, which has provided investment management services and served as a placement agent for certain debt issuances. Fees paid to that company for services rendered amounted to $159,000, $739,000 and $956,000 in 2004,2003 and 2002.
TIFFANY & CO. AND SUBSIDIARIES 51
P. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
In November 2003, the Board of Directors extended and increased the Company's stock repurchase program. That program, which was due to expire in November 2003, was extended until November 2006; the remaining authorization was increased by S100,000,000, allowing the Company at that time to repurchase up to $116,500,000 of the Company's outstanding Common Stock in addition to those shares which already had been purchased as of November 2003. The program was initially authorized in November 1997 for the repurchase of up to $100,000,000 of the Company's Common Stock in the open market over a three-year period. That authorization was superseded in September 2000 by a further authorization of repurchases of up to $100,000,000 of the Company's Common Stock in the open market. The timing of purchases and the actual number of shares to be repurchased depend on a variety of factors such as price and other market conditions. The Company's share repurchase activity was as follows:
Years Ended January 31,
(in thousands, ---------------------------------
except per share amounts) 2005 2004 2003
-------------------------------------------------------------
Cost of repurchases $86,732 $ 4,610 $37,526
Shares repurchased
and retired 2,735 200 1,350
Average cost per share $ 31.71 $ 23.05 $ 27.80
|
In March 2005, the Board of Directors approved a new stock repurchase program and terminated the previously existing program. This new program, effective immediately, authorizes the Company to repurchase up to $400,000,000 of its Common Stock through open market or private transactions. Repurchases under this program in excess of $159,000,000 will be subject to lender approval under the Company's Credit Facility. The new program expires on March 30, 2007.
STOCKHOLDER RIGHTS PLAN
In September 1998, the Board of Directors amended and restated the Company's existing Stockholder Rights Plan ("Rights Plan") to extend its expiration date from November 1998 to September 2008. Under the Rights Plan, as amended, each outstanding share of the Company's Common Stock has a stock purchase right, initially subject to redemption at $0.01 per right, which right first becomes exercisable should certain takeover-related events occur. Following certain such events, but before any person has acquired beneficial ownership of 15% of the Company's common shares, each right maybe used to purchase 0.0025 of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price of $165.00 (subject to adjustment); after such an acquisition, each right becomes nonredeemable and may be used to purchase, for the exercise price, common shares having a market value equal to two times the exercise price. If, after such an acquisition, a merger of the Company occurs (or 50% of the Company's assets are sold), each right may be exercised to purchase, for the exercise price, common shares of the acquiring corporation having a market value equal to two times the exercise price. Rights held by such a 15% owner may not be exercised This statement is a brief summary of the Rights Plan. The Rights Plan document is filed as an exhibit to the Company's Form 10-K.
PREFERRED STOCK
The Board of Directors is authorized to issue, without further action by the stockholders, shares of Preferred Stock and to fix and alter the rights related to such stock. In March 1987, the stockholders authorized 2,000,000 shares of Preferred Stock, par value $0.01 per share. In November 1988, the Board of Directors designated certain shares of such Preferred Stock as Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per share, to be issued in connection with the exercise of certain stock purchase rights under the Rights Plan. At January 31, 2005 and 2004, there were no shares of Preferred Stock issued or outstanding.
CASH DIVIDENDS
In May 2004, the Company's Board of Directors declared an increase of 20% in the quarterly dividend rate on common shares, increasing the quarterly rate from $0.05 per share to $0.06 per share. On February 17, 2005, the Board of Directors declared a quarterly dividend of $0.06 per common share. This dividend will be paid on April 11, 2005 to stockholders of record on March 21, 2005.
Q. STOCK COMPENSATION PLANS
The Company has two stock compensation plans: the 1998 Employee Incentive Plan and the Directors Option Plan,
52 TIFFANY & CO. AND SUBSIDIARIES
both of which were approved by the stockholders. No award may be made under either plan after March 19, 2008. No further stock options may be granted under the Company's 1986 Employee Stock Option Plan or under the 1988 Directors Option Plan, both of which have expired; however, 1,869,345 and 264,160 shares remain subject to issuance based on prior grants made under such plans, respectively.
Under the Employee Incentive Plan, the maximum number of common shares authorized for issuance was 15,373,764, as amended (subject to adjustment); awards may be made to employees of the Company or its related companies in the form of stock options, stock appreciation rights, shares of stock and cash.
Awards made in the form of non-qualified stock options, tax-qualified incentive stock options or stock appreciation rights have a maximum term of 10 years from the grant date and may not be granted for an exercise price below fair-market value.
Until January 2005, the Company granted only stock options to employees, vesting in increments of 25% per year over four years. In January 2005, the Company, in addition to stock options, granted performance share units ("PSU") to the executive officers of the Company and restricted stock units ("RSU") to other management employees. PSU and RSU payouts will be in shares of Company stock at vesting. PSU's vest at the end of a three-year period, contingent on the Company's performance against pre-set objectives established by the Board of Directors. RSU's vest in increments of 25% per year over a four-year period. The PSU's and RSU's require no payment from the employee, and compensation expense is recognized based on the market price on the grant date ratably over the vesting period. However, PSU compensation expense may be adjusted over the vesting period if interim performance objectives are not met.
Under the Directors Option Plan, the maximum number of shares of Common Stock authorized for issuance was 1,000,000 (subject to adjustment); awards may be made to non-employee directors of the Company in the form of stock options or shares of stock but may not exceed 20,000 (subject to adjustment) shares per non-employee director in any fiscal year; awards made in the form of stock options may have a maximum term of 10 years from the grant date and may not be granted for an exercise price below fair-market value unless the director has agreed to forego all or a portion of his or her annual cash retainer or other fees for service as a director in exchange for below market exercise price options. All director options granted to-date vest in increments of 50% per year over a two-year period.
The Company uses newly-issued shares to satisfy stock option exercises and vesting of PSU's and RSU's.
The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model and compensation expense is recognized ratably over the vesting period. The valuation model uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock. The Company uses historical data to estimate the expected term of the option that represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date.
Years Ended January 31,
--------------------------
2005 2004 2003
-----------------------
Dividend yield 0.6% 0.6% 0.6%
Expected volatility 37.6% 37.5% 37.5%
Risk-free interest rate 3.7% 3.3% 2.9%
Expected term(years) 6 6 5
|
A summary of the option activity for the Company's stock option plans is presented below:
Weighted
Weighted Average Aggregate
Number Average Remaining Intrinsic
of Exercise Contractual Value
Shares Price Term(years) (in thousands)
----------------------------------------------------------
Outstanding
January 31,
2004 13,145,250 $ 26.58
Granted 1,197,780 32.56
Exercised (482,375) 13.76
Forfeited/
cancelled (271,685) 34.69
------------------------
Outstanding,
January 31,
2005 13,588,970 $ 27.40 6.34 $ 93,007
========================================================
Exercisable,
January 31,
2005 9,415,543 $ 24.67 5.28 $ 87,153
========================================================
|
TIFFANY & CO. AND SUBSIDIARIES 53
The weighted-average grant-date fair value of options granted for the years ended January 31,2005,2004 and 2003 was $12.98, $14.89 and $9.40. The total intrinsic value (market value on date of exercise less grant price) of options exercised during the years ended January 31,2005,2004 and 2003 was $10,569,000, $51,953,000 and $30,828,000.
There were 509,944 RSU's granted in 2004 at a weighted-average grant-date fair value of $31.68, all of which remain unvested at January 31, 2005. There were 346,000 PSU's granted in 2004 at a weighted-average grant-date fair value of $31.49, all of which remain unvested at January 31, 2005. There were no RSU's or PSU's granted prior to 2004.
As of January 31,2005, there was $64,116,000 of total unrecognized compensation expense related to non-vested share based compensation arrangements (options and restricted stock units) granted under the Employee Incentive Plan and Directors Option Plan. The expense is expected to be recognized over a weighted-average period of 3.1 years.
R. EMPLOYEE BENEFIT PLANS
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains the following pension plans: a noncontributory defined benefit pension plan ("Pension Plan") covering substantially all U.S. employees, a nonqualified unfunded retirement income plan ("Excess Plan") covering certain employees affected by Internal Revenue Service Code compensation limits and a non-qualified unfunded Supplemental Retirement Income Plan ("SRIP") that covers executive officers of the Company.
The Pension Plan is a qualified plan in accordance with the Internal Revenue Service Code. Pension Plan benefits are based on the highest five years of compensation and the number of years of service. The Company funds the Pension Plan's trust in accordance with regulatory limits to provide for current service and for unfunded benefit obligation over a reasonable period. The Company made cash contributions of $25,000,000 to the Pension Plan in 2004 and plans to contribute approximately $15,000,000 in 2005. However, this expectation is subject to change based on asset performance being significantly different than the assumed long-term rate of return on pension assets.
On January 1,2004, the Company established the Excess Plan which uses the same retirement benefit formula set forth in the Pension Plan, but includes earnings that are excluded under the Pension Plan due to Internal Revenue Service Code limitations. Benefits payable under the Pension Plan offset benefits payable under the Excess Plan. Employees vested under the Pension Plan are vested under the Excess Plan; however, benefits under the Excess Plan are subject to forfeiture if employment is terminated for cause and, for those who leave the Company prior to age 65, for failure to execute and adhere to non-competition and confidentiality covenants.
The SRIP is a supplement to the Pension Plan, Excess Plan and Social Security by providing additional payments upon a participant's retirement. Benefits payable under the Pension Plan, Excess Plan and Social Security offset payments payable under the SRIP. Benefits payable under the SRIP do not vest until a participant attains age 60 while employed by the Company and until the employee has provided 15 years of service, except in the event of a change in control. Furthermore, benefits are subject to forfeiture if benefits under the Excess Plan are forfeited.
The Company accounts for pension expense using the projected unit credit actuarial method for financial reporting purposes. The actuarial present value of the benefit obligation is calculated based on the expected date of separation or retirement of the Company's eligible employees.
The Company provides certain health-care and life insurance benefits ("Other Postretirement Benefits") for current and retired employees and accrues the cost of providing these benefits throughout the employees' active service period until they attain full eligibility for those benefits. Substantially all of the Company's U.S. full-time employees may become eligible for these benefits if they reach normal or early retirement age while working for the Company. The cost of providing postretirement health-care benefits is shared by the retiree and the Company, with retiree contributions evaluated annually and adjusted in order to maintain the Company/retiree cost-sharing target ratio. In September 2003, the share of contributions for current and future retirees was increased, in addition to other benefit changes, in order to maintain the cost-sharing target ratio,
54 TIFFANY & CO. AND SUBSIDIARIES
which reduced postretirement expense by $5,100,000 and $1,500,000 in 2004 and 2003. The life insurance benefits are noncontributory. The Company's employee and retiree health-care benefits are administered by an insurance company, and premiums on life insurance are based on prior years' claims experience.
The Company uses a December 31 measurement date for its employee benefit plans.
The following tables provide a reconciliation of benefit obligations, plan assets and funded status of the plans as of the measurement date:
January 31,
----------------------------------------------------------
Pension Benefits Other Postretirement Benefits
----------------------------------------------------------
(in thousands) 2005 2004 2005 2004
-------------- ----------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 170,344 $ 143,463 $ 27,357 $ 38,031
Service cost 11,072 9,370 1,246 2,543
Interest cost 10,738 9,299 1,535 2,364
Participants' contributions - - 45 45
Amendment - 4,916 - (19,311)
Actuarial loss (gain) 8,302 6,445 (1,771) 4,970
Benefits paid (3,530) (3,149) (1,294) (1,285)
---------------------------------------------------------
Benefit obligation at end of year* $ 196,926 $ 170,344 $ 27,118 $ 27,357
=========================================================
Change in plan assets:
Fair value of plan assets at
beginning of year $ 115,943 $ 79,368 $ - $ -
Actual return on plan assets 6,038 17,209 - -
Employer contribution 25,046 22,515 1,249 1,240
Participants' contributions - - 45 45
Benefits paid (3,530) (3,149) (1,294) (1,285)
=========================================================
Fair value of plan assets at end
of year $ 143,497 $ 115,943 $ - $ -
=========================================================
Funded status (53,429) (54,401) $ (27,118) $ (27,357)
Unrecognized net actuarial loss 38,970 30,232 6,979 9,017
Unrecognized prior service cost 4,865 5,669 (17,402) (18,615)
---------------------------------------------------------
Accrued benefit cost $ (9,594) $ (18,500) $ (37,541) $ (36,955)
=========================================================
|
* The benefit obligation for Pension Benefits is the projected benefit obligation and for Other Postretirement Benefits is the accumulated benefit obligation.
The following table provides additional information regarding the Company's pension plan's benefit obligation and assets (included in pension benefits in the table above) and accumulated benefit obligation:
January 31,
----------------------------------------------------------------------------------------------------
2005 2004
----------------------------------------------------------------------------------------------------
(in thousands) Pension Excess SRIP Total Pension Excess SRIP Total
--------------------------------------------------------------------------------------------------------------------------
Benefit obligation $ 163,743 $ 16,804 $ 16,379 $ 196,926 $ 141,032 $ 11,647 $ 17,665 $ 170,344
Fair value of plan
assets 143,497 - - 143,497 115,943 - - 115,943
----------------------------------------------------------------------------------------------------
Funded status $ (20,246) $ (16,804) $ (16,379) $ (53,429) $ (25,089) $ (11,647) $ (17,665) $ (54,401)
====================================================================================================
Accumulated benefit
obligation $ 138,392 $ 7,688 $ 3,738 $ 149,818 $ 116,910 $ 5,380 $ 3,646 $ 125,936
====================================================================================================
|
At January 31, 2005, the Company recognized an accrued liability of $19,711,000 and a prepaid asset of $10,117,000 for pension benefits.
TIFFANY & CO. AND SUBSIDIARIES 55
Net periodic pension and other postretirement benefit expense included the following components:
Years Ended January 31,
--------------------------------------------------------------------
Pension Benefits Other Postretirement Benefits
--------------------------------------------------------------------
(in thousands) 2005 2004 2003 2005 2004 2003
--------------------------------------------------------------------------------------------
Service cost $ 11,072 $ 9,370 $ 8,248 $ 1,246 $ 2,543 $ 2,415
Interest cost 10,738 9,299 8,298 1,535 2,364 2,042
Expected return
on plan assets (8,311) (6,534) (6,428) - - -
Amortization of prior
service cost 804 185 185 (1,213) (408) (6)
Amortization of net
loss (gain) 1,837 1,076 416 267 299 (26)
--------------------------------------------------------------------
Net expense $ 16,140 $ 13,396 $ 10,719 $ 1,835 $ 4,798 $ 4,425
====================================================================
|
Weighted-average assumptions used to determine benefit obligation:
January 31,
-----------------------------------------
Pension Other Postretirement
Benefits Benefits
-----------------------------------------
2005 2004 2005 2004
-----------------------------------------
Discount rate 6.00% 6.25% 6.00% 6.25%
Rate of increase
in compensation* 3.50% 3.75% - -
|
* Weighted-average assumption of the rate of increase in compensation excludes the SRIP Plan. Weighted-average assumption of the rate of increase in compensation used for the SRIP Plan was 8.00% and 8.25% for the years ended January 31, 2005 and 2004.
Weighted-average assumptions used to determine net benefit cost:
Years Ended January 31,
-----------------------------------------
Pension Other Postretirement
Benefits Benefits
-----------------------------------------
2005 2004 2005 2004
-----------------------------------------
Discount rate 6.25% 6.50% 6.25% 6.50%
Expected return
on plan assets 7.50% 7.50% - -
Rate of increase
in compensation* 3.75% 4.00% - -
|
* Weighted-average assumption of the rate of increase in compensation excludes the SRIP Plan. Weighted-average assumption of the rate of increase in compensation used for the SRIP Plan was 8.25% and 8.50% for the years ended January 31, 2005 and 2004.
The expected long-term rate of return on Pension Plan assets is selected by taking into account the expected duration of the projected benefit obligation for the Plan, the rates of return expected for the asset mix (including reinvestment asset return rates), historical performance of Plan assets and the fact that the Plan assets are actively managed to mitigate downside risk.
For postretirement benefit measurement purposes, 10.0% (for pre-age 65 retirees) and 11.0% (for post-age 65 retirees) annual rates of increase in the per capita cost of covered health care were assumed for 2005. The rate was assumed to decrease gradually to 5.0% for both groups by 2017 and remain at that level thereafter.
Assumed health-care cost trend rates have a significant effect on the amounts reported for the Company's postretirement health-care benefits plan. A one-percentage-point increase in the assumed health-care cost trend rate would increase the Company's accumulated postretirement benefit obligation by $4,165,000 and the aggregate service and interest cost components of net periodic postretirement benefits by $567,000 for the year ended January 31, 2005. Decreasing the health-care cost trend rate by one-percentage-point would decrease the Company's accumulated postretirement benefit obligation by $3,873,000 and the aggregate service and interest cost components of net periodic postretirement benefits by $439,000 for the year ended January 31, 2005.
The Company's Pension Plan asset allocation at the measurement date and target asset allocation by asset category are as follows:
Percentage of
Pension Plan Assets
at December 31,
Target Asset -------------------
Asset Category Allocation 2004 2003
-----------------------------------------------------
Equity securities 63% 67% 65%
Debt securities 30 28 29
Real estate 4 2 3
Other 3 3 3
--- --- ---
100% 100% 100%
=== === ===
|
56 TIFFANY & CO. AND SUBSIDIARIES
Pension Plan assets include investments in the Company's Common Stock, representing 5% and 8% of Pension Plan assets at December 31, 2004 and 2003.
The Company's investment objectives, related to Pension Plan assets, are the preservation of principal and the achievement of a reasonable rate of return over time. As a result, the Pension Plan's assets are allocated based on an expectation that equity securities will outperform debt securities over the long term. Assets of the Pension Plan are broadly diversified, consisting primarily of equity mutual funds, common stocks and U.S. government, corporate and mortgage obligations. The Company attempts to mitigate investment risk by rebalancing asset allocation periodically to ensure equity securities do not exceed 75% of total Pension Plan assets.
The Company expects the following future benefit payments to be paid:
Other
Pension Postretirement
Years Ending Benefits Benefits
January 31, (in thousands) (in thousands)
---------------------------------------- --------------
2006 $ 3,920 $ 1,295
2007 4,326 1,343
2008 4,787 1,407
2009 5,317 1,454
2010 5,973 1,504
2011-2015 45,518 8,602
|
PROFIT SHARING AND RETIREMENT SAVINGS PLAN
The Company also maintains an Employee Profit Sharing and Retirement Savings Plan ("EPSRS Plan") that covers substantially all U.S. based employees. Under the profit-sharing portion of the EPSRS Plan, the Company makes contributions, in the form of newly-issued Company Common Stock, to the employees' accounts based on the achievement of certain targeted earnings objectives established by, or as otherwise determined by, the Board of Directors. The Company recorded expense of $4,400,000, $2,625,000 and $2,000,000 in 2004, 2003 and 2002. Under the retirement savings portion of the EPSRS Plan, employees who meet certain eligibility requirements may participate by contributing up to 15% of their annual compensation, and the Company provides a 50% matching cash contribution up to 6% of each participant's total compensation. The Company recorded expense of $5,342,000, $4,649,000 and $4,238,000 in 2004, 2003 and 2002. Contributions to both portions of the EPSRS Plan are made in the following year.
Under the profit-sharing portion of the EPSRS Plan, the Company's stock contribution is required to be maintained in such stock until the employee either leaves or retires from the Company, subject to certain diversification rights. Under the retirement savings portion of the EPSRS Plan, the employees have the ability to elect to invest their contribution and the matching contribution in Company stock. At January 31, 2005, investments in Company stock in the profit-sharing portion and in the retirement savings portion represented 18% and 13% of total EPSRS Plan assets.
DEFERRED COMPENSATION PLAN
The Company has non-qualified deferred compensation plans for certain executives and management employees, whereby eligible employees may defer a portion of annual compensation for payment at specified future dates upon retirement, death or termination of employment. The deferred compensation is adjusted to reflect performance, whether positive or negative, of selected investment options, chosen by each participant, during the deferral period or adjusted to reflect guaranteed returns, depending on the plan. The amounts accrued under the plans were $12,340,000 and $10,321,000 at January 31, 2005 and 2004 and are reflected in other long-term liabilities.
S. INCOME TAXES
Earnings before income taxes consisted of the following:
Years Ended January 31,
---------------------------------------
(in thousands) 2005 2004 2005
----------------------------------------------------------
United States $ 333,514 $ 224,789 $ 216,713
Foreign 138,634 117,896 82,924
---------------------------------------
$ 472,148 $ 342,685 $ 299,637
=======================================
|
TIFFANY & CO. AND SUBSIDIARIES 57
Components of the provision for income taxes were as follows:
Years Ended January 31,
--------------------------------
(in thousands) 2005 2004 2003
------------------------------------------------
Current
Federal $ 124,585 $ 54,977 $ 64,500
State 17,729 16,803 17,090
Foreign 49,015 46,623 33,362
--------------------------------
191,329 118,403 114,952
--------------------------------
Deferred:
Federal (20,205) 8,741 (3,367)
State (3,940) 2,027 (1,597)
Foreign 665 (2,003) (245)
--------------------------------
(23,480) 8,765 (5,209)
--------------------------------
$ 167,849 $ 127,168 $ 109,743
================================
|
Deferred tax assets(liabilities) consisted of the following:
January 31,
-------------------
(in thousands) 2005 2004
--------------------------------------------
Deferred tax assets:
Postretirement/
employment benefits $ 17,766 $ 16,346
Inventory reserves 40,034 26,449
Accrued expenses 13,690 12,891
Stock options 9,251 -
Asset impairment 4,122 -
Pension and retirement
benefits 2,025 7,119
Foreign net operating
losses 25,477 25,317
Other 1,678 3,124
-------------------
114,043 91,246
Valuation allowance (25,477) (25,317)
-------------------
88,566 65,929
-------------------
Deferred tax liabilities:
Undistributed earnings
of foreign subsidiaries (39,739) (36,840)
Trademark amortization (3,277) (3,462)
Financial hedging
instruments (229) (71)
Depreciation (13,706) (2,910)
-------------------
(56,951) (43,283)
-------------------
Net deferred tax asset $ 31,615 $ 22,646
===================
|
The Company has recorded a valuation allowance against certain deferred tax assets related to foreign net operating loss carryforwards where recovery is uncertain.
The income tax effects of items comprising the deferred income tax (benefit) expense were as follows:
Years Ended January 31,
-------------------------------
(in thousands) 2005 2004 2003
-------------------------------------------------------------------------------
Stock options $ (9,251) $ - $ -
Undistributed earnings of
foreign subsidiaries (2,831) 4,161 2,609
Inventory reserves (7,762) 266 (1,847)
Accelerated depreciation 1,456 5,175 (4,028)
Inventory capitalization (4,083) (1,852) (1,602)
Asset impairment (4,122) - -
Deferred income (3,763) - -
Postretirement/employment
benefit obligations (1,419) (1,575) (1,395)
Equity investments (1,069) - -
Accrued expenses (2) (1,805) 1,936
Excess pension contribution 5,922 4,664 375
Other 3,444 (269) (1,257)
-------------------------------
$ (23,480) $ 8,765 $ (5,209)
===============================
|
Reconciliations of the provision for income taxes at the statutory Federal income tax rate to the Company's effective tax rate were as follows:
Years Ended January 31,
-----------------------
2005 2004 2003
-----------------------
Statutory Federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal benefit 2.2 4.2 4.0
Foreign losses with
no tax benefit 0.5 1.1 0.7
American Jobs Creation Act (1.8) - -
Extraterritorial income
exclusion (1.3) (1.7) (3.8)
Other 1.0 (1.5) 0.7
-----------------------
35.6% 37.1% 36.6%
=======================
|
The American Jobs Creation Act of 2004 ("AJCA"), which was signed into law on October 22, 2004, creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. This incentive will effectively reduce the amount of U.S. Federal income tax due on the repatriation. During the year ending January 31, 2006, the Company plans to repatriate approximately $100,000,000 of accumulated foreign earnings in the form of extraordinary
58 TIFFANY & CO. AND SUBSIDIARIES
dividends, as defined in the AJCA. The Company had previously accrued income taxes on these earnings at historical statutory rates. Therefore, an income tax benefit of $8,600,000 has been recorded as of January 31,2005, pursuant to the Company's repatriation plans and the provisions of the AJCA.
In October 2000, the United States Government repealed the tax provisions associated with Foreign Sales Corporations and enacted, in their place, the Extraterritorial Income Exclusion Act ("ETI"). The ETI provides for the exclusion from United States taxable income of certain extraterritorial income earned from the sale or license of qualified property. In the third quarter ended October 31, 2002, the Company determined that the ETI applied to its operations and, since that time, has recognized a tax benefit in connection with qualifying activity.
The AJCA also provides a deduction for income from qualified domestic production activities ("manufacturing deduction"), which will be phased in from 2005 through 2010. Pursuant to FASB Staff Position No. 109-1, "Application of SFAS No. 109 (Accounting for Income Taxes), to the Tax Deduction on Qualified Production Activities provided by the AJCA," the effect of this deduction will be reported in the period in which the deduction is claimed on the Company's tax return beginning in 2005. As regulations are still pending, management has been unable to quantify this effect.
In return for this manufacturing deduction, the AJCA provides for a two-year phase out of the existing ETI exclusion tax benefit for foreign sales which the World Trade Organization ("WTO") ruled was an illegal export subsidy. The European Union believes that the AJCA fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these transitional provisions are in compliance with their prior ruling. Pending the final resolution of this matter, management is currently unable to predict what effect this issue will have on future earnings.
T. SEGMENT INFORMATION
The Company's reportable segments are: U.S. Retail, International Retail and Direct Marketing (see Note A). These reportable segments represent channels of distribution that offer similar merchandise and service and have similar marketing and distribution strategies. Other includes all non-reportable segments which consist of worldwide sales of businesses operated under non-TIFFANY & CO. trademarks or trade names, as well as sales associated with the Company's diamond sourcing and manufacturing operations.
The Company's products are primarily sold in TIFFANY & CO. retail locations around the world. Net sales by geographic area are presented by attributing revenues from external customers on the basis of the country in which the merchandise is sold.
In deciding how to allocate resources and assess performance, the Company's Executive Officers regularly evaluate the performance of its reportable segments on the basis of net sales and earnings from operations, after the elimination of intersegment sales and transfers. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Reclassifications were made to prior years' earnings (losses) from operations by segments to conform to the current year presentation and the revised manner in which management evaluates the performance of segments. The reclassifications resulted in LIFO costs being included in segment results, as opposed to unallocated corporate expenses where it was previously reported.
TIFFANY & CO. AND SUBSIDIARIES 59
Certain information relating to the Company's segments is set forth below:
Years Ended January 31,
---------------------------------------
(in thousands) 2005 2004 2003
-----------------------------------------------------------------------------------
Net sales:
U.S. Retail $1,063,892 $ 948,891 $ 819,814
International Retail 857,360 781,572 683,489
Direct Marketing 195,461 197,397 179,175
Other 88,118 72,185 24,124
---------------------------------------
$2,204,831 $ 2,000,045 $1,706,602
=======================================
Earnings (losses) from operations*:
U.S. Retail $ 233,647 $ 224,710 $ 190,644
International Retail 202,260 213,666 189,254
Direct Marketing 41,221 46,252 42,609
Other (23,290) (8,460) (1,184)
---------------------------------------
$ 453,838 $ 476,168 $ 421,323
=======================================
|
* Represents earnings from operations excluding unallocated corporate expenses.
Each of the above segment's earnings (losses) from operations in 2004 was affected by an allocation of the expense associated with the adoption of SFAS No. 123R.
The Company's Executive Officers do not evaluate the performance of the Company's assets on a segment basis for internal management reporting and, therefore, such information is not presented.
The following table sets forth reconciliations of the segments' earnings from operations to the Company's consolidated earnings before income taxes:
Years Ended January 31,
---------------------------------------
(in thousands) 2005 2004 2003
-------------------------------------------------------------------------------
Earnings from operations
for segments $ 453,838 $ 476,168 $ 421,323
Unallocated corporate
expenses (159,309) (120,649) (102,126)
Interest,financing and
other expenses, net (15,978) (12,834) (19,560)
Gain on sale of
equity investment 193,597 - -
---------------------------------------
Earnings before
income taxes $ 472,148 $ 342,685 $ 299,637
=======================================
|
Unallocated corporate expenses include costs related to the Company's administrative support functions, such as information technology, finance, legal and human resources, which the Company does not allocate to its segments. In addition, unallocated corporate expenses for the year ended January 31, 2005 included a $25,000,000 contribution to The Tiffany & Co. Foundation, a non-profit organization that provides grants to other non-profit organizations.
Sales to unaffiliated customers and long-lived assets were as follows:
GEOGRAPHIC AREAS
Years Ended January 31,
------------------------------------------
(in thousands) 2005 2004 2003
--------------------------------------------------------------------------------
Net sales:
United States $1,311,348 $1,189,027 $1,026,383
Japan 492,125 485,424 441,764
Other countries 401,358 325,594 238,455
------------------------------------------
$2,204,831 $2,000,045 $1,706,602
==========================================
Long-lived assets:
United States $ 640,524 $ 638,174 $ 600,624
Japan 175,001 163,686 4,106
Other countries 124,762 105,020 89,792
------------------------------------------
$ 940,287 $ 906,880 $ 694,522
==========================================
|
CLASSES OF SIMILAR PRODUCTS
Years Ended January 31,
----------------------------------------------
(in thousands) 2005 2004 2003
--------------------------------------------------------------------------------
Net sales:
Jewelry $1,827,541 $1,640,495 $1,360,243
Tableware,
timepieces and other 377,290 359,550 346,359
----------------------------------------------
$2,204,831 $2,000,045 $1,706,602
==============================================
|
60 TIFFANY & CO. AND SUBSIDIARIES
U. QUARTERLY FINANCIAL DATA (UNAUDITED)
2004 Quarters Ended
--------------------------------------------------------
(in thousands, except per share amounts) April 30 July 31 October 31 January 31*
-----------------------------------------------------------------------------------------------------------
Net sales $ 456,960 $ 476,597 $ 461,152 $ 810,122
Gross profit 258,876 264,488 245,528 461,681
Earnings from operations 62,695 58,170 33,364 140,300
Net earnings 36,811 33,090 17,358 217,040
Net earnings per share:
Basic $ 0.25 $ 0.23 $ 0.12 $ 1.50
------------------------------------------------------
Diluted $ 0.25 $ 0.22 $ 0.12 $ 1.48
======================================================
|
*Net earnings and net earnings per share include the effect of the Company's sale of its equity investment in Aber (see Note D).
Financial data for the 2004 quarters ended April 30, July 31 and October 31 have been restated to reflect the adoption of SFAS No. 123R, retroactive to February 1, 2004 (see Note B), as follows:
2004 Quarters Ended
--------------------------------------------
(in thousands, except per share amounts) April 30 July 31 October 31
-------------------------------------------------------------------------------------------------
Gross profit, as reported $ 259,666 $ 265,284 $ 246,310
Effect of adoption of SFAS No. 123R (790) (796) (782)
--------------------------------------------
Restated gross profit $ 258,876 $ 264,488 $ 245,528
============================================
Earnings from operations, as reported $ 68,336 $ 63,857 $ 38,948
Effect of adoption of SFAS No. 123R (5,641) (5,687) (5,584)
--------------------------------------------
Restated earnings from operations $ 62,695 $ 58,170 $ 33,364
============================================
Net earnings, as reported $ 40,308 $ 36,616 $ 20,809
Effect of adoption of SFAS No. 123R, net of tax (3,497) (3,526) (3,451)
--------------------------------------------
Restated net earnings $ 36,811 $ 33,090 $ 17,358
============================================
Earnings per basic share:
As reported $ 0.27 $ 0.25 $ 0.14
Restated $ 0.25 $ 0.23 $ 0.12
Earnings per diluted share:
As reported $ 0.27 $ 0.25 $ 0.14
Restated $ 0.25 $ 0.22 $ 0.12
|
2003 Quarters Ended
-------------------------------------------------------
(in thousands, except per share amounts) April 30 July 31 October 31 January 31
-----------------------------------------------------------------------------------------------------------
Net sales $ 395,839 $ 442,495 $ 430,123 $ 731,588
Gross profit 229,644 254,972 237,721 435,045
Earnings from operations 58,969 68,453 49,215 178,882
Net earnings 35,863 41,147 28,031 110,476
Net earnings per share:
Basic $ 0.25 $ 0.28 $ 0.19 $ 0.75
------------------------------------------------------
Diluted $ 0.24 $ 0.28 $ 0.19 $ 0.74
======================================================
|
The sum of the quarterly net earnings per share amounts in the above tables may not equal the full-year amount since the computations of the weighted-average number of common equivalent shares outstanding for each quarter and the full year are made independently.
TIFFANY & CO. AND SUBSIDIARIES 61
Exhibit 23.1 Tiffany & Co.
Report on Form 10-K
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-82653) and Form S-8 (File Nos. 333-43978, 333-85195, 333-85197, 333-85199, 333-85201, 033-54847, 333-111258, 333-67723, and 333-67725) of Tiffany & Co. and Subsidiaries of our report dated April 4, 2005 relating to the financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated April 4, 2005 relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP New York, New York April 13, 2005 |
EXHIBIT 31.1
TIFFANY & CO.
REPORT ON FORM 10-K
CERTIFICATIONS
I, Michael J. Kowalski, certify that:
1. I have reviewed this annual report on Form 10-K of Tiffany & Co.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: April 14, 2005
/s/ Michael J. Kowalski
------------------------------------
Chairman and Chief Executive Officer
(principal executive officer)
|
EXHIBIT 31.2
TIFFANY & CO.
REPORT ON FORM 10-K
CERTIFICATIONS
I, James N. Fernandez, certify that:
1. I have reviewed this annual report on Form 10-K of Tiffany & Co.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: April 14, 2005
/s/ James N. Fernandez
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Executive Vice President and Chief Financial
Officer (principal financial officer)
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EXHIBIT 32.1
TIFFANY & CO.
REPORT ON FORM 10-K
CERTIFICATION
PURSUANT TO 18 U.S.C. 1350 AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In connection with the Annual Report of Tiffany & Co. (the "Company") on
Form 10-K for the period ended January 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Michael J.
Kowalski, as Chairman of the Board of Directors and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 14, 2005
/s/ Michael J. Kowalski
------------------------------------
Michael J. Kowalski
Chairman and Chief Executive Officer
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EXHIBIT 32.2
TIFFANY & CO.
REPORT ON FORM 10-K
CERTIFICATION
PURSUANT TO 18 U.S.C. 1350 AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Annual Report of Tiffany & Co. (the "Company") on Form 10-K for the period ended January 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James N. Fernandez, as Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 14, 2005
/s/ James. N. Fernandez
----------------------------
James N. Fernandez
Executive Vice President and
Chief Financial Officer
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