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<SEC-DOCUMENT>0000950123-06-004587.txt : 20060412
<SEC-HEADER>0000950123-06-004587.hdr.sgml : 20060412
<ACCEPTANCE-DATETIME>20060412170810
ACCESSION NUMBER: 0000950123-06-004587
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20060131
FILED AS OF DATE: 20060412
DATE AS OF CHANGE: 20060412
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MOVADO GROUP INC
CENTRAL INDEX KEY: 0000072573
STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873]
IRS NUMBER: 132595932
STATE OF INCORPORATION: NY
FISCAL YEAR END: 0131
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-16497
FILM NUMBER: 06756516
BUSINESS ADDRESS:
STREET 1: 650 FROM ROAD
CITY: PARAMUS
STATE: NJ
ZIP: 07652
BUSINESS PHONE: 201-267-8000
MAIL ADDRESS:
STREET 1: 650 FROM ROAD
CITY: PARAMUS
STATE: NJ
ZIP: 07652
FORMER COMPANY:
FORMER CONFORMED NAME: NORTH AMERICAN WATCH CORP
DATE OF NAME CHANGE: 19930916
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>y18915e10vk.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended January 31, 2006,
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 Number 1-16497
MOVADO GROUP, INC.
(Exact name of registrant as specified in its charter)
<Table>
<S> <C>
New York 13-2595932
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
650 From Road, 07652
Paramus, New Jersey (Zip Code)
(Address of Principal Executive Offices)
</Table>
Registrant's Telephone Number, Including Area Code:(201) 267-8000
Securities Registered Pursuant to Section 12(b) of the Act:
<Table>
Name of Each Exchange
Title of Each Class on which Registered
- ---------------------------------------- ----------------------------------------
<S> <C>
Common stock, par value $0.01 per share New York Stock Exchange
</Table>
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 31, 2005 was approximately $394,027,633 (based on the
closing sale price of the registrant's Common Stock on that date as reported on
the New York Stock Exchange). For purposes of this computation, each share of
Class A Common Stock is assumed to have the same market value as one share of
Common Stock into which it is convertible and only shares of stock held by
directors and executive officers were excluded.
The number of shares outstanding of the registrant's Common Stock and Class
A Common Stock as of March 31, 2006 were 23,218,749 and 6,766,909, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to registrant's 2006
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference in Part III hereof.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
FORWARD-LOOKING STATEMENTS
Statements in this annual report on Form 10-K, including, without limitation,
statements under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and oral statements made by or with
the approval of an authorized executive officer of the Company, which are not
historical in nature, are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management's assumptions. Words such as "expects", "anticipates", "targets",
"goals", "projects", "intends", "plans", "believes", "seeks", "estimates",
"may", "will", "should" and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company's future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs, plans
for future operations, expectations regarding capital expenditures and operating
expenses, effective tax rates, margins, interest costs, and income as well as
assumptions relating to the foregoing. Forward-looking statements are subject to
certain risks and uncertainties, some of which cannot be predicted or
quantified. Actual results and future events could differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC including, without
limitation, the following: general economic and business conditions which may
impact disposable income of consumers in the United States and the other
significant markets where the Company's products are sold, general uncertainty
related to possible terrorist attacks and the impact on consumer spending,
changes in consumer preferences and popularity of particular designs, new
product development and introduction, competitive products and pricing,
seasonality, availability of alternative sources of supply in the case of the
loss of any significant supplier, the loss of significant customers, the
Company's dependence on key employees and officers, the ability to successfully
integrate the operations of acquired businesses without disruption to other
business activities, the continuation of licensing arrangements with third
parties, the ability to secure and protect trademarks, patents and other
intellectual property rights, the ability to lease new stores on suitable terms
in desired markets and to complete construction on a timely basis, the continued
availability to the Company of financing and credit on favorable terms, business
disruptions, disease, general risks associated with doing business outside the
United States including, without limitation, import duties, tariffs, quotas,
political and economic stability, and success of hedging strategies with respect
to currency exchange rate fluctuations.
These risks and uncertainties, along with the risk factors discussed under Item
1A "Risk Factors" in this Annual Report on Form 10-K, should be considered in
evaluating any forward-looking statements contained in this report or
incorporated by reference herein. All forward-looking statements speak only as
of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to the Company or any person acting on
its behalf are qualified by the cautionary statements in this section. The
Company undertakes no obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report.
1
<PAGE>
Item 1. Business
GENERAL
In this Form 10-K, all references to the "Company", "Movado Group" or "MGI"
include Movado Group, Inc. and its subsidiaries, unless the context requires
otherwise.
Movado Group, Inc. is a manufacturer, distributor and retailer of fine watches
and jewelry. Its portfolio of brands is comprised of Movado(R), Ebel(R),
Concord(R), ESQ(R) SWISS ("ESQ"), Coach(R) Watches, HUGO BOSS(R) Watches, Juicy
Couture(TM) Watches and Tommy Hilfiger(R) Watches and beginning January 2007,
Lacoste(R) Watches. The Company is a leader in the design, development,
marketing and distribution of watch brands sold in almost every major category
comprising the watch industry. The Company also designs, develops and markets
proprietary Movado-branded jewelry, tabletop and accessory products which it
retails in its luxury Movado Boutiques.
The Company was incorporated in New York in 1967 under the name North American
Watch Corporation, to acquire Piaget Watch Corporation and Corum Watch
Corporation, which had been, respectively, the exclusive importers and
distributors of Piaget and Corum watches in the United States since the 1950's.
The Company sold its Piaget and Corum distribution businesses in 1999 and 2000,
respectively, to focus on its own portfolio of brands. Since its incorporation,
the Company has developed its brand-building reputation and distinctive image
across an expanding number of brands and geographic markets. Strategic
acquisitions and their subsequent growth, along with license agreements have
played an important role in the expansion of the Company's brand portfolio.
In 1970, the Company acquired the Concord brand and the Swiss company that had
been manufacturing Concord watches since 1908. In 1983, the Company acquired the
U.S. distributor of Movado watches and substantially all of the assets related
to the Movado brand from the Swiss manufacturer of Movado watches. The Company
changed its name to Movado Group, Inc. in 1996. In March 2004, the Company
completed its acquisition of Ebel, one of the world's premier luxury watch
brands that was established in La Chaux-de-Fonds, Switzerland in 1911.
The Company is very selective in its licensing strategy and chooses to enter
long-term partnerships with only powerful brands that are leaders in their
respective businesses. Under an exclusive agreement with The Hearst Corporation,
the Company launched ESQ in 1993. In 1999, the Company launched Coach Watches
under an exclusive agreement with Coach, Inc., and in 2001 Tommy Hilfiger
Watches under an exclusive agreement with Tommy Hilfiger, Inc.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share. On October 21, 1997, the Company
completed a secondary stock offering in which 1,500,000 shares of common stock
were issued. On May 21, 2001, the Company moved from the NASDAQ National Market
to the New York Stock Exchange ("NYSE"). The Company's common stock is traded on
the NYSE under the trading symbol MOV.
RECENT DEVELOPMENTS
Effective March 21, 2005, the Company entered into an exclusive worldwide
license agreement with HUGO BOSS to design, produce and market a collection of
watches under the BOSS(TM) and HUGO(TM) brand names. In 2005, the Company
introduced a limited number of HUGO BOSS watch models, with a major launch of a
new collection planned for Spring 2006 at Baselworld, the annual watch and
jewelry trade show held in Basel,
2
<PAGE>
Switzerland. The HUGO BOSS collection will be sold through select distribution
outlets in Europe, the Americas and Asia, as well as HUGO BOSS retail locations.
On August 31, 2005, the Company signed a joint venture agreement ("JV
Agreement") with Financiere TWC SA ("TWC"), a French company with established
distribution, marketing and sales operations in France and Germany. Under the JV
Agreement, the Company and TWC control 51% and 49%, respectively, of MGI-TWC
B.V., a Dutch holding company that owns MGI-TWC SAS, a French corporation, and
MGI-TWC GmbH, a German corporation (collectively, the "Subsidiaries"). The
Subsidiaries are responsible for the marketing, distribution and sale in France
and Germany of the Company's licensed HUGO BOSS and Tommy Hilfiger brands, as
well as future brands licensed to the Company, subject to the terms of the
applicable license agreement. The terms of the JV Agreement include financial
performance measures which, if not attained, give either party the right to
terminate the JV Agreement after the fifth (5th) and the tenth (10th) year
(January 31, 2011 and January 31, 2016); restrictions on the transfer of shares
in the Dutch holding company; and a buy out right whereby the Company can
purchase all of TWC's shares in the holding company as of July 1, 2016 and every
5th anniversary thereafter at a pre-determined price. As of January 31, 2006,
there were no transactions between the Company and TWC.
In November 2005, Movado Group, Inc. entered into an exclusive worldwide license
agreement with L.C. Licensing, Inc. to design, produce and market a collection
of watches under the Juicy Couture and Couture Couture brand names. Juicy
Couture Watches are scheduled to launch in Fall 2006 and will be sold through
select high-end retailers initially in the United States, followed by Europe and
Asia.
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste, S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE name and the distinctive Lacoste "alligator" logo beginning in the
first half of 2007.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and Asia. The
Company divides the watch market into six principal categories as set forth in
the following table.
<TABLE>
<CAPTION>
Suggested Retail Primary Category of Movado Group, Inc.
Market Category Price Range Brands
- --------------- ---------------- ---------------------------------------
<S> <C> <C>
Exclusive $10,000 and over Ebel and Concord
Luxury $1,500 to $9,999 Ebel, Concord and Movado
Premium $500 to $1,499 Movado
Moderate $100 to $499 ESQ, Coach, HUGO BOSS and Juicy Couture
Fashion $55 to $99 Tommy Hilfiger
Mass Market Less than $55 --
</TABLE>
3
<PAGE>
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and are often set with precious gems. These watches are primarily
mechanical or quartz-analog watches. Mechanical watches keep time with intricate
mechanical movements consisting of an arrangement of wheels, jewels and winding
and regulating mechanisms. Quartz-analog watches have quartz movements in which
time is precisely calibrated to the regular frequency of the vibration of quartz
crystal. Exclusive watches are manufactured almost entirely in Switzerland. In
addition to the Company's Ebel and Concord watches, well-known brand names of
exclusive watches include Audemars Piguet, Patek Philippe, Piaget and Vacheron
Constantin.
Luxury Watches
Luxury watches are either quartz-analog watches or mechanical watches. These
watches typically are made with either 14 or 18 karat gold, stainless steel or a
combination of gold and stainless steel, and are occasionally set with precious
gems. Luxury watches are primarily manufactured in Switzerland. In addition to a
majority of the Company's Ebel and Concord watches and certain Movado watches,
well-known brand names of luxury watches include Baume & Mercier, Breitling,
Cartier, Omega, Rolex and TAG Heuer.
Premium Watches
The majority of premium watches are quartz-analog watches. These watches
typically are made with gold finish, stainless steel or a combination of gold
finish and stainless steel. Premium watches are manufactured primarily in
Switzerland, although some are manufactured in Asia. In addition to a majority
of the Company's Movado watches, well-known brand names of premium watches
include Gucci, Rado and Raymond Weil.
Moderate Watches
Most moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in Asia and Switzerland. These watches typically are made
with gold finish, stainless steel, brass or a combination of gold finish and
stainless steel. In addition to the Company's ESQ, Coach, HUGO BOSS and Juicy
Couture brands, well-known brand names of watches in the moderate category
include Anne Klein, Bulova, Citizen, Guess, Seiko and Wittnauer.
Fashion Watches
Watches comprising the fashion market are primarily quartz-analog watches but
also include some digital watches. Watches in the fashion category are generally
made with stainless steel, gold finish, brass and/or plastic and are
manufactured primarily in Asia. Fashion watches feature designs that reflect
current and emerging fashion trends. Many are sold under licensed designer and
brand names that are well-known principally in the apparel industry. In addition
to the Company's Tommy Hilfiger brand, other well-known brands of fashion
watches include Anne Klein II, DKNY, Fossil, Guess, Kenneth Cole and Swatch.
Mass Market Watches
Mass market watches typically consist of digital watches and analog watches made
from stainless steel, brass and/or plastic and are manufactured in Asia.
Well-known brands include Casio, Citizen, Pulsar, Seiko and Timex. The Company
does not compete in the mass market watch category.
4
<PAGE>
PRODUCTS
The Company designs, develops, markets and distributes products under the
following watch brands:
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, Movado is an icon of modern
design. Today the brand includes a line of watches, inspired by the simplicity
of the Bauhaus movement, including the world famous Movado Museum watch and a
number of other watch collections with more traditional dial designs. The design
for the Movado Museum watch was the first watch design chosen by the Museum of
Modern Art for its permanent collection. It has since been honored by other
museums throughout the world. All Movado watches have Swiss movements and are
made with 14 or 18 karat gold, 18 karat gold finish, stainless steel or a
combination of 18 karat gold finish and stainless steel. The majority of Movado
watches have suggested retail prices between $550 and $2,995.
Ebel
The Ebel brand, one of the world's premier luxury watch brands, was established
in La Chaux-de-Fonds, Switzerland in 1911. All Ebel watches feature Swiss
movements and are made with solid 18 karat gold, stainless steel or a
combination of 18 karat gold and stainless steel. The majority of Ebel watches
have suggested retail prices between $1,400 and $17,800.
Concord
Concord was founded in 1908 in Bienne, Switzerland. All Concord watches have
Swiss movements and are made with solid 18 karat or 14 karat gold, stainless
steel or a combination of 18 karat gold and stainless steel. The majority of
Concord watches have suggested retail prices between $1,690 and $14,900.
Coach Watches
Coach Watches are an extension of the Coach leathergoods brand and reflect the
Coach brand image. A distinctive American brand, Coach delivers stylish,
aspirational, well-made products that represent excellent value. Coach watches
contain Swiss movements and are made with stainless steel, gold finish or a
combination of stainless steel and gold finish with leather straps, stainless
steel bracelets or gold finish bracelets. The majority of Coach watches have
suggested retail prices between $228 and $498.
ESQ
ESQ competes in the entry level Swiss watch category and is defined by bold
sport and fashion designs. All ESQ watches contain Swiss movements and are made
with stainless steel, gold finish or a combination of stainless steel and gold
finish, with leather straps, stainless steel bracelets or gold finish bracelets.
The majority of ESQ watches have suggested retail prices between $150 and $395.
Tommy Hilfiger Watches
Reflecting the fresh, fun all-American style for which Tommy Hilfiger is known,
Tommy Hilfiger Watches feature quartz, digital or analog-digital movements, with
stainless steel, titanium, aluminum, silver-tone, two-tone or gold-tone cases
and bracelets, and leather, fabric, plastic or rubber straps. The line includes
fashion and sport models with the majority of Tommy Hilfiger watches having
suggested retail prices between $65 and $125.
5
<PAGE>
HUGO BOSS Watches
HUGO BOSS is a global market leader in the world of fashion. Following the
execution of an exclusive worldwide license agreement with HUGO BOSS to design,
produce and market a collection of watches, under the BOSS and HUGO brand names,
the Company distributed certain watches within the pre-existing HUGO BOSS watch
collections, with limited new product introductions. Major new product launches
have been planned for spring 2006 at Baselworld, the annual watch and jewelry
trade show held in Basel, Switzerland. The new HUGO BOSS watch collection will
include classy, sporty, elegant and fashion timepieces with suggested retail
prices between $195 and $695.
DESIGN
The Company's continued emphasis on innovation and distinctive design has been
an important contributor to the prominence, strength and reputation of Movado
Group's brands. The Company's products are created and developed by in-house
design teams in both Switzerland and the United States, in cooperation with
various outside sources, including licensors' design teams. Senior management is
actively involved in the design process.
MARKETING
The Company's marketing strategy is to communicate a consistent brand specific
message each time a consumer comes in contact with them. Advertising is an
integral component to the successful marketing of the Company's product
offerings and therefore, the Company devotes significant resources to
advertising. Since 1972, the Company has maintained its own in-house advertising
department, which today focuses primarily on the implementation and management
of global marketing and advertising strategies for each of its brands, ensuring
consistency of presentation. The Company utilizes the creative development of
advertising campaigns from outside agencies. Advertising is developed
individually for each of the Company's watch brands as well as Movado Boutique
jewelry, tabletop and accessories and is directed primarily to the end consumer
rather than to trade customers. In addition, advertising is developed by
targeting consumers with particular demographic characteristics appropriate to
the image and price range of the brand. Advertisements are placed predominantly
in magazines and other print media but are also created for radio and television
campaigns, catalogs, outdoor and other promotional materials. Marketing expenses
totaled 16.1%, 16.2% and 16.1% of net sales in fiscal 2006, 2005 and 2004,
respectively.
OPERATING SEGMENTS
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. For operating segment data and geographic segment data for the years
ended January 31, 2006, 2005 and 2004, see Note 15 to the Consolidated Financial
Statements regarding Segment Information.
The Company's wholesale segment includes the design, development, marketing and
distribution of high quality watches, in addition to revenue generated from
after-sales service activities and shipping. The Retail segment includes the
Company's Movado Boutiques and its outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's international operations
are principally conducted in Europe, the Middle East and Asia. The Company's
international assets are substantially located in Switzerland.
6
<PAGE>
Wholesale
Domestic Wholesale
The Company sells all of its brands in the domestic wholesale market primarily
through major jewelry store chains such as Helzberg Diamonds Corp., Sterling,
Inc. and Zale Corporation; department stores, such as Macy's, Neiman Marcus and
Saks Fifth Avenue, as well as independent jewelers. Sales to trade customers in
the United States, Canada and the Caribbean are made directly by the Company's
domestic sales force of approximately 150 employees. Of these employees, sales
representatives are responsible for a defined geographic territory, specialize
in a particular brand and sell to and service the independent jewelers within
their territory. Their compensation is based on salary plus commission. The
sales force also consists of account executives and account representatives who,
respectively, sell to and service the chain and department store accounts. The
latter typically handle more than one of the Company's brands and are
compensated based on salary and incentives. In South America, the Company
primarily sells Tommy Hilfiger watches through independent distributors.
International Wholesale
The Company sells Movado, Ebel, Concord, Coach and HUGO BOSS watches
internationally through its own international sales force of approximately 100
employees operating from the Company's sales and distribution offices in China,
France, Germany, Hong Kong, Japan, Singapore, Switzerland, the United Kingdom
and the United Arab Emirates. In addition, the Company sells Movado, Ebel,
Concord, Coach, HUGO BOSS and Tommy Hilfiger watches through a network of
independent distributors operating in numerous countries around the world. A
majority of the Company's arrangements with its international distributors are
long-term, generally require certain minimum purchases and restrict the
distributor from selling competitive products.
Retail
The Company operates in two retail markets, the luxury boutique market and the
outlet market. Movado Boutiques reinforce the luxury image of the Movado brand
and are a primary strategic focus of the Company. The Company operates 27 Movado
Boutiques in North America that are located in upscale regional shopping centers
and metropolitan areas. Movado Boutiques are merchandised with select models of
Movado watches, as well as proprietary Movado-branded jewelry, tabletop and
accessories and other product line extensions. The modern store design creates a
distinctive environment that showcases these products and provides consumers
with the ability to fully experience the complete Movado design philosophy. The
Company's 28 outlet stores are multi-branded and serve solely as an effective
vehicle to sell discontinued models and factory seconds of all of the Company's
watches, jewelry, tabletop and accessory products. Three additional Movado
Boutiques and one outlet are scheduled to open in fiscal year 2007.
SEASONALITY
The Company's domestic sales are traditionally greater during the Christmas and
holiday season. Consequently, the Company's net sales historically have been
higher during the second half of the fiscal year. The second half of each year
accounted for 56.9%, 58.7% and 58.6% of the Company's net sales for the fiscal
years ended January 31, 2006, 2005 and 2004, respectively. The amount of net
sales and operating profit generated during the second half of each fiscal year
depends upon the general level of retail sales during the Christmas and holiday
season, as well as economic conditions and other factors beyond the Company's
control. The Company does not expect any significant change in the seasonality
of its domestic business in the foreseeable future. Major selling seasons in
certain international markets center on significant local holidays that occur in
late winter or early spring.
7
<PAGE>
BACKLOG
At March 31, 2006, the Company had unfilled orders of $43.5 million compared to
$21.4 million and $20.2 million at March 31, 2005 and 2004, respectively.
Unfilled orders include both confirmed orders and orders the Company believes
will be confirmed based on the historic experience with the customers. It is
customary for many of the Company's customers not to confirm their future orders
with a formal purchase order until shortly before their desired delivery.
CUSTOMER SERVICE, WARRANTY AND REPAIR
The Company has developed an approach to managing the retail sales process of
its wholesale customers that involves monitoring their sales and inventories by
product category and style. The Company also assists in the conception,
development and implementation of customers' marketing vehicles. The Company
places considerable emphasis on cooperative advertising programs with its major
retail customers. The Company's retail sales process has resulted in close
relationships with its principal customers, often allowing for influence on the
mix, quantity and timing of their purchasing decisions. The Company believes
that customers' familiarity with its sales approach has facilitated, and should
continue to facilitate, the introduction of new products through its existing
distribution network.
The Company permits the return of damaged or defective products. In addition,
although the Company has no obligation to do so, it does accept limited amounts
of product returns from customers in certain instances.
The Company has service facilities around the world including five Company-owned
service facilities and approximately 180 authorized independent service centers
worldwide. In order to maintain consistency and quality at its service
facilities and authorized independent service centers, the Company conducts
training sessions for and distributes technical information and updates to
repair personnel. All watches sold by the Company come with limited warranties
covering the movement against defects in material and workmanship for periods
ranging from two to three years from the date of purchase, with the exception of
Tommy Hilfiger watches, for which the warranty period is ten years. In addition,
the warranty period is five years for the gold plating for Movado watch cases
and bracelets. Products that are returned under warranty to the Company are
generally serviced by the Company's employees at its service facilities.
The Company retains adequate levels of component parts to facilitate after-sales
service of its watches for an extended period of time after the discontinuance
of such watches.
In 2003, the Company introduced Customer Wins, a web-based system providing
immediate access for the Company's retail partners and consumers to the
information they may want or need about after sales service issues. Customer
Wins allows the Company's retailers and end consumers to track their repair
status online 24 hours a day. The system permits customers to authorize repairs,
track repair status through the entire repair life cycle, view repair
information, and obtain service order history. Customer Wins can be accessed
online at www.mgiservice.com.
SOURCING, PRODUCTION AND QUALITY
The Company does not own any product manufacturing facilities, with the
exception of a small manufacturing facility for proprietary movements for its
Ebel brand. The Company employs a flexible manufacturing model that relies
primarily on independent manufacturers to meet shifts in marketplace demand and
changes in consumer preferences. All product sources must achieve and maintain
the Company's high quality standards and specifications. With strong supply
chain organizations in Switzerland, China and Hong Kong, the
8
<PAGE>
Company maintains control over the quality of its products, wherever they are
manufactured. Compliance is monitored with strictly implemented quality control
standards, including site quality inspections.
A majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers. The Company obtains
other watch components for all of its brands, including movements, cases, hands,
dials, bracelets and straps from a number of other suppliers. The Company does
not have long-term supply contract commitments with any of its component parts
suppliers. Additionally, the Company manufactures some proprietary movements for
its Ebel brand.
Movado, Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are manufactured
using Swiss movements and other components obtained from third party suppliers.
Coach, ESQ, Tommy Hilfiger and HUGO BOSS watches are manufactured by independent
contractors. Coach and ESQ watches are manufactured using Swiss movements and
other components purchased from third party suppliers. Tommy Hilfiger and HUGO
BOSS watches are manufactured using movements and other components purchased
from third party suppliers.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks MOVADO(R), EBEL(R) and CONCORD(R), as well as
trademarks for the Movado Museum dial design, and related trademarks for watches
and jewelry in the United States and in numerous other countries.
The Company licenses ESQUIRE(R), ESQ(R) and related trademarks on an exclusive
worldwide basis for use in connection with the manufacture, distribution,
advertising and sale of watches pursuant to an agreement with The Hearst
Corporation ("Hearst License Agreement"). The current term of the Hearst License
Agreement expires December 31, 2009, but contains options for renewal at the
Company's discretion through December 31, 2018.
The Company licenses the trademark COACH(R) and related trademarks on an
exclusive worldwide basis for use in connection with the manufacture,
distribution, advertising and sale of watches pursuant to an agreement with
Coach, Inc. ("Coach License Agreement"). The Coach License Agreement expires on
January 31, 2008.
Under an agreement with Tommy Hilfiger Licensing, Inc. ("THLI"), the Company has
the exclusive license to use the trademark TOMMY HILFIGER(R) and related
trademarks in connection with the manufacture of watches worldwide and in
connection with the marketing, advertising, sale and distribution of watches at
wholesale (and at retail through its outlet stores) in the Western Hemisphere,
Europe, Pan Pacific, Latin America and Korea. The term of the license agreement
with THLI expires March 31, 2012.
Under its 2004 agreement with HUGO BOSS Trademark Management GmbH & Co ("HUGO
BOSS"), the Company received a worldwide exclusive license to use the trademark
HUGO BOSS(R) and any other trademarks of HUGO BOSS containing the names "HUGO"
or "BOSS", in connection with the production, promotion and sale of watches. The
term of the license continues through December 31, 2013, with an optional
five-year renewal period.
On November 21, 2005, the Company entered into an agreement with L.C. Licensing,
Inc. ("L.C. Licensing"), for the exclusive worldwide license to use the
trademarks JUICY COUTURE(TM) and COUTURE COUTURE LOS ANGELES(TM), in connection
with the manufacture, advertising, merchandising, promotion, sale and
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<PAGE>
distribution of timepieces and components. The term of the license is through
December 31, 2011, with a four-year renewal period at the option of the Company,
provided that certain sales thresholds are met.
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE(R) name and the distinctive "alligator" logo beginning in the first
half of 2007. The agreement continues through December 31, 2014 and renews
automatically for successive five year periods unless either party notifies the
other of non-renewal at least six months before the end of the initial term or
any renewal period.
The Company also owns, and has pending applications for, a number of design
patents in the United States and internationally for various watch designs, as
well as designs of watch cases, bracelets and jewelry.
The Company actively seeks to protect and enforce its intellectual property
rights by working with industry associations, anti-counterfeiting organizations,
private investigators and law enforcement authorities, including U.S. Customs
and Border Protection and, when necessary, sues infringers of its trademarks and
patents. Consequently, the Company is involved from time to time in litigation
or other proceedings to determine the enforceability, scope and validity of
these rights. With respect to the trademarks MOVADO, EBEL, CONCORD and certain
other related trademarks, the Company has received exclusion orders that
prohibit the importation of counterfeit goods or goods bearing confusingly
similar trademarks into the United States. In accordance with customs
regulations, these exclusion orders, however, cannot cover the importation of
gray-market Movado, Ebel and Concord watches because the Company is the
manufacturer of such watches. All of the Company's exclusion orders are
renewable.
COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of the Swatch Group, Ltd., a large Swiss-based competitor, no
single company competes with the Company across all of its brands. Certain
companies, however, compete with Movado Group, Inc. with respect to one or more
of its watch brands. Certain of these companies have, and other companies that
may enter the Company's markets in the future may have greater financial,
distribution, marketing and advertising resources than the Company. The
Company's future success will depend, to a significant degree, upon its
continued ability to compete effectively with regard to, among other things, the
style, quality, price, advertising, marketing, distribution and availability of
supply of the Company's watches and other products.
EMPLOYEES
As of January 31, 2006, the Company had approximately 1,300 full-time employees
in its domestic and international operations. No employee of the Company is
represented by a labor union or is subject to a collective bargaining agreement.
The Company has never experienced a work stoppage due to labor difficulties and
believes that its employee relations are good.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge on the Company's website, located
at www.movadogroup.com, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the Securities and Exchange
Commission. The public may read any materials filed by the Company with the SEC
at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C.,
20549.
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The public may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains
reports, proxy and information statements, and other information regarding the
Company at www.sec.gov.
The Company has adopted a Code of Business Conduct and Ethics that applies to
all directors, officers and employees, including the Company's Chief Executive
Officer, Chief Financial Officer and principal accounting and financial
officers, which is posted on the Company's website. The Company will post any
amendments to the Code of Business Conduct and Ethics and any waivers that are
required to be disclosed by SEC regulations on the Company's website. In
addition, the Company's audit committee charter, compensation committee charter,
nominating/corporate governance committee charter and corporate governance
guidelines have been posted on the Company's website.
Item 1A. Risk Factors
The following risk factors and the forward-looking statements contained in this
Form 10-K should be read carefully in connection with evaluating Movado Group,
Inc.'s business. These risks and uncertainties could cause actual results and
events to differ materially from those anticipated. Additional risks which the
Company does not presently consider material, or of which it is not currently
aware, may also have an adverse impact on the business. Please also see
"Forward-Looking Statements" on page 1.
The Company faces intense competition in the worldwide watch industry.
The watch industry is highly competitive, and the Company competes globally with
numerous manufacturers, importers and distributors, some of which are larger and
have greater financial, distribution, advertising and marketing resources. The
Company's products compete on the basis of price, features, perceived
desirability, reliability and perceived attractiveness. The Company also faces
increased competition from internet-based retailers. The Company's future
results of operations may be adversely affected by these and other competitors.
Maintaining favorable brand recognition is essential to the success of the
Company, and failure to do so could materially and adversely affect the
Company's results of operations.
Favorable brand recognition is an important factor to the future success of the
Company. The Company sells its products under a variety of owned and licensed
brands. Factors affecting brand recognition are often outside the Company's
control, and the Company's efforts to create or enhance favorable brand
recognition, such as advertising campaigns, product design and anticipation of
fashion trends, may not have their desired effects. Additionally, the Company
relies on its license partners to maintain favorable brand recognition of their
respective parent brands, and the Company often has no control over the brand
management efforts of its license partners. Finally, although the Company's
independent distributors are subject to contractual requirements to protect the
Company's brands, it may be difficult to monitor or enforce such requirements,
particularly in foreign jurisdictions. Any decline in perceived favorable
recognition of the Company's owned or licensed brands could materially and
adversely affect future results of operations and profitability.
If the Company is unable to respond to changes in consumer demands and fashion
trends in a timely manner, sales and profitability could be adversely affected.
Fashion trends and consumer demands and tastes often shift quickly. The Company
attempts to monitor these trends in order to adapt its product offerings to suit
customer demand. There is a risk that the Company will not properly perceive
changes in trends or tastes, which may result in the failure to adapt the
Company's products accordingly. In addition, new model designs are regularly
introduced into the market for all brands to keep ahead of evolving fashion
trends as well as to initiate new trends of their own. There is risk that the
public may
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<PAGE>
not favor these new models or that the models may not be ready for sale until
after the trend has passed. If the Company fails to respond to and keep up to
date with fashion trends and consumer demands and tastes, its brand image,
sales, profitability and results of operations could be materially and adversely
affected.
If the Company misjudges the demand for its products, high inventory levels
could adversely affect future operating results and profitability.
Consumer demand for the Company's products can affect inventory levels. If
consumer demand is lower than expected, inventory levels can rise causing a
strain on operating cash flow. If the inventory cannot be sold through the
Company's wholesale or retail outlets, additional reserves or write-offs to
future earnings could be necessary. Conversely, if consumer demand is higher
than expected, insufficient inventory levels could result in unfulfilled
customer orders, loss of revenue and an unfavorable impact on customer
relationships. Failure to properly judge consumer demand and properly manage
inventory could have a material, adverse effect on profitability and liquidity.
An increase in product returns could negatively impact the Company's operating
results and profitability.
The Company recognizes revenue as sales when merchandise is shipped and title
transfers to the customer. The Company permits the return of damaged or
defective products and accepts limited amounts of product returns in certain
instances. Accordingly, the Company provides allowances for the estimated
amounts of these returns at the time of revenue recognition based on historical
experience. While such returns have historically been within management's
expectations and the provisions established, future return rates may differ from
those experienced in the past. Any significant increase in product damages or
defects and the resulting credit returns could have a material adverse effect on
the Company's operating results for the period or periods in which such returns
materialize.
The Company's business relies on the use of independent parties to manufacture
its products. Any loss of an independent manufacturer, or the Company's
inability to deliver quality goods in a timely manner, could have an adverse
affect on customer relations, brand image, net sales and results of operations.
The Company employs a flexible manufacturing model that relies primarily on
independent manufacturers to meet shifts in marketplace demand. All product
sources must achieve and maintain the Company's high quality standards and
specifications. The inability of a manufacturer to ship orders in a timely
manner or to meet the Company's high quality standards and specifications could
cause the Company to miss committed delivery dates with customers, which could
result in cancellation of the customers' orders. In addition, delays in delivery
of satisfactory products could have a material, adverse effect on the Company's
profitability if the delays cause the Company to be unable to market certain
products during the seasonal periods during which its sales are typically
higher. See "Risk Factors - The Company's business is seasonal, with sales
traditionally greater during certain holiday seasons, so events and
circumstances that adversely affect holiday consumer spending will have a
disproportionately adverse effect on the Company's results of operations." A
majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers. Additionally, the
Company does not have long-term supply commitments with its manufacturers and
thus competes for production facilities with other organizations, some of which
are larger and have greater resources.
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If the Company loses any of its license agreements, there may be significant
loss of revenues and a negative effect on business.
Many of the Company's brands are subject to license agreements. License
agreements give the Company the right to produce, market and distribute certain
products under the brand names of ESQ, Coach, Tommy Hilfiger, HUGO BOSS, Juicy
Couture and beginning in 2007, Lacoste. There are certain minimum royalty
payments as well as other requirements associated with these agreements. Failure
to meet any of these requirements could result in the loss of the license.
Additionally, after the term of the license agreement has concluded, the
licensor may decide not to renew with the Company. Any loss of one or more of
the Company's licenses could result in loss of future revenues which could
adversely affect its financial condition.
Changes in the sales mix of the Company's products could impact gross profit
margins.
The individual brands that are sold by the Company are sold at a wide range of
price points and yield a variety of gross profit margins. Thus, the mix of sales
by brand can have an impact on the gross profit margins of the Company. If the
Company's sales mix shifts unfavorably toward brands with lower gross profit
margins than the Company's historical consolidated gross profit margin or if the
mix of business changes significantly in the Movado Boutiques, it could have an
adverse affect on the results of operations.
The Company's business is seasonal, with sales traditionally greater during
certain holiday seasons, so events and circumstances that adversely affect
holiday consumer spending will have a disproportionately adverse effect on the
company's results of operations.
The Company's sales are seasonal by nature. The Company's U.S. domestic sales
are traditionally greater during the Christmas and holiday season.
Internationally, major selling seasons center on significant local holidays that
occur in late winter or early spring. The amount of net sales and operating
income generated during these seasons depends upon the general level of retail
sales during the Christmas and holiday season, as well as economic conditions
and other factors beyond the Company's control. If events or circumstances were
to occur that negatively impact consumer spending during such holiday seasons,
it could have a material, adverse effect on the Company's sales, profitability
and results of operations.
If the economy faces a recessionary period, purchases of the Company products
may be adversely affected.
Some of the Company's products fall into higher price categories that are
considered discretionary luxury items. Consumer purchases of discretionary
luxury items can change due to many economic and global factors. Declining
confidence in the U.S. or international economies, rising interest rates and
taxation issues could adversely affect the level of available discretionary
income for consumers to spend. In addition, events such as war, terrorism,
natural disasters or outbreaks or disease could further dampen consumer spending
on luxury items. If any of these events should occur, the Company could suffer
from losses of future sales.
If the Company is unable to successfully implement its growth strategies or
manage its growing business, its future operating results could suffer.
The Company is constantly expanding its business through acquisitions, license
agreements, joint ventures and new initiatives such as the growing Movado
Boutique business. There is risk involved with each of these. Acquisitions and
new license agreements require the Company to ensure that new brands will
successfully complement the other brands in its portfolio. The Company assumes
the risk that the new brand will not be viewed by the public as favorably as its
other brands. In addition, the integration of an acquired company or licensed
brand into the Company's existing business can strain the Company's current
infrastructure with the
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additional work required and there can be no assurance that the integration of
acquisitions or licensed brands will be successful or that acquisitions or
licensed brands will generate sales increases. The Company needs to ensure it
has the proper manpower and systems in place to allow for successful
assimilation of new businesses. The risk involved in growing the Movado Boutique
business is that the Company will not be able to successfully implement its
business model. In addition, the costs associated with leasehold improvements to
current Boutiques and the costs associated with opening new Boutiques could have
a material adverse effect on the Company's financial condition and results of
operations. The inability to successfully implement its growth strategies could
adversely affect the Company's future financial condition and results of
operations.
The loss or infringement of trademarks of the Company could have an adverse
effect on future results of operations.
The Company believes that its trademarks are vital to the competitiveness and
success of the business and has taken the appropriate actions to establish and
protect them. There can be no assurance, however, that such actions will be
adequate to prevent imitation of the Company's products or infringement of its
trademarks or that others will not challenge the Company's rights in, or its
ownership of certain trademarks, or that such trademarks will be successfully
defended. In addition, the laws of some foreign countries, including some of
which the Company sells its products, may not protect the rights to these
trademarks to the same extent as do the laws of the United States, which could
make it more difficult to successfully defend such challenges in these areas.
The inability to obtain or maintain rights in the Company's trademarks could
have an adverse effect on brand image and future results of operations.
Pricing fluctuations of commodities could adversely affect the Company's ability
to produce product at favorable prices.
Some of the Company's higher-end watch offerings are made with materials such as
diamonds, precious metals and gold. The Company's proprietary jewelry is
manufactured with silver, gold and platinum, semi-precious and precious stones,
and diamonds. A significant change in the prices of these commodities could
adversely affect the Company's business by:
- reducing gross profit margins;
- forcing an increase in suggested retail prices; which could lead to
- decreasing consumer demand; which could lead to
- higher inventory levels.
All of the above could adversely affect the Company's future cash flow and
results of operations.
The Company's business is subject to foreign currency exchange rate risk.
The majority of the Company's inventory purchases are denominated in Swiss
francs. The Company operates under a hedging program which utilizes forward
exchange contracts and purchased foreign currency options to mitigate foreign
currency risk. If these hedge instruments are unsuccessful at minimizing the
risk or are deemed ineffective, any fluctuation of the Swiss franc exchange rate
could impact the future results of operations. Changes in currency exchange
rates may also affect relative prices at which the Company and its foreign
competitors sell products in the same market. A portion of the Company's net
sales are derived from international subsidiaries and are denominated in
Canadian dollars, Swiss francs, Euros, Hong Kong dollars, Singapore dollars,
Japanese yen and British pounds. Future revenues derived in these currencies
could be affected by currency fluctuations.
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The Grinberg family owns a majority of the voting power of the Company's stock.
Each share of common stock of the Company is entitled to one vote per share
while each share of class A common stock of the Company is entitled to ten votes
per share. While the members of the Grinberg family do not own a majority of the
Company's outstanding common stock, by their significant holdings of class A
common stock they control a majority of the voting power represented by all
outstanding shares of both classes of stock. Consequently, the Grinberg family
is in a position to significantly influence any matters that are brought to a
vote of the shareholders including, but not limited to, the election of the
board of directors and approving any action requiring the approval of
shareholders, including any amendments to the Company's certificate of
incorporation, mergers or sales of all or substantially all of the Company's
assets. This concentration of ownership also may delay, defer or even prevent a
change in control of the Company and make some transactions more difficult or
impossible without the support of the Grinberg family. These transactions might
include proxy contests, tender offers, mergers or other purchases of common
stock that could give stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of the Company's common stock.
The stock price of the Company could fluctuate and possibly decline due to
changes in revenue, operating results and cash flow.
The revenue, results of operations and cash flow of the Company can be affected
by several factors, some of which are not controllable by the Company. These
factors may include, but are not limited to, the following:
- the ability to anticipate consumer demands and fashion trends;
- increased competition within the watch industry;
- a downturn in the local or global economy that could affect the
purchase of consumer discretionary goods;
- material fluctuations in foreign exchange rates or commodities;
- the ability to prevent the loss of or infringement upon the
Company's trademarks;
- the loss of any of the Company's license agreements;
- the financial stability of the Company's customers;
- the success of the Company's growth strategies; and
- disease, natural disasters, acts of terrorism or war or other
similar global events.
The factors above, as well as any other factors discussed in section 1A of this
Form 10-K, could cause a decline in revenues or increased expenses, both of
which could have an adverse effect on the results of operations. If the
Company's earnings failed to meet the expectations of the public in any given
period, the Company's stock price could fluctuate and possibly decline.
If the Company were to lose its relationship with any of its key customers or
distributors or any of such customers or distributors were to experience
financial difficulties, there may be a significant loss of revenue and operating
results.
The Company's customer base covers a wide range of distribution including
national jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc.
and Zale Corporation, department stores such as Macy's, Neiman Marcus and Saks
Fifth Avenue, independent regional jewelers, licensed partner retail stores and
a network of distributors in many countries throughout the world. The Company
does not have long term purchase contracts with its customers, nor does it have
a significant backlog of unfilled orders. Customer purchasing decisions
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could vary with each selling season. A material change in the Company's
customers' purchasing decisions could have an adverse effect on its revenue and
operating results.
The Company extends credit to its customers based on an evaluation of each
customer's financial condition usually without requiring collateral. Should any
of the Company's larger customers experience financial difficulties, it could
result in the Company's curtailing doing business with them or an increase in
its exposure related to its accounts receivable. The inability to collect on
these receivables could have an adverse effect on the Company's financial
results.
If the Company were to lose key members of management or be unable to attract
and retain the talent required for the business, operating results could suffer.
The Company's ability to execute key operating initiatives as well as to deliver
product and marketing concepts appealing to target consumers depends largely on
the efforts and abilities of key executives and senior management's
competencies. The unexpected loss of one or more of these individuals could have
an adverse effect on the future business. The Company cannot guarantee that it
will be able to attract and retain the talent and skills needed in the future.
If the Company were unable to maintain existing space or to lease new space for
Boutiques in prime mall locations or be unable to complete construction on a
timely basis, it may result in adversely affecting the Company's ability to
achieve profitable results in the Boutique business.
The Company's strategy to create a Movado lifestyle image and build retail
presence with product assortments that complement successful wholesale watch
distribution is a key element in the Company's future business plans. Movado
Boutiques are strategically located in the top malls throughout the United
States. If the Company could not maintain and secure locations in the prime
malls it could jeopardize the operations of the stores and business plans for
the future. Additionally, if the Company could not complete construction in new
stores within the planned timeframes, cost overruns and lost revenue could
adversely affect the profitability of the Boutique segment.
If the Company could not secure financing and credit with favorable terms, the
Company could suffer high borrowing costs which could impact financial results.
The Company has been able to secure financing and credit facilities with very
favorable terms due to the Company's financial stability and good relationships
with its lending partners. If conditions were to change where the Company was
unable to comply with its key covenants in its lending agreements or where
relationships were to deteriorate it could increase the borrowing rates and have
an adverse effect on financial results.
The Company relies heavily on its activities outside of the United States. Many
factors affecting business activities outside the United States could result in
an adverse impact on the business.
The Company produces all of its watches and a portion of its proprietary jewelry
outside the United States and primarily in Europe and Asia. The Company also
generates approximately 21% of its revenue through international sources.
Factors that could affect the business activity vary by region and market and
generally include without limitation:
- changes in social, political and/or economic conditions that could
disrupt the trade activity in the countries where the Company's
manufacturers, suppliers and customers are located;
- the imposition of additional duties, taxes and other charges on
imports and exports;
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- changes in foreign laws and regulations;
- the adoption or expansion of trade sanctions; and
- a significant change in currency valuation in specific countries or
markets.
The occurrence or consequences of any of these risks could affect the Company's
ability to operate in the affected regions. This could have an adverse effect on
the Company's financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases various facilities in North America, Europe, the Middle East
and Asia for its corporate, manufacturing, distribution and sales operations. As
of January 31, 2006, the Company's leased facilities were as follows:
<TABLE>
<CAPTION>
Square Lease
Location Function Footage Expiration
- -------- -------- ------- ----------
<S> <C> <C> <C>
Moonachie, New Jersey Watch assembly, distribution and repair 100,000 May 2010
Paramus, New Jersey Executive offices 90,050 June 2013
Bienne, Switzerland Corporate functions, watch sales, 56,400 April 2007
distribution, assembly and repair
Villers le Lac, France European service and watch distribution 12,800 January 2015
Kowloon, Hong Kong Watch sales, distribution and repair 12,300 June 2007
Markham, Canada Office, distribution and repair 11,200 June 2007
ChangAn Dongguan, China Quality control and engineering 9,600 June 2010
Hackensack, New Jersey Warehouse 6,600 July 2007
Munich, Germany Watch sales 3,300 August 2008
Grenchen, Switzerland Watch sales 2,800 March 2006
New York, New York Public relations office 2,700 April 2008
Coral Gables, Florida Caribbean office, watch sales 1,500 November 2006
Shanghai, China Market research 1,100 July 2006
Singapore Watch sales, distribution and repair 1,100 August 2006
Dubai, United Arab Emirates Watch sales 730 July 2007
Richmond-Upon-Thames, United Kingdom Watch sales 500 February 2006
Tokyo, Japan Watch sales 270 July 2007
</TABLE>
All of the foregoing facilities are used exclusively in connection with the
wholesale segment of the Company's business except that a portion of the
Company's executive office space in Paramus, New Jersey is used in connection
with management of its retail business.
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The Company owns three properties totaling 40,400 square feet located in La
Chaux-de-Fonds, Switzerland used for manufacturing, storage and public
relations. In addition, the Company acquired an architecturally significant
building in La Chaux-de-Fonds in 2004 as part of its acquisition of Ebel.
The Company also owns approximately 2,500 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions.
The Company also leases retail space for the operation of 27 Movado Boutiques in
the United States, each of which averages 2,200 square feet (with the exception
of the Company's Soho Boutique in New York City which is approximately 4,700
square feet and the Company's Boutique in The Mall at Short Hills in New Jersey,
which is approximately 3,200 square feet) expiring from June 2006 to September
2016. In addition, the Company leases retail space averaging 1,600 square feet
per store with leases expiring from June 2006 to January 2016 for the operation
of the Company's 28 outlet stores in the United States.
The Company believes that its existing facilities are suitable and adequate for
its current operations.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the normal
course of its business. The Company believes that none of these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's operating results, liquidity or its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company during the
fourth quarter of fiscal 2006.
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PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of March 31, 2006, there were 50 holders of record of Class A Common Stock
and, the Company estimates, 6,583 beneficial owners of the Common Stock
represented by 392 holders of record. The Common Stock is traded on the New York
Stock Exchange under the symbol "MOV" and on March 31, 2006, the closing price
of the Common Stock was $23.08. The quarterly high and low split-adjusted
closing prices for the fiscal years ended January 31, 2006 and 2005 were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
January 31, 2006 January 31, 2005
----------------- -----------------
Quarter Ended Low High Low High
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
April 30 $15.94 $19.58 $12.63 $15.31
July 31 $15.83 $19.38 $14.30 $17.24
October 31 $16.70 $20.00 $13.02 $17.81
January 31 $17.30 $19.29 $17.16 $18.95
</TABLE>
In connection with the October 7, 1993 public offering, each share of the then
currently existing Class A Common Stock was converted into 10.46 shares of new
Class A Common Stock, par value of $.01 per share (the "Class A Common Stock").
Each share of Common Stock is entitled to one vote per share and each share of
Class A Common Stock is entitled to 10 votes per share on all matters submitted
to a vote of the shareholders. Each holder of Class A Common Stock is entitled
to convert, at any time, any and all such shares into the same number of shares
of Common Stock. Each share of Class A Common Stock is converted automatically
into Common Stock in the event that the beneficial or record ownership of such
shares of Class A Common Stock is transferred to any person, except to certain
family members or affiliated persons deemed "permitted transferees" pursuant to
the Company's Amended Restated Certificate of Incorporation. The Class A Common
Stock is not publicly traded and consequently, there is currently no established
public trading market for these shares.
During the fiscal year ended January 31, 2005, the Board of Directors approved
four $0.04 per share quarterly cash dividends, which reflects the effect of the
fiscal 2005 two-for-one stock split. On March 23, 2005, the Board approved an
increase in the quarterly cash dividend rate from $0.04 to $0.05 per share. On
March 28, 2006, the Board approved an increase in the quarterly cash dividend
rate from $0.05 to $0.06 per share. The declaration and payment of future
dividends, if any, will be at the sole discretion of the Board of Directors and
will depend upon the Company's profitability, financial condition, capital and
surplus requirements, future prospects, terms of indebtedness and other factors
deemed relevant by the Board of Directors. See Notes 5 and 6 to the Consolidated
Financial Statements regarding contractual restrictions on the Company's ability
to pay dividends.
19
<PAGE>
Item 6. Selected Financial Data
The selected financial data presented below has been derived from the
Consolidated Financial Statements. This information should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of this report. Amounts
are in thousands except per share amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $470,941 $418,966 $330,214 $300,077 $299,725
Cost of sales 184,621 168,818 129,908 115,907 115,653
-------- -------- -------- -------- --------
Gross profit 286,320 250,148 200,306 184,170 184,072
Selling, general and administrative (1) (2) 238,283 215,072 165,525 152,394 157,799
-------- -------- -------- -------- --------
Operating profit 48,037 35,076 34,781 31,776 26,273
Other income, net (3) (4) 1,008 1,444 -- -- --
Interest expense, net 4,109 3,430 3,044 3,916 5,415
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of a change
in accounting principle 44,936 33,090 31,737 27,860 20,858
Provision for income taxes (5) (6) 18,319 6,783 8,886 7,801 3,735
-------- -------- -------- -------- --------
Income before cumulative effect of a change in
accounting principle 26,617 26,307 22,851 20,059 17,123
Cumulative effect of a change in accounting principle -- -- -- -- (109)
-------- -------- -------- -------- --------
Net income $ 26,617 $ 26,307 $ 22,851 $ 20,059 $ 17,014
======== ======== ======== ======== ========
Net income per share-Basic (7) $ 1.05 $ 1.06 $ 0.95 $ 0.84 $ 0.73
Net income per share-Diluted (7) $ 1.02 $ 1.03 $ 0.92 $ 0.82 $ 0.71
Basic shares outstanding (7) 25,273 24,708 24,101 23,739 23,366
Diluted shares outstanding (7) 26,180 25,583 24,877 24,381 24,014
Cash dividends declared per share (7) $ 0.20 $ 0.16 $ 0.105 $ 0.06 $ 0.06
Balance Sheet Data (End of Period):
Working capital (8) $369,227 $303,225 $252,883 $219,420 $153,932
Total assets $549,892 $477,074 $390,967 $345,154 $290,676
Total long-term debt $109,955 $ 45,000 $ 35,000 $ 35,000 $ 40,000
Shareholders' equity $321,678 $316,557 $274,713 $236,212 $172,470
</TABLE>
(1) Fiscal 2005 includes a non-cash impairment charge of $2.0 million recorded
in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144").
(2) Fiscal 2002 includes a one-time severance and early retirement charge of
$2.7 million.
(3) The fiscal 2006 other income is comprised of a pre-tax gain of $2.6 million
on the sale of a building offset by a pre-tax loss of $1.6 million
representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions
would occur by the end of the originally specified time period.
(4) The fiscal 2005 other income is comprised of a $1.4 million litigation
settlement.
(5) The fiscal 2006 effective tax rate of 40.8% reflects a tax charge of $7.5
million associated with repatriated foreign earnings under the American
Jobs Creation Act of 2004.
(6) The effective tax rate for fiscal 2005 was reduced to 20.5% principally as
the result of adjustments in the fourth quarter relating to refunds from a
retroactive Swiss tax ruling and a favorable U.S. tax accrual adjustment.
(7) For all periods presented, basic and diluted shares outstanding, and the
related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
(8) The Company defines working capital as current assets less current
liabilities.
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
GENERAL
Wholesale Sales. The primary factors that influence annual sales are general
economic conditions in the Company's domestic and international markets, new
product introductions, the level and effectiveness of advertising and marketing
expenditures and product pricing decisions.
Approximately 21% of the Company's total sales are from international markets
and therefore reported sales made in those markets are affected by foreign
exchange rates. The Company's international sales are billed in local currencies
(predominantly Euros and Swiss francs) and translated to U.S. dollars at average
exchange rates for financial reporting purposes. With the acquisition of Ebel in
March of 2004 and the introduction of HUGO BOSS watches, the Company expects
that a higher percentage of its total sales will be derived from international
markets in the future.
The Company's business is seasonal. There are two major selling seasons in the
Company's markets: the spring season, which includes school graduations and
several holidays and, most importantly, the Christmas and holiday season. Major
selling seasons in certain international markets center on significant local
holidays that occur in late winter or early spring. The Company's net sales
historically have been higher during the second half of the fiscal year. The
second half of the fiscal year ended January 31, 2006 accounted for 56.9% of the
Company's net sales.
Retail Sales. The Company's retail operations consist of 27 Movado Boutiques and
28 outlet stores located throughout the United States. The Company does not have
any retail operations outside of the United States.
The significant factors that influence annual sales volumes in the Company's
retail operations are similar to those that influence domestic wholesale sales.
In addition, many of the Company's outlet stores are located near vacation
destinations and, therefore, the seasonality of these stores is driven by the
peak tourist seasons associated with these locations.
Gross Margins. The Company's overall gross margins are primarily affected by
four major factors: brand and product sales mix, product pricing strategy,
manufacturing costs and the U.S. dollar/Swiss franc exchange rate. Gross margins
for the Company may not be comparable to those of other companies, since some
companies include all the costs related to its distribution network in cost of
sales whereas the Company does not include the costs associated with its U.S.
warehousing and distribution facility nor the occupancy costs for the retail
segment in the cost of sales line item.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Watches in the luxury and premium price
point categories generally earn lower gross margin percentages than moderate
price models. Gross margins in the Company's outlet business are lower than
those of the wholesale business since the outlets primarily sell seconds and
discontinued models that generally command lower selling prices. Gross margins
in the Movado Boutiques are affected by the mix of product sold. The margins
from the sale of watches are greater than those from the sale of jewelry and
accessories. Gross margins from the sale of watches in the Movado Boutiques also
exceed those of the wholesale business since the Company earns margins from
manufacture to point of sale to the consumer.
All of the Company's brands compete with a number of other brands on the basis
of not only styling but also wholesale and retail price. The Company's ability
to improve margins through price increases is therefore, to some extent,
constrained by competitors' actions.
21
<PAGE>
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and assembly in Switzerland. Through
productivity improvement efforts, the Company has controlled the level of
overhead costs and maintained flexibility in its cost structure by outsourcing a
significant portion of its component and assembly requirements and expects to
extend this strategy over the near term.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's cost of goods sold and, therefore, its gross margins. The Company
hedges its Swiss franc purchases using a combination of forward contracts,
purchased currency options and spot purchases. The Company's hedging program had
the effect of minimizing the exchange rate impact on product costs and gross
margins.
Selling, General and Administrative ("SG&A") Expenses. The Company's SG&A
expenses consist primarily of marketing, selling, distribution and general and
administrative expenses. Annual marketing expenditures are based principally on
overall strategic considerations relative to maintaining or increasing market
share in markets that management considers to be crucial to the Company's
continued success as well as on general economic conditions in the various
markets around the world in which the Company sells its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, expenses associated with Baselworld, the annual
watch and jewelry trade show and other industry trade shows and operating costs
incurred in connection with the Company's retail business. Sales commissions
vary with overall sales levels. Retail selling expenses consist primarily of
payroll related and store occupancy costs.
Distribution expenses consist primarily of salaries of distribution staff,
rental and other occupancy costs, security, depreciation and amortization of
furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other
employee compensation, employee benefit plan costs, office rent, management
information systems costs, professional fees, bad debts, depreciation and
amortization of furniture and leasehold improvements, patent and trademark
expenses and various other general corporate expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to the Company's
Consolidated Financial Statements. The preparation of these financial statements
and the application of certain critical accounting policies require management
to make judgments based on estimates and assumptions that affect the information
reported. On an on-going basis, management evaluates its estimates and
judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, warranty obligations, and
contingencies and litigation. Management bases its estimates and judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources on historical experience, contractual commitments and on various
other factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following are the critical accounting
policies requiring significant judgments and estimates used in the preparation
of its consolidated financial statements.
22
<PAGE>
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances as a
reduction of revenue in the same period that the sales are recorded. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may be
uncollectible in the future. Estimates are used in determining the allowance for
doubtful accounts and are based on an analysis of the aging of accounts
receivable, assessments of collectibility based on historic trends, the
financial condition of the Company's customers and an evaluation of economic
conditions. While the actual bad debt losses have historically been within the
Company's expectations and the allowances established, there can be no guarantee
that the Company will continue to experience the same bad debt loss rates. As of
January 31, 2006, the Company knew of no situations with any of the Company's
major customers which would indicate the customer's inability to make their
required payments.
Inventories
The Company values its inventory at the lower of cost or market. The Company's
domestic inventory is valued using the first-in, first-out (FIFO) method. The
cost of finished goods and component inventories, held by overseas subsidiaries,
are determined using average cost. The Company's management regularly reviews
its sales to customers and customers' sell through at retail to evaluate the
adequacy of inventory reserves. Inventory with less than acceptable turn rates
is classified as discontinued and, together with the related component parts
which can be assembled into saleable finished goods, is sold through the
Company's outlet stores. When management determines that finished product is
unsaleable in the Company's outlet stores or that it is impractical to build the
remaining components into watches for sale in the outlets, a reserve is
established for the cost of those products and components. These estimates could
vary significantly, either favorably or unfavorably, from actual requirements
depending on future economic conditions, customer inventory levels or
competitive conditions which may differ from the Company's expectations.
Long-Lived Assets
The Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company performs an impairment review, at a minimum, on an annual basis.
However, the Company will review its long-lived assets for impairment once
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). When such a
determination has been made, management compares the carrying value of the
assets with their estimated future undiscounted cash flows. If it is determined
that an impairment loss has
23
<PAGE>
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the fair value of
the long-lived assets.
During fiscal 2006, the Company performed the review which resulted in no
impairment charge. During the fourth quarter of fiscal 2005, the Company
determined that the carrying value of its long-lived assets in the Movado
Boutique located in the Soho section of New York City, might not be recoverable.
The impairment review was performed pursuant to SFAS No. 144 because of an
economic downturn affecting the Soho Boutique operations and revenue forecasts.
As a result, the Company recorded a non-cash pretax impairment charge of $2.0
million consisting of property, plant and equipment of $0.8 million and other
assets of $1.2 million. The entire impairment charge is included in the selling,
general and administrative expenses in the fiscal 2005 Consolidated Statements
of Income. The Company will continue to operate this boutique. There were no
impairment losses related to long-lived assets in fiscal 2004.
Warranties
All watches sold by the Company come with limited warranties covering the
movement against defects in material and workmanship for periods ranging from
two to three years from the date of purchase, with the exception of Tommy
Hilfiger watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating for Movado watch cases and
bracelets. The Company records an estimate for future warranty costs based on
historical repair costs. Warranty costs have historically been within the
Company's expectations and the provisions established. If such costs were to
substantially exceed estimates, this could have an adverse effect on the
Company's operating results.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more-likely-than-not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
24
<PAGE>
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2006
compared to fiscal 2005 and fiscal 2005 compared to fiscal 2004 along with a
discussion of the changes in financial condition during fiscal 2006.
The following are net sales by business segment (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
<S> <C> <C> <C>
Wholesale:
Domestic $286,825 $256,331 $224,866
International 98,558 88,697 44,475
Retail 85,558 73,938 60,873
-------- -------- --------
Net Sales $470,941 $418,966 $330,214
======== ======== ========
</TABLE>
The following table presents the Company's results of operations expressed as a
percentage of net sales for the fiscal years indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------------------------
2006 2005 2004
-------------- -------------- --------------
% of net sales % of net sales % of net sales
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross margin 60.8% 59.7% 60.6%
Selling, general and administrative expenses 50.6% 51.3% 50.1%
Operating profit 10.2% 8.4% 10.5%
Other income 0.2% 0.3% --
Interest expense, net 0.9% 0.8% 0.9%
Income taxes 3.9% 1.6% 2.7%
Net income 5.6% 6.3% 6.9%
</TABLE>
Fiscal 2006 Compared to Fiscal 2005
Net Sales
Net sales in fiscal 2006 were $470.9 million, or 12.4% above fiscal 2005 sales
of $419.0 million. For the year, sales increases were recorded in all business
segments and all brands, except the Concord brand.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 11.9%, or $30.5 million, to $286.8
million. A sales increase of $12.1 million was recorded in the Movado brand.
This sales growth was achieved through the introduction of new styling and
variations within existing watch families, including the addition of diamonds to
offer fresh elements appealing to the Movado customer coupled with strong iconic
marketing and advertising support. The
25
<PAGE>
ESQ brand recorded a sales increase of $8.1 million due to the successful
repositioning of the brand in the entry level Swiss watch category by the
introduction of new product with integrated marketing support and a new
advertising campaign which led to strong retailer demand. The Ebel brand
recorded a sales increase of $6.0 million. This strong performance reflects the
cumulative impact of the Company's efforts over the past two years to
re-establish the brand with product and marketing support to bring the brand
image back to its roots and values. Concord sales were below prior year by $1.8
million, primarily due to reduced retailer demand and sell through to the
ultimate consumer.
International Wholesale Net Sales
The international wholesale business increased by 11.1%, or $9.9 million, to
$98.6 million. Ebel and Tommy Hilfiger recorded increases of $9.1 million and
$4.8 million, respectively. The increases in Ebel were achieved in virtually all
international markets. This was primarily the result of stronger retailer demand
for the new product introductions and the Company's marketing and advertising
support. Tommy Hilfiger sales increased primarily in Europe due to market
expansions and increased consumer recognition and demand. Concord sales were
below prior year by $3.9 million due to sales decreases recorded in Asia and the
Middle East.
Retail Net Sales
Sales in the Company's retail segment increased by $11.6 million, or 15.7%, to
$85.6 million. Comparable store sales increases of 8.5% were achieved in the
Movado Boutiques. In addition, non-comparable store sales grew by $6.0 million
over the prior year. Comparable store sales in the Company outlet stores
increased by 7.3%. At January 31, 2006, the Company operated 27 Movado Boutiques
and 28 outlet stores as compared to 24 Movado Boutiques and 27 outlet stores at
January 31, 2005.
The Company considers comparative store sales to be sales of stores that were
open as of February 1st of the prior fiscal year through January 31st of the
current fiscal year. The sales from stores that have been relocated, renovated
or refurbished are included in the calculation of comparable store sales. The
method of calculating comparative store sales varies across the retail industry.
As a result, the calculation of comparative store sales may not be comparable to
similar measures reported by other companies.
Gross Margin
Gross margin for the year was $286.3 million, an increase of $36.2 million over
prior year gross margin of $250.1 million. The increase of $36.2 million was
primarily due to increased sales of $52.0 million as well as an overall increase
in the gross margin as a percent of sales from 59.7% to 60.8%. The higher gross
margin percentage was attributed to margin improvements in most of the Company's
brands, particularly Ebel. This improvement was due to Ebel being
fully-integrated into the Company's existing supply chain. In addition, the
Movado Boutiques margin rate improved due to both the product mix and generally
higher margins in jewelry.
Selling, General and Administrative Expenses
SG&A expenses of $238.3 million increased by $23.2 million, or 10.8%, from
$215.1 million in fiscal 2005. The primary reasons for the increase was $7.1
million of increased spending in support of the retail expansion, increased
marketing spending of $7.3 million to support the new and existing brands and a
$4.9 million increase in payroll and related infrastructure costs in support of
brand growth and expansion. Fiscal 2005 amounts include a non-cash impairment
charge of $2.0 million related to the Soho Boutique.
26
<PAGE>
Wholesale Operating Profit
Operating profit in the wholesale segment increased by $9.2 million to $42.3
million. The increase is the net result of higher gross margin of $27.3 million,
partially offset by an increase in SG&A expenses of $18.1 million. The higher
gross margin of $27.3 million was primarily the result of an increase in net
sales of $40.4 million. The increase in the SG&A expenses of $18.1 million is
primarily due to increased marketing spending of $7.3 million to support the
brand growth initiatives and a $4.9 million increase in payroll and related
infrastructure costs in support of the brand growth and expansion.
Retail Operating Profit
Operating profit in the retail segment increased by $3.7 million to $5.7 million
at January 31, 2006. The increase in the operating profit was the net result of
higher gross profit of $8.8 million partially offset by higher SG&A expenses of
$5.1 million. The increased gross profit was primarily attributed to the
increase in net sales of $11.6 million as well as higher gross margins in the
Movado Boutiques due to both product mix and generally higher margins in
jewelry. The higher SG&A expenses were primarily due to the costs associated
with the retail expansion. This amount included higher payroll related expense
of $3.2 million, increased occupancy costs of $1.6 million and increased
depreciation expense of $0.8 million. Fiscal 2005 amounts include a non-cash
impairment charge of $2.0 million for the Soho Boutique.
Other Income
The Company recorded other income for the year ended January 31, 2006 of $1.0
million. The Company recorded a pre-tax gain of $2.6 million on the sale of a
building acquired on March 1, 2004 in connection with the acquisition of Ebel.
The building was classified as an asset held for sale in other current assets.
Additionally, the Company recorded a pre-tax loss of $1.6 million representing
the impact of the discontinuation of foreign currency cash flow hedges because
it was not probable that the forecasted transactions would occur by the end of
the originally specified time period.
The Company recognized other income for the year ended January 31, 2005 from a
litigation settlement in the amount of $1.4 million.
Interest Expense
Interest expense for fiscal 2006 was $4.1 million, reflecting a 19.8% increase
over fiscal 2005 interest of $3.4 million. The increase was primarily the result
of higher average borrowings, which were $78.7 million or 35.7% above the prior
year. The increased borrowings were incurred in Switzerland in order to
repatriate foreign earnings under the American Jobs Creation Act of 2004 as well
as to fund the Company's working capital needs. Additionally, higher borrowing
rates for the year contributed to the increase in expense.
For borrowings data for the years ended January 31, 2006 and 2005, see Notes 5
and 6 to the Consolidated Financial Statements regarding Bank Credit
Arrangements and Lines of Credit and Long-Term Debt. For further information on
the American Jobs Creation Act of 2004, see Note 9 to the Consolidated
Financial Statements.
Income Taxes
The Company's income tax provision amounted to $18.3 million and $6.8 million in
fiscal 2006 and 2005 respectively. This represents an effective tax rate of
40.8% in fiscal 2006 compared to 20.5% for fiscal 2005. The higher effective tax
rate for 2006 is primarily due to the fourth quarter 2006 tax charge of $7.5
million
27
<PAGE>
associated with repatriated foreign earnings under the American Jobs Creation
Act of 2004. For additional information related to income taxes for the years
ended January 31, 2006 and 2005, see Note 9 to the Consolidated Financial
Statements. In the prior year, the lower effective tax rate was the result of a
retroactive favorable Swiss tax ruling and a favorable U.S. tax accrual
adjustment.
Fiscal 2005 Compared to Fiscal 2004
Net Sales
Net sales in fiscal 2005 were $419.0 million, or 26.9% above fiscal 2004 sales
of $330.2 million. For the year, sales increases were recorded in all brands and
business segments.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 14.0%, or $31.5 million, to $256.3
million, including Ebel sales of $15.7 million. A sales increase of $7.2 million
was recorded in the Movado brand. The increase is attributed to new product
introductions at more affordable price points as well as increased sell through
at certain retailers in key customer chain stores. The Coach brand increased by
$2.3 million as a result of the introduction of fashion products in tandem with
new product offerings by Coach, Inc. The Tommy Hilfiger watch business increased
by $4.4 million. This reflects the expansion into new doors in the North
American marketplace as well as the continued strength of the Tommy Hilfiger
watch business.
International Wholesale Net Sales
The international wholesale business was $88.7 million and was above prior year
by $44.2 million or 99.4%, including Ebel sales of $28.5 million. An increase of
$6.3 million was recorded in Tommy Hilfiger as a result of international market
expansion. Coach, Concord and Movado increased by $2.0 million, $5.0 million and
$2.3 million, respectively, due to growth primarily recorded in Asia.
Retail Net Sales
Sales in the Company's retail segment increased by $13.1 million, or 21.5%, to
$73.9 million. Comparable store sales increases of 11.2% were achieved in the
Movado Boutiques. In addition, non-comparable sales grew by $10.4 million over
the prior year. Comparable store sales in the Company outlet stores were flat
year over year. At January 31, 2005, the Company operated 24 Movado Boutiques
and 27 outlet stores as compared to 17 Movado Boutiques and 26 outlet stores at
January 31, 2004.
Gross Margin
Gross margin for the year was $250.1 million, an increase of $49.8 million over
prior year gross margin of $200.3 million. The increase of $49.8 million was due
to increased sales of $88.8 million. As a percent of sales, gross margin was
59.7% versus 60.7% in the prior year. The lower gross margin percentage was
primarily attributed to a sales mix change due to the addition of Ebel and the
increased sales of Tommy Hilfiger, where the gross margins are lower than the
Company's historical average.
Selling, General and Administrative Expenses
SG&A expenses of $215.1 million increased by $49.5 million, or 29.9%, from
$165.5 million in fiscal 2004. The primary reasons for the increases were the
addition of Ebel, which recorded $28.3 million of incremental expenses, $6.6
million of increased spending in support of the Movado Boutique expansion,
higher payroll and
28
<PAGE>
related costs of $6.4 million, additional marketing programs of $1.3 million
and other corporate initiatives of $2.2 million, which included higher legal
costs, costs incurred in connection with Sarbanes-Oxley implementation and costs
associated with the acquisition of Ebel which could not be capitalized. In
addition, in accordance with SFAS No. 144, the Company recorded a non-cash
impairment charge of $2.0 million which is included in SG&A.
Wholesale Operating Profit
Operating profit in the wholesale segment increased by $1.9 million to $33.0
million. The effect of the addition of Ebel was an operating loss for the year
of $3.8 million. Excluding the loss of Ebel, operating profit in the wholesale
segment was $36.8 million or an increase over prior year of $5.7 million. The
increase excluding the effect of Ebel is the net result of higher gross margin
of $16.8 million, partially offset by the increase in SG&A expenses of $11.1
million.
The higher gross margin of $16.8 million was the result of an increase in net
sales of $30.3 million. The increase in the SG&A expenses of $11.1 million is
primarily due to $1.7 million in the wholesale segment as a result of the
translation impact of the weak U.S. dollar, an increase of $1.3 million in
marketing spending, which includes support for the Movado expansion in China and
support for the international market expansion of Tommy Hilfiger, higher payroll
and related costs of $6.4 million and $2.2 million in other corporate
initiatives including higher legal costs, costs incurred in connection with
Sarbanes-Oxley implementation and costs associated with the acquisition of Ebel
which could not be capitalized.
Retail Operating Profit
Operating profit in the retail segment decreased by $1.6 million. The decrease
is the net result of higher gross margin of $8.5 million partially offset by
increased SG&A expenses of $10.1 million.
The retail segment higher gross margin was due to a net sales increase of $13.1
million. This was primarily due to comparable store sales increases in the
Movado Boutiques of 11.2% and the opening of seven new Movado Boutiques and one
new outlet store. The comparable store sales in the outlet stores were flat year
over year.
The increase in SG&A expenses of $10.1 million was primarily attributed to the
costs associated with the opening of the seven new Movado Boutiques and one new
outlet store of $6.6 million and the effect of the impairment charge related to
the Soho Boutique of $2.0 million.
Other Income
The Company recognized income for the year ended January 31, 2005 from a
litigation settlement in the net amount of $1.4 million. This consisted of a
gross settlement of $1.9 million partially offset by direct costs related to the
litigation of $0.5 million. After accounting for fees and taxes associated with
the settlement, net income increased by $0.8 million, or $0.03 per diluted
share.
Interest Expense
Interest expense for fiscal 2005 was $3.4 million, reflecting a 12.7% increase
over fiscal 2004 interest of $3.0 million. The increase was primarily the result
of higher average borrowings, which were $58.0 million or 14.9% above the prior
year. The increased borrowings were initiated to take advantage of low long-term
rates and to improve the Company's capital structure.
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<PAGE>
Income Taxes
The Company's income tax provision amounted to $6.8 million and $8.9 million in
fiscal 2005 and 2004 respectively. This represents an effective tax rate of
20.5% in fiscal 2005 compared to 28.0% for fiscal 2004. The lower effective tax
rate for fiscal 2005 is primarily due to adjustments in the fourth quarter
relating to refunds from a retroactive Swiss tax ruling, a favorable U.S. tax
accrual adjustment and the recording of the tax benefit from an asset impairment
in the U.S.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2006, the Company had $123.6 million of cash and cash equivalents
as compared to $63.8 million in the comparable prior year period. The $59.8
million increase is primarily due to the borrowing of 83.0 million Swiss francs,
with a dollar equivalent of $65.0 million, to repatriate foreign earnings under
the American Jobs Creation Act of 2004 and partially offset by cash used for
capital expenditures of $16.4 million, primarily to support the build out of
five new retail stores, renovation and expansion of existing stores, the
expansion of office space in the corporate headquarters in Paramus, New Jersey
and further automation of the distribution center in Moonachie, New Jersey. In
addition, cash provided by operating activities was $28.4 million.
Cash generated by operating activities continues to be the Company's primary
source to fund its growth initiatives and to pay dividends. In fiscal 2006, 2005
and 2004, the Company generated cash from operations of $28.4 million, $30.2
million and $51.6 million, respectively.
Accounts receivable at January 31, 2006 were $109.9 million as compared to
$104.7 million in the comparable prior year period. The increase of $5.2 million
or 4.9% was below the sales growth of 12.4%. This improvement reflects the
results of higher cash collections during the year as well as higher sales in
the retail segment and for the Company's licensed brands where shorter payment
terms are the norm. The accounts receivable days outstanding were 70 days and 74
days for the fiscal years ended January 31, 2006 and 2005, respectively.
Inventories at January 31, 2006 were $198.6 million as compared to $185.6
million in the comparable prior year period. Inventory increased by $13.0
million primarily due to the increase in Concord inventory of $3.1 million as a
result of the decline in sales and increased Ebel inventory of $8.0 million due
to new product launches. Additionally, inventory held for retail increased by
$3.4 million primarily due to the retail expansion and an expanded jewelry
product offering in the Boutiques. These increases include a favorable impact of
$5.3 million due to the stronger U.S. dollar in translating the inventory.
Cash used in investing activities amounted to $13.2 million, $59.5 million and
$11.5 million in fiscal 2006, 2005 and 2004, respectively. Cash used in
investing activities during fiscal 2006 was for capital expenditures of $16.4
million primarily to support the build out of five new retail stores, renovation
and expansion of existing stores, the expansion of office space in the corporate
headquarters in Paramus, New Jersey and further automation of the distribution
center in Moonachie, New Jersey. The cash used in investing activities was
offset by $4.0 million received as proceeds from the sale of a building acquired
on March 1, 2004 in connection with the acquisition of Ebel. The cash used in
investing activities during fiscal 2005 was primarily to fund the acquisition of
Ebel and capital expenditures related to the build out of the new Movado
Boutiques opened during the period.
Cash provided by / (used) in financing activities amounted to $62.1 million,
$3.6 million and ($1.9) million in fiscal 2006, 2005 and 2004, respectively.
Cash provided by financing activities during fiscal 2006 was primarily due to
the increase in borrowings of 83.0 million Swiss francs, with a dollar
equivalent of $65.0
30
<PAGE>
million, to repatriate foreign earnings under the American Jobs Creation Act of
2004. Cash provided by financing activities during fiscal 2005 was primarily the
result of a net increase in long-term debt of $10.0 million partially offset by
the payment of a $5.2 million mortgage assumed as part of the Ebel acquisition.
During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes
under a Note Purchase and Private Shelf Agreement dated November 30, 1998. These
notes bear interest of 6.90% per annum, mature on October 30, 2010 and are
subject to annual repayments of $5.0 million commencing October 31, 2006. These
notes contain financial covenants including an interest coverage ratio,
maintenance of consolidated net worth and certain non-financial covenants that
restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. At January 31, 2006, the Company was in compliance with all
financial and non-financial covenants and $25.0 million of these notes were
issued and outstanding.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes"), in
an aggregate principal amount of $20.0 million, which will mature on October 8,
2011 and are subject to annual repayments of $5.0 million commencing on October
8, 2008. Proceeds of the Senior Series A-2004 Notes have been used by the
Company for capital expenditures, repayment of certain of its debt obligations
and general corporate purposes. These notes contain financial covenants
including an interest coverage ratio, maintenance of consolidated net worth and
certain non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. As of January 31, 2006, the Company was in
compliance with all financial and non-financial covenants and $20.0 million of
these notes were issued and outstanding.
On June 30, 2005, the Company renewed its promissory note for a $5.0 million
unsecured working capital line with Bank of New York, originally dated June 27,
2000. The line expires on July 31, 2006. The Company had no outstanding
borrowings under the line as of January 31, 2006 and 2005.
On December 12, 2005, the Company executed a line of credit letter agreement
with Bank of America ("B of A") and an amended and restated promissory note in
the principal amount of up to $20.0 million payable to B of A. Pursuant to the
line of credit letter agreement, B of A will consider requests for short-term
loans and documentary letters of credit for the importation of merchandise
inventory, the aggregate amount of which at any time outstanding shall not
exceed $20.0 million. The Company's obligations under the agreement are
guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.
Pursuant to the amended and restated promissory note, the Company promised to
pay to B of A $20.0 million, or such lesser amount as may then be the unpaid
balance of all loans made by B of A to the Company thereunder, in immediately
available funds upon the maturity date of June 16, 2006. The Company has the
right to prepay all or part of any outstanding amounts under the promissory note
without penalty at any time prior to the maturity date. The amended and restated
promissory note bears interest at an annual rate equal to either (i) a floating
rate equal to the prime rate or (ii) such fixed rate as may be agreed upon by
the Company and B of A for an interest period which is also then agreed upon.
The amended and restated promissory note contains various representations and
warranties and events of default that are customary for instruments of that
type. As of January 31, 2006, there were no outstanding borrowings against this
line.
On December 13, 2005, the Company executed a promissory note in the principal
amount of up to $37.0 million payable to JPMorgan Chase Bank, N.A. ("Chase").
Pursuant to the promissory note, the Company promised to
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<PAGE>
pay to Chase $37.0 million, or such lesser amount as may then be the unpaid
balance of each loan made or letter of credit issued by Chase to the Company
thereunder, upon the maturity date of July 31, 2006; provided that during the
period between January 31, 2006 and the maturity date, the maximum principal
amount of all loans made by Chase to the Company, and outstanding under the
promissory note, shall not exceed $2.0 million. The Company has the right to
prepay all or part of any outstanding amounts under the promissory note without
penalty at any time prior to the maturity date. The promissory note bears
interest at an annual rate equal to either (i) a floating rate equal to the
prime rate, (ii) a fixed rate equal to an adjusted LIBOR plus 0.625% or (iii) a
fixed rate equal to a rate of interest offered by Chase from time to time on any
single commercial borrowing. The promissory note contains various events of
default that are customary for instruments of that type. In addition, it is an
event of default for any security interest or other encumbrance to be created or
imposed on the Company's property, other than as permitted in the lien covenant
of the Credit Agreement. Chase issued 11 irrevocable standby letters of credit
for retail and operating facility leases to various landlords, for the
administration of the Movado Boutique private-label credit card and Canadian
payroll to the Royal Bank of Canada totaling $1.2 million with expiration dates
through March 18, 2007. As of January 31, 2006, there were no outstanding
borrowings against this promissory note.
On December 15, 2005, the Company, and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "Swiss Credit Agreement") which provides for a
revolving credit facility of 90.0 million Swiss francs and matures on December
15, 2010. The obligations of the Company's two Swiss subsidiaries under this
credit agreement are guaranteed by the Company under a Parent Guarantee, dated
as of December 15, 2005, in favor of the lenders. The credit agreement contains
financial covenants including an interest coverage ratio, average debt coverage
ratio, limitations on capital expenditures and certain non-financial covenants
that restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. Until the date immediately preceding the first day of the calendar
month following the date of delivery of the first annual or quarterly financial
statements after December 15, 2005, the credit facility bears interest at a rate
equal to the LIBOR (as defined in the Swiss Credit Agreement) plus .50% per
annum, after which it will bear interest at a rate equal to the LIBOR plus a
margin ranging from .50% per annum to .875% per annum (depending upon a leverage
ratio). As of January 31, 2006, the Company was in compliance with all financial
and non-financial covenants and had 83.0 million Swiss francs, with a dollar
equivalent of $65.0 million, outstanding under this revolving credit facility.
On December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "US Credit Agreement") which provides for a
revolving credit facility of $50.0 million (including a sublimit for borrowings
in Swiss francs of up to $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain terms and conditions.
The US Credit Agreement will mature on December 15, 2010. The obligations of MGI
Luxury Group S.A. and Movado Watch Company SA are guaranteed by the Company
under a Parent Guarantee, dated as of December 15, 2005, in favor of the
lenders. The obligations of the Company are guaranteed by certain domestic
subsidiaries of the Company under subsidiary guarantees, in favor of the
lenders. The credit agreement contains financial covenants including an interest
coverage ratio, average debt coverage ratio, limitations on capital expenditures
and certain non-financial covenants that restrict the Company's activities
regarding investments and acquisitions, mergers, certain transactions with
affiliates, creation of liens, asset transfers, payment of dividends and
limitation of the amount of debt outstanding. Until the date immediately
preceding the first day of the calendar month following the date of delivery of
the first annual or quarterly financial statements after December 15, 2005, the
credit facility bears interest, at Borrower's option, at a rate equal to the
Adjusted LIBOR (as defined in the US Credit Agreement) plus .50% per annum, or
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the Alternate Base Rate (as defined in the US Credit Agreement), after which it
will bear interest, at Borrower's option, at a rate equal to the Adjusted LIBOR
plus a margin ranging from .50% per annum to .875% per annum (depending upon a
leverage ratio), or the Alternate Base Rate. As of January 31, 2006, the Company
was in compliance with all financial and non-financial covenants and there were
no outstanding borrowings against this line.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million Swiss francs, with dollar equivalents of $6.3 million and
$6.7 million at January 31, 2006 and 2005. As of January 31, 2006, the Swiss
bank has guaranteed the Company's Swiss subsidiary's obligations to certain
Swiss third parties in the amount of $3.3 million in various foreign
currencies. As of January 31, 2006, there were no outstanding borrowings against
these lines.
For fiscal 2006, treasury shares increased by 180,092 as the result of cashless
exercises of stock options for 527,387 shares of stock.
Cash dividends were $5.1 million, $4.0 million and $2.5 million in fiscal years
2006, 2005 and 2004, respectively.
At January 31, 2006, the Company had working capital of $369.2 million as
compared to $303.2 million in the prior year. The Company defines working
capital as the difference between current assets and current liabilities. The
Company expects that annual capital expenditures in the near term will be higher
by approximately $1.5 million when compared to fiscal 2006 levels. The increase
in capital expenditures will be due to the remodeling of existing stores,
increased spending in support of the Movado Boutiques expansion and higher costs
related to improving the Company's information technology infrastructure.
Management believes that the cash on hand in addition to the expected cash flow
from operations and the Company's short-term borrowing capacity will be
sufficient to meet its working capital needs for at least the next 12 months.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments due by period (in thousands):
<TABLE>
<CAPTION>
2-3 4-5
Total Less than 1 year years years More than 5 years
-------- ---------------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Contractual Obligations:
Long-Term Debt Obligations (1) $109,955 $ 5,000 $15,000 $ 84,955 $ 5,000
Interest Payments on Long-Term Debt (1) 14,236 3,657 6,280 4,059 240
Operating Lease Obligations (2) 79,103 12,590 21,417 18,719 26,377
Purchase Obligations (3) 40,344 40,344 -- -- --
Other Long-Term Obligations (4) 68,250 9,814 20,400 20,939 17,097
-------- ------- ------- -------- -------
Total Contractual Obligations $311,888 $71,405 $63,097 $128,672 $48,714
======== ======= ======= ======== =======
</TABLE>
(1) The Company has long-term debt obligations and related interest payments of
$54.5 million related to Series A-2004 Senior Notes and Series A Senior
Notes further discussed in "Liquidity and Capital Resources". Additionally,
the Company has long-term debt obligations and related interest payments of
$69.7 million related to the Swiss revolving credit facility entered into
in fiscal 2006.
(2) Includes store operating leases, which generally provide for payment of
direct operating costs in addition to rent. These obligation amounts
include future minimum lease payments and exclude direct operating costs.
(3) The Company had outstanding purchase obligations with suppliers at the end
of fiscal 2006 for raw materials, finished watches and packaging in the
normal course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid
for items required to be purchased under agreements that are enforceable,
legally binding and specify minimum quantity, price and term.
(4) Other long-term obligations consist of minimum obligations related to the
Company's license agreements. The Company manufactures, distributes,
advertises and sells watches pursuant to its exclusive license agreements
with unaffiliated licensors. Royalty amounts are generally based on a
stipulated percentage of revenues, although certain of these agreements
contain provisions
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for the payment of minimum annual royalty amounts. The license agreements
have various terms with additional renewal options, provided that minimum
sales levels are achieved. Additionally, the license agreements require the
Company to pay certain advertising expenses based on a stipulated
percentage of revenues, although certain of these agreements contain
provisions for the payment of minimum annual advertising amounts.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges by requiring the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure will no longer be an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company will be adopting SFAS No. 123(R) in the first quarter of
fiscal 2007 using the modified prospective application transition method. For
outstanding unvested options granted as of January 31, 2006, the adoption is
expected to have an impact of approximately $1.0 million, net of tax, on the
Company's consolidated results of operations for fiscal year ending January 31,
2007.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
34
<PAGE>
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN 47 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The
adoption of EITF 05-6 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
35
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Rate Risk
The Company's primary market risk exposure relates to foreign currency exchange
risk (see Note 7 to the Consolidated Financial Statements). The majority of the
Company's purchases are denominated in Swiss francs. The Company reduces its
exposure to the Swiss franc exchange rate risk through a hedging program. Under
the hedging program, the Company manages most of its foreign currency exposures
on a consolidated basis, which allows it to net certain exposures and take
advantage of natural offsets. The Company uses various derivative financial
instruments to further reduce the net exposures to currency fluctuations,
predominately forward and option contracts. These derivatives either (a) are
used to hedge the Company's Swiss franc liabilities and are recorded at fair
value with the changes in fair value reflected in earnings or (b) are documented
as SFAS No. 133 cash flow hedges with the gains and losses on this latter
hedging activity first reflected in other comprehensive income, and then later
classified into earnings. In both cases, the earnings impact is partially offset
by the effects of currency movements on the underlying hedged transactions. If
the Company did not engage in a hedging program, any change in the Swiss franc
to local currency would have an equal effect on the Company's cost of sales. In
addition, the Company hedges its Swiss franc payable exposure with forward
contracts. As of January 31, 2006, the Company's entire net forward contracts
hedging portfolio consisted of 140.0 million Swiss francs equivalent for various
expiry dates ranging through October 31, 2006 compared to a portfolio of 239.0
million Swiss franc equivalent for various expiry dates ranging through January
27, 2006 as of January 31, 2005. If the Company was to settle its Swiss franc
forward contracts at January 31, 2006, the net result would be a loss of $1.6
million, net of tax benefit of $1.0 million. The Company had 10.0 million Swiss
franc option contracts related to cash flow hedges for various expiry dates
ranging through October 27, 2006 as of January 31, 2006 compared to 30.0 million
Swiss franc option contracts for various expiry dates ranging through October
31, 2005 as of January 31, 2005. If the Company was to settle its Swiss franc
option contracts at January 31, 2006, the net result would be a gain of $0.2
million, net of tax of $0.1 million.
The Company's Board of Directors authorized the hedging of the Company's Swiss
franc denominated investment in its wholly-owned Swiss subsidiaries using
purchase options under certain limitations. These hedges are treated as net
investment hedges under SFAS No. 133. As of January 31, 2006, the Company did
not hold a purchased option hedge portfolio related to net investment hedging
compared to 50.0 million Swiss francs as of January 31, 2005.
Commodity Risk
Additionally, the Company has a hedging program related to gold used in the
manufacturing of the Company's watches. Under this hedging program, the Company
purchases various commodity derivative instruments, primarily future contracts.
These derivatives are documented as SFAS No. 133 cash flow hedges, and gains and
losses on these derivative instruments are first reflected in other
comprehensive income, and later reclassified into earnings, partially offset by
the effects of gold market price changes on the underlying actual gold
purchases. If the Company did not engage in a gold hedging program, any changes
in the gold price would have an equal effect on the Company's cost of sales. The
Company did not hold any futures contracts in its gold hedge portfolio related
to cash flow hedges as of January 31, 2006.
Debt and Interest Rate Risk
In addition, the Company has certain debt obligations with variable interest
rates, which are based on LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The differences between the market
based interest rates at
36
<PAGE>
January 31, 2006, and the fixed rates were unfavorable. The Company believes
that a 1% change in interest rates would affect the Company's net income by
approximately $0.6 million.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Schedule Page
Number Number
-------- -----------
<S> <C> <C>
Management's Annual Report on Internal Control Over
Financial Reporting F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Income for the fiscal years ended
January 31, 2006, 2005 and 2004 F-4
Consolidated Balance Sheets at January 31, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2006, 2005 and 2004 F-6
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 31, 2006, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8 to F-33
Valuation and Qualifying Accounts and Reserves II S-1
</TABLE>
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as
amended (the "Exchange Act"). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of the end of the period covered by
this report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial
reporting during the quarter ended January 31, 2006, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
It should be noted that while the Company's Chief Executive Officer and Chief
Financial Officer believe that the Company's disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that the Company's disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
See Consolidated Financial Statements and Supplementary Data for Management's
Annual Report on Internal Control Over Financial Reporting and the Report of
Independent Registered Public Accounting Firm containing an attestation thereto.
Item 9B. Other Information
None.
39
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the captions
"Election of Directors" and "Management" and is incorporated herein by
reference.
Information on the beneficial ownership reporting for the Company's directors
and executive officers is contained in the Company's Proxy Statement for the
2006 annual meeting of shareholders under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
Information on the Company's Audit Committee and Audit Committee Financial
Expert is contained in the Company's Proxy Statement for the 2006 annual meeting
of shareholders under the caption "Information Regarding the Board of Directors
and Its Committees" and is incorporated herein by reference.
The Company has adopted and posted on its website at www.movadogroupinc.com a
Code of Business Conduct and Ethics that applies to all directors, officers and
employees, including the Company's Chief Executive Officer, Chief Financial
Officer and principal financial and accounting officers. The Company will post
any amendments to the Code of Business Conduct and Ethics, and any waivers that
are required to be disclosed by SEC regulations, on the Company's website.
Item 11. Executive Compensation
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the captions
"Executive Compensation" and "Compensation of Directors" and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption "Fees
Paid to PricewaterhouseCoopers LLP" and is incorporated herein by reference.
40
<PAGE>
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report
1. Financial Statements:
See Financial Statements Index on page 38 included in Item 8 of Part
II of this annual report.
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying
Accounts and Reserves
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index on pages 44 through 50 of this annual report.
41
<PAGE>
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.
MOVADO GROUP, INC.
(Registrant)
Dated: April 12, 2006 By: /s/ Gedalio Grinberg
------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
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.
Dated: April 12, 2006 /s/ Gedalio Grinberg
----------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Dated: April 12, 2006 /s/ Efraim Grinberg
----------------------------------------
Efraim Grinberg
President and Chief Executive Officer
Dated: April 12, 2006 /s/ Richard J. Cote
----------------------------------------
Richard J. Cote
Executive Vice President and
Chief Operating Officer
Dated: April 12, 2006 /s/ Eugene J. Karpovich
----------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
Dated: April 12, 2006 /s/ Ernest R. LaPorte
----------------------------------------
Ernest R. LaPorte
Vice President of Finance and
Principal Accounting Officer
Dated: April 12, 2006 /s/ Margaret Hayes Adame
----------------------------------------
Margaret Hayes Adame
Director
Dated: April 12, 2006 /s/ Donald Oresman
----------------------------------------
Donald Oresman
Director
42
<PAGE>
Dated: April 12, 2006 /s/ Leonard L. Silverstein
----------------------------------------
Leonard L. Silverstein
Director
Dated: April 12, 2006 /s/ Alan H. Howard
----------------------------------------
Alan H. Howard
Director
Dated: April 12, 2006 /s/ Nathan Leventhal
----------------------------------------
Nathan Leventhal
Director
Dated: April 12, 2006 /s/ Richard D. Isserman
----------------------------------------
Richard D. Isserman
Director
43
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
3.1 Restated By-Laws of the Registrant. Incorporated by reference to
Exhibit 3.1 filed with the Company's Registration Statement on Form
S-1 (Registration No. 33-666000).
3.2 Restated Certificate of Incorporation of the Registrant as amended.
Incorporated herein by reference to Exhibit 3(i) to the Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended July 31,
1999.
4.1 Specimen Common Stock Certificate. Incorporated herein by reference to
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 1998.
4.2 Note Purchase and Private Shelf Agreement dated as of November 30,
1998 between the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended January 31,
1999.
4.3 Note Purchase and Private Shelf Agreement dated as of March 21, 2001
between the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 4.4 to the
Registrant's Annual Report on Form 10-K for the year ended January 31,
2001.
4.4 Amendment dated as of March 21, 2004 to Note Purchase and Private
Shelf Agreement dated as of March 21, 2001 between the Registrant and
The Prudential Insurance Company of America. Incorporated herein by
reference to Exhibit 4.5 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2004.
10.1 Amendment Number 1 to License Agreement dated December 9, 1996 between
the Registrant as Licensee and Coach, a division of Sara Lee
Corporation as Licensor, dated as of February 1, 1998. Incorporated
herein by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1998.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.2 Agreement, dated January 1, 1992, between The Hearst Corporation and
the Registrant, as amended on January 17, 1992. Incorporated herein by
reference to Exhibit 10.8 filed with the Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.3 Letter Agreement between the Registrant and The Hearst Corporation
dated October 24, 1994 executed October 25, 1995 amending License
Agreement dated as of January 1, 1992, as amended. Incorporated herein
by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1995.
10.4 Registrant's 1996 Stock Incentive Plan amending and restating the 1993
Employee Stock Option Plan. Incorporated herein by reference to
Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1996. *
10.5 Lease dated August 10, 1994 between Rockefeller Center Properties, as
landlord and SwissAm, Inc., as tenant for space at 630 Fifth Avenue,
New York, New York. Incorporated herein by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1994.
10.6 Death and Disability Benefit Plan Agreement dated September 23, 1994
between the Registrant and Gedalio Grinberg. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1994. *
10.7 Registrant's amended and restated Deferred Compensation Plan for
Executives effective June 17, 2004. Incorporated herein by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2005. *
10.8 License Agreement dated December 9, 1996 between the Registrant and
Sara Lee Corporation. Incorporated herein by reference to Exhibit
10.32 to the Registrant's Annual Report on Form 10-K for the year
ended January 31, 1997.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.9 First Amendment to Lease dated April 8, 1998 between RCPI Trust,
successor in interest to Rockefeller Center Properties ("Landlord")
and Movado Retail Group, Inc., successor in interest to SwissAm, Inc.
("Tenant") amending lease dated August 10, 1994 between Landlord and
Tenant for space at 630 Fifth Avenue, New York, New York. Incorporated
herein by reference to Exhibit 10.37 to the Registrant's Annual Report
on Form 10-K for the year ended January 31, 1998.
10.10 Second Amendment dated as of September 1, 1999 to the December 1, 1996
License Agreement between Sara Lee Corporation and Registrant.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1999.
10.11 License Agreement entered into as of June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and Registrant. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1999.
10.12 Severance Agreement dated December 15, 1999, and entered into December
16, 1999 between the Registrant and Richard J. Cote. Incorporated
herein by reference to Exhibit 10.35 to the Registrant's Annual Report
on Form 10-K for the year ended January 31, 2000. *
10.13 Lease made December 21, 2000 between the Registrant and Mack-Cali
Realty, L.P. for premises in Paramus, New Jersey together with First
Amendment thereto made December 21, 2000. Incorporated herein by
reference to Exhibit 10.22 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2000.
10.14 Lease Agreement dated May 22, 2000 between Forsgate Industrial Complex
and the Registrant for premises located at 105 State Street,
Moonachie, New Jersey. Incorporated herein by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended April 30, 2000.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.15 Second Amendment of Lease dated July 26, 2001 between Mack-Cali
Realty, L.P., as landlord, and Movado Group, Inc., as tenant, further
amending lease dated as of December 21, 2000. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q filed for the quarter ended October 31, 2001.
10.16 Third Amendment of Lease dated November 6, 2001 between Mack-Cali
Realty, L.P., as lessor and Movado Group, Inc., as lessee, for
additional space at Mack-Cali II, One Mack Drive, Paramus, New Jersey.
Incorporated herein by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended October 31,
2001.
10.17 Amendment Number 2 to Registrant's 1996 Stock Incentive Plan dated
March 16, 2001. Incorporated herein by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the year ended January
31, 2002.*
10.18 Amendment Number 3 to Registrant's 1996 Stock Incentive Plan approved
June 19, 2001. Incorporated herein by reference to Exhibit 10.28 to
the Registrant's Annual Report on Form 10-K for the year ended January
31, 2002.*
10.19 Amendment Number 3 to License Agreement dated December 9, 1996, as
previously amended, between the Registrant, Movado Watch Company S.A.
and Coach, Inc. dated as of January 30, 2003. Incorporated herein by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2002.
10.20 Line of Credit Letter Agreement dated August 20, 2001 between the
Registrant and The Bank of New York. Incorporated herein by reference
to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended January 31, 2002.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.21 First Amendment to the License Agreement dated June 3, 1999 between
Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company
S.A. entered into January 16, 2002. Incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 31, 2002.
10.22 Second Amendment to the License Agreement dated June 3, 1999 between
Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company
S.A. entered into August 1, 2002. Incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 31, 2002.
10.23 Amendment dated August 5, 2004 to Line of Credit Agreement between the
Registrant and The Bank of New York dated August 20, 2001.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.
10.24 Endorsement Agreement dated as of April 4, 2003 between the Registrant
and The Grinberg Family Trust. Incorporated herein by reference to
Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2003.
10.25 Third Amendment to License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and the Registrant entered into as of May 7,
2004. Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
30, 2004.
10.26 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Eugene J. Karpovich. Incorporated herein by reference to Exhibit
10.2 the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2004. *
10.27 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Frank Kimick. Incorporated herein by reference to Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 2004. *
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.28 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Timothy F. Michno. Incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2004. *
10.29 Master Credit Agreement dated August 17, 2004 and August 20, 2004
between MGI Luxury Group S.A. and UBS AG. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 2004.
10.30 Fourth Amendment to License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and the Registrant entered into as of June
25, 2004. Incorporated herein by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended July
31, 2004.
10.31 Fifth Amendment of Lease dated October 20, 2003 between Mack-Cali
Realty, L.P. as landlord and the Registrant as tenant further amending
the lease dated as of December 21, 2000. Incorporated herein by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2004.
10.32 Registrant's 1996 Stock Incentive Plan, amended and restated as of
April 8, 2004. Incorporated herein by reference to Exhibit 10.37 to
the Registrant's Annual Report on Form 10-K for the year ended
January 31, 2005.*
10.33 License Agreement entered into December 15, 2004 between MGI Luxury
Group S.A. and HUGO BOSS Trade Mark Management GmbH & Co. Incorporated
herein by reference to Exhibit 10.38 to the Registrant's Annual Report
on Form 10-K for the year ended January 31, 2005.
10.34 $50 million Credit Agreement dated as of December 15, 2005 between the
Registrant, MGI Luxury Group S.A. and Movado Watch Company S.A., as
borrowers the Lenders signatory thereto and JPMorgan Chase Bank, N.A.
as Administrative Agent, Swingline Bank and Issuing Bank.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.35 CHF 90 million Credit Agreement dated as of December 15, 2005 between
MGI Luxury Group S.A. and Movado Watch Company S.A., as borrowers, the
Registrant as Parent, each of the lenders signatory thereto and
JPMorgan Chase Bank as administrative agent.
10.36 Line of Credit Agreement between the Registrant and Bank of America,
N.A. and Amended and Restated Promissory Note payable to Bank of
America, N.A., dated as of December 12, 2005.
10.37 License Agreement dated as of November 18, 2005 by and between the
Registrant, Swissam Products Limited and L.C. Licensing, Inc. **
10.38 Line of Credit Letter Agreement dated as of June 19, 2005 between the
Registrant and Bank of America and Amended and Restated Promissory
Note as of June 19, 2005. Incorporated by reference herein by
reference to Exhibit 10.1 of Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 2005.
10.39 Promissory Note dated as of December 13, 2005 to JPMorgan Chase Bank,
N.A.
21.1 Subsidiaries of the Registrant.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
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.
</TABLE>
* Constitutes a compensatory plan or arrangement.
** Confidential portions of Exhibit 10.37 have been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Exchange Act of 1934.
50
<PAGE>
Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such terms are defined in
Rule 13a-15(f) under the Exchange Act, for the Company. With the participation
of the Chief Executive Officer and the Chief Financial Officer, the Company's
management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the framework and criteria
established in Internal Control - Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, the Company's management has concluded that the Company's internal
control over financial reporting was effective as of January 31, 2006.
Management's assessment of the effectiveness of our internal control over
financial reporting as of January 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
F-1
<PAGE>
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Movado Group, Inc.:
We have completed integrated audits of Movado Group, Inc.'s 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of January 31, 2006, and an audit of its 2004 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 and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Movado
Group, Inc. and its subsidiaries at January 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended January 31, 2006 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "Management's Annual
Report on Internal Control Over Financial Reporting" listed in the accompanying
index, that the Company maintained effective internal control over financial
reporting as of January 31, 2006 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, 2006, 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.
F-2
<PAGE>
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
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.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 12, 2006
F-3
<PAGE>
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
<S> <C> <C> <C>
Net sales $470,941 $418,966 $330,214
Cost of sales 184,621 168,818 129,908
-------- -------- --------
Gross profit 286,320 250,148 200,306
Selling, general and administrative 238,283 215,072 165,525
-------- -------- --------
Operating profit 48,037 35,076 34,781
Other income, net (Note 18) 1,008 1,444 --
Interest expense, net 4,109 3,430 3,044
-------- -------- --------
Income before income taxes 44,936 33,090 31,737
Provision for income taxes (Note 9) 18,319 6,783 8,886
-------- -------- --------
Net income $ 26,617 $ 26,307 $ 22,851
======== ======== ========
Basic income per share:
Net income per share $ 1.05 $ 1.06 $ 0.95
Weighted basic average shares outstanding 25,273 24,708 24,101
Diluted income per share:
Net income per share $ 1.02 $ 1.03 $ 0.92
Weighted diluted average shares outstanding 26,180 25,583 24,877
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31,
-------------------
2006 2005
-------- --------
ASSETS
Current assets:
Cash $123,625 $ 63,782
Trade receivables, net 109,852 104,685
Inventories, net 198,582 185,609
Other 28,989 32,630
-------- --------
Total current assets 461,048 386,706
Property, plant and equipment, net 52,168 52,510
Other assets 36,676 37,858
-------- --------
Total assets $549,892 $477,074
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 5,000 --
Accounts payable 35,529 38,488
Accrued payroll and benefits 10,239 10,747
Accrued liabilities 32,826 28,996
Current taxes payable 7,724 --
Deferred income taxes 503 5,250
-------- --------
Total current liabilities 91,821 83,481
Long-term debt 104,955 45,000
Deferred and noncurrent income taxes 11,947 14,827
Other liabilities 19,491 17,209
-------- --------
Total liabilities 228,214 160,517
-------- --------
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued -- --
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 23,215,836 and 22,580,459 shares
issued, respectively 232 226
Class A Common Stock, $0.01 par value, 30,000,000
shares authorized; 6,766,909 and 6,801,812 shares
issued and outstanding, respectively 68 68
Capital in excess of par value 107,965 100,289
Retained earnings 236,515 214,953
Accumulated other comprehensive income 27,673 48,706
Treasury Stock, 4,613,645 and 4,433,553 shares at
cost, respectively (50,775) (47,685)
-------- --------
Total shareholders' equity 321,678 316,557
-------- --------
Total liabilities and shareholders' equity $549,892 $477,074
======== ========
See Notes to Consolidated Financial Statements
F-5
<PAGE>
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,617 $ 26,307 $ 22,851
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16,780 12,603 9,973
Utilization of NOL 2,881 2,725 --
Impairment of long-lived assets -- 2,025 --
Deferred and noncurrent income taxes (4,575) 8,132 10,101
Provision for losses on accounts receivable 2,399 2,072 2,290
Provision for losses on inventories 1,529 3,221 993
(Gain) loss on disposition of property, plant and equipment -- (253) 109
Gain on sale of asset held for sale (2,630) -- --
Loss on hedge derivatives 1,622 -- --
Tax benefit from stock options exercised 2,436 2,554 2,511
Changes in assets and liabilities:
Trade receivables (5,496) 1,422 4,583
Inventories (18,282) (29,587) (6,248)
Other current assets (240) 5,716 12,179
Accounts payable (1,662) 11,248 160
Accrued liabilities 351 (6,615) 987
Accrued payroll and benefits (508) 2,714 2,023
Current taxes payable 7,727 (12,199) (9,370)
Other noncurrent assets (2,808) (6,253) (4,997)
Other noncurrent liabilities 2,302 4,358 3,502
-------- -------- --------
Net cash provided by operating activities 28,443 30,190 51,647
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (16,367) (14,947) (10,830)
Proceeds from sale of asset held for sale 4,000 -- --
Acquisition of Ebel, net of cash acquired -- (43,525) --
Trademarks (798) (1,000) (653)
-------- -------- --------
Net cash used in investing activities (13,165) (59,472) (11,483)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 64,955 -- --
Repayment of Senior Notes -- (10,000) --
Payment of Ebel mortgage -- (5,187) --
Proceeds of Senior Notes -- 20,000 --
Stock options exercised and other changes 2,156 2,703 589
Dividends paid (5,055) (3,955) (2,537)
-------- -------- --------
Net cash provided by (used in) financing activities 62,056 3,561 (1,948)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (17,491) 7,420 5,502
Net increase (decrease) in cash and cash equivalents 59,843 (18,301) 43,718
Cash and cash equivalents at beginning of year 63,782 82,083 38,365
-------- -------- --------
Cash and cash equivalents at end of year $123,625 $ 63,782 $ 82,083
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Class A Capital in Other
Preferred Common Common Excess of Retained Comprehensive Treasury
Stock Stock Stock Par Value Earnings Income (Loss) Stock
--------- ------ ------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 2003 $-- $101 $34 $ 72,145 $172,287 $ 19,386 ($27,741)
Net income 22,851
Dividends ($0.105 per share) (2,537)
Stock options exercised, net of tax of $2,511 8 16,861 (14,254)
Supplemental executive retirement plan 170
Restricted stock amortization less cancellations 315
Net unrealized gain on investments, net of tax
of $89 139
Net change in effective portion of
hedging contracts, net of
tax of $2,212 (3,434)
Foreign currency translation adjustment 18,382
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2004 $-- $109 $34 $ 89,491 $192,601 $ 34,473 ($41,995)
Net income 26,307
Stock split adjustment 109 34 (143)
Dividends ($0.16 per share) (3,955)
Stock options exercised, net of tax of $2,554 8 10,010 (5,690)
Supplemental executive retirement plan 107
Restricted stock amortization less cancellations 824
Net unrealized gain on investments, net of tax
of $18 39
Net change in effective portion of
hedging contracts, net of
tax of $134 366
Foreign currency translation adjustment 13,828
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2005 $-- $226 $68 $100,289 $214,953 $ 48,706 ($47,685)
Net income 26,617
Dividends ($0.20 per share) (5,055)
Stock options exercised, net of tax of $2,436 6 6,325 (3,090)
Supplemental executive retirement plan 124
Restricted stock amortization less cancellations 1,227
Net unrealized gain on investments, net of tax
of $19 1
Net change in effective portion of
hedging contracts, net of
tax of $2,055 (3,318)
Foreign currency translation adjustment (17,716)
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2006 $-- $232 $68 $107,965 $236,515 $ 27,673 ($50,775)
=== ==== === ======== ======== ======== ========
</TABLE>
Note: Balances prior to fiscal 2004 within the Consolidated Statements of
Changes in Shareholders' Equity have not been split-adjusted.
<TABLE>
<CAPTION>
(Shares information in thousands) Common Stock Class A Common Stock Treasury Stock
------------ -------------------- --------------
<S> <C> <C> <C>
Balance at January 31, 2003 20,116 6,802 (3,094)
Stock issued to employees exercising stock options 1,639 -- (1,033)
Conversion of Class A Common Stock -- -- 14
Restricted stock and other stock plans, less cancellations -- -- --
------ ----- ------
Balance January 31, 2004 21,755 6,802 (4,113)
------ ----- ------
Stock issued to employees exercising stock options 825 -- (337)
Conversion of Class A Common Stock -- -- --
Restricted stock and other stock plans, less cancellations -- -- 16
------ ----- ------
Balance January 31, 2005 22,580 6,802 (4,434)
------ ----- ------
Stock issued to employees exercising stock options 601 -- (180)
Conversion of Class A Common Stock 35 (35) --
Restricted stock and other stock plans, less cancellations -- -- --
------ ----- ------
Balance January 31, 2006 23,216 6,767 (4,614)
====== ===== ======
</TABLE>
Note: Shares information provided has been adjusted to reflect the effect of the
fiscal 2005 two-for-one stock split.
See Notes to Consolidated Financial Statements
F-7
<PAGE>
NOTES TO MOVADO GROUP, INC.'S CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Movado Group, Inc. (the "Company") is a designer, manufacturer and distributor
of quality watches with prominent brands in almost every price category
comprising the watch industry. In fiscal 2006, the Company marketed seven
distinctive brands of watches: Movado, Ebel, Concord, ESQ, Coach, HUGO BOSS and
Tommy Hilfiger, which compete in most segments of the watch market.
Movado, Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are manufactured
using Swiss movements and other components obtained from third party suppliers.
Coach, ESQ, Tommy Hilfiger and HUGO BOSS watches are manufactured by
independent contractors. Coach and ESQ watches are manufactured using Swiss
movements and other components purchased from third party suppliers. Tommy
Hilfiger and HUGO BOSS watches are manufactured using movements and other
components purchased from third party suppliers.
In addition to its sales to trade customers and independent distributors,
through a wholly-owned domestic subsidiary, the Company sells Movado watches, as
well as proprietary Movado jewelry, tabletop and accessories directly to
consumers in its Movado Boutiques. Additionally, the Company operates outlet
stores throughout the United States, through which it sells discontinued models
and factory seconds.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company uses estimates when accounting for sales discounts, rebates,
allowances and incentives, warranty, income taxes, depreciation, amortization,
contingencies and asset and liability valuations.
Reclassification
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2006 presentation.
Translation of Foreign Currency Financial Statements and Foreign Currency
Transactions
The financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at
F-8
<PAGE>
average exchange rates for the year. Foreign currency transaction gains and
losses are charged or credited to earnings as incurred. Foreign currency
translation gains and losses are reflected in the equity section of the
Company's consolidated balance sheet in accumulated other comprehensive income
(loss). The balance of the foreign currency translation adjustment, included in
Accumulated Other Comprehensive Income, was $30.3 million and $48.1 million as
of January 31, 2006 and 2005, respectively.
Cash and Cash Equivalents
Cash equivalents are considered all highly liquid investments with original
maturities at date of purchase of three months or less.
Trade Receivables
Trade receivables as shown on the consolidated balance sheet is net of
allowances. The allowance for doubtful accounts is determined through an
analysis of the aging of accounts receivable, assessments of collectibility
based on historic trends, the financial condition of the Company's customers and
an evaluation of economic conditions. The Company writes off uncollectible trade
receivables once collection efforts have been exhausted and third parties
confirm the balance is not recoverable.
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Ebel, Concord, Coach, HUGO BOSS and Tommy
Hilfiger watches are also marketed outside the U.S. through a network of
independent distributors. Accounts receivable are stated net of allowances for
doubtful accounts of $7.0 million, $6.8 million and $6.7 million and net of
estimated sales returns and allowances of $18.7 million, $21.2 million and $17.3
million at January 31, 2006, 2005 and 2004, respectively.
The Company's concentrations of credit risk arise primarily from accounts
receivable related to trade customers during the peak selling seasons. The
Company has significant accounts receivable balances due from major national
chain and department stores. The Company's results of operations could be
materially adversely affected in the event any of these customers or a group of
these customers defaulted on all or a significant portion of their obligations
to the Company as a result of financial difficulties. As of January 31, 2006,
there were no known situations with any of the Company's major customers which
indicate the customer's inability to make the required payments.
Sales returns and allowances for the fiscal years ended January 31, 2006, 2005
and 2004 were as follows (in thousands):
<TABLE>
<CAPTION>
2006 2005 2004
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 21,249 $ 17,270 $ 16,974
Acquired Ebel reserves -- 7,181 --
Provision charged to operations 33,400 27,032 26,329
Credits issued (35,783) (30,334) (26,054)
Currency impact (163) 100 21
-------- -------- --------
Balance, end of year $ 18,703 $ 21,249 $ 17,270
======== ======== ========
</TABLE>
F-9
<PAGE>
Inventories
The Company values its inventory at the lower of cost or market. The Company's
domestic inventory is valued using the first-in, first-out (FIFO) method. The
cost of finished goods and component inventories, held by overseas subsidiaries,
are determined using average cost. The Company's management regularly reviews
its sales to customers and customers' sell through at retail to determine excess
or obsolete inventory reserves. Inventory with less than acceptable turn rates
is classified as discontinued and, together with the related component parts
which can be assembled into saleable finished goods, is sold through the
Company's outlet stores. When management determines that finished product is
unsaleable in the Company's outlet stores or when it is impractical to build the
remaining components into watches for sale in the outlets, a reserve is
established for the cost of those products and components. In addition, as part
of the acquisition of Ebel, a significant value of parts and components were
acquired that could not readily be identifiable to be produced as watches or for
future after sales service needs. These parts and components have been reserved
for based on future expected usage. These estimates could vary significantly,
either favorably or unfavorably, from actual requirements depending on future
economic conditions, customer inventory levels, expected usage or competitive
conditions which may differ from expectations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of buildings is amortized using the straight-line method based on
the useful life of 40 years. Depreciation of furniture and equipment is provided
using the straight-line method based on the estimated useful lives of assets,
which range from four to ten years. Computer software is amortized using the
straight-line method over periods which range from five to seven years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the term of the lease or the estimated useful life of the leasehold
improvement. Design fees and tooling costs are amortized using the straight-line
method based on the useful life of three years. 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.
Long-Lived Assets
The Company establishes the estimated useful lives of its depreciable assets
based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company performs an impairment review, at a minimum, on an annual basis.
However, the Company will review its long-lived assets for impairment once
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable. When such a determination
has been made, management compares the carrying value of the assets with their
estimated future undiscounted cash flows. If it is determined that an impairment
loss has occurred, the loss is recognized during that period. The impairment
loss is calculated as the difference between asset carrying values and the fair
value of the long-lived assets.
During fiscal 2006, the Company performed the review which resulted in no
impairment charge. During the fourth quarter of fiscal 2005, the Company
determined that the carrying value of its long-lived assets in the Movado
Boutique located in the Soho section of New York City, may not be recoverable
and performed an
F-10
<PAGE>
impairment review. The impairment review was performed pursuant to SFAS No. 144
because of an economic downturn affecting the Boutique operations and revenue
forecasts. As a result, the Company recorded a non-cash impairment charge of
$2.0 million consisting of property, plant and equipment of $0.8 million and
other assets of $1.2 million. The entire impairment charge is included in the
selling, general and administrative expenses in the fiscal 2005 Consolidated
Statement of Income. There were no impairment losses related to long-lived
assets in fiscal 2004.
Deferred Rent Obligations and Contributions from Landlords
The Company accounts for rent expense under non-cancelable operating leases with
scheduled rent increases on a straight-line basis over the lease term. The
excess of straight-line rent expense over scheduled payments is recorded as a
deferred liability. In addition, the Company receives build out contributions
from landlords primarily as an incentive for the Company to lease retail store
space from the landlords. This is also recorded as a deferred liability. Such
amounts are amortized as a reduction of rent expense over the life of the
related lease.
Capitalized Software Costs
The Company capitalizes certain computer software costs after technological
feasibility has been established. The costs are amortized utilizing the
straight-line method over the economic lives of the related products ranging
from five to seven years.
Intangibles
Intangible assets consist primarily of trade names and trademarks and are
recorded at cost. Trade names are not amortized. Trademarks are amortized over
ten years. The Company continually reviews intangible assets to evaluate whether
events or changes have occurred that would suggest an impairment of carrying
value. An impairment would be recognized when expected undiscounted future
operating cash flows are lower than the carrying value. At January 31, 2006 and
2005, intangible assets at cost were $10.3 million and $13.5 million,
respectively, and related accumulated amortization of intangibles was $5.7
million and $4.5 million, respectively. Amortization expense for fiscal 2006,
2005 and 2004 was $1.2 million, $1.0 million and $0.7 million, respectively.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce foreign currency
fluctuation risks. The Company accounts for its derivative financial instruments
in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS No. 133")
as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged.
F-11
<PAGE>
The Company's risk management policy is to enter into forward exchange contracts
and purchase foreign currency options, under certain limitations, to reduce
exposure to adverse fluctuations in foreign exchange rates and, to a lesser
extent, in commodity prices related to its purchases of watches. When entered
into, the Company designates and documents these derivative instruments as a
cash flow hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
cash flow hedge and is highly effective, are recorded in other comprehensive
income until the underlying transaction affects earnings, and then are later
reclassified into earnings in the same account as the hedged transaction. The
Company formally assesses, both at the inception and at each financial quarter
thereafter, the effectiveness of the derivative instrument hedging the
underlying forecasted cash flow transaction. Any ineffectiveness related to the
derivative financial instruments' change in fair value will be recognized in the
period in which the ineffectiveness was calculated.
The Company uses forward exchange contracts to offset its exposure to certain
foreign currency liabilities. These forward contracts are not designated as SFAS
No. 133 hedges and, therefore, changes in the fair value of these derivatives
are recognized into earnings, thereby offsetting the current earnings effect of
the related foreign currency liabilities.
During fiscal 2003, the Company's risk management policy was modified to include
net investment hedging of the Company's Swiss franc-denominated investment in
its wholly-owned subsidiaries located in Switzerland using purchase foreign
currency options under certain limitations. When entered into for this purpose,
the Company designates and documents the derivative instrument as a net
investment hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
net investment hedge are recorded in other comprehensive income in the same
manner as the cumulative translation adjustment of the Company's Swiss
franc-denominated investment. The Company formally assesses, both at the
inception and at each financial quarter thereafter, the effectiveness of the
derivative instrument hedging the net investment.
All of the Company's derivative instruments have liquid markets to assess fair
value. The Company does not enter into any derivative instruments for trading
purposes.
During fiscal 2006, the Company recorded a pre-tax loss of $1.6 million in other
expense, representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions would
occur by the end of the originally specified time period.
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances in the
same period that the sales are recorded as a reduction of revenue. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
F-12
<PAGE>
Cost of Sales
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and minor assembly in Switzerland.
Selling, General and Administrative Expenses
The Company's SG&A expenses consist primarily of marketing, selling,
distribution and general and administrative expenses. Annual marketing
expenditures are based principally on overall strategic considerations relative
to maintaining or increasing market share in markets that management considers
to be crucial to the Company's continued success as well as on general economic
conditions in the various markets around the world in which the Company sells
its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, expenses associated with Baselworld, the annual
watch and jewelry trade show and other industry trade shows and operating costs
incurred in connection with the Company's retail business. Sales commissions
vary with overall sales levels. Retail selling expenses consist primarily of
payroll related and store occupancy costs.
Distribution expenses consist primarily of salaries of distribution staff,
rental and other occupancy costs, security, depreciation and amortization of
furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other
employee compensation, employee benefit plan costs, office rent, management
information systems costs, professional fees, bad debts, depreciation and
amortization of furniture and leasehold improvements, patent and trademark
expenses and various other general corporate expenses.
Warranty Costs
The Company has warranty obligations in connection with the sale of its watches.
All watches sold by the Company come with limited warranties covering the
movement against defects in material and workmanship for periods ranging from
two to three years from the date of purchase, with the exception of Tommy
Hilfiger watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating for Movado watch cases and
bracelets. As a practice, warranty costs are expensed as incurred and recorded
in the quarterly consolidated statement of income. The warranty obligations are
evaluated quarterly and reviewed in detail on an annual basis to determine if
any material changes occurred. When changes in warranty costs are experienced,
the Company will adjust the warranty accrual as required. Warranty liability for
the fiscal years ended January 31, 2006, 2005 and 2004 was as follows (in
thousands):
F-13
<PAGE>
<TABLE>
<CAPTION>
2006 2005 2004
------- ------- -----
<S> <C> <C> <C>
Balance, beginning of year $ 3,979 $ 900 $ 900
Acquired Ebel reserves -- 3,127 --
Provision charged to operations 2,185 1,450 789
Settlements made (3,979) (1,498) (789)
------- ------- -----
Balance, end of year $ 2,185 $ 3,979 $ 900
======= ======= =====
</TABLE>
Preopening Costs
Costs associated with the opening of new boutique and outlet stores, including
pre-opening rent, are expensed in the period incurred.
Marketing
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Included in marketing expenses
are costs associated with cooperative advertising, media advertising, production
costs and costs of point-of-sale materials and displays. These costs are
recorded as SG&A expenses. The Company participates in cooperative advertising
programs on a voluntary basis and receives a "separately identifiable benefit in
exchange for the consideration". Since the amount of consideration paid to the
retailer does not exceed the fair value of the benefit received by the Company,
these costs are recorded as SG&A expenses as opposed to being recorded as a
reduction of revenue. Marketing expense for fiscal 2006, 2005 and 2004 amounted
to $75.9 million, $67.8 million and $53.1 million, respectively.
Included in the other current assets in the consolidated balance sheets as of
January 31, 2006 and 2005 are prepaid advertising costs of $3.8 million and $2.5
million, respectively. These prepaid costs represent advertising costs paid to
licensors in advance, pursuant to the Company's licensing agreements and
sponsorships.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and cost of goods sold,
respectively.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applies to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more-likely-than-not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves
F-14
<PAGE>
estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
Earnings Per Share
The Company presents net income per share on a basic and diluted basis. Basic
earnings per share is computed using weighted-average shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of shares outstanding adjusted for dilutive common stock equivalents.
The weighted-average number of shares outstanding for basic earnings per share
were 25,273,000, 24,708,000 and 24,101,000 for fiscal 2006, 2005 and 2004,
respectively. For diluted earnings per share, these amounts were increased by
907,000, 875,000 and 776,000 in fiscal 2006, 2005 and 2004, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans. For all periods presented, basic and diluted shares outstanding,
and the related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
Stock-Based Compensation
Employee stock options are accounted for under the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense has not been recognized for stock
options granted at or above fair value. Had compensation expense been determined
and recorded based upon the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", net income (in thousands) and net
income per share would have been reduced to pro forma amounts for the fiscal
years ended January 31, 2006, 2005 and 2004 as follows:
<TABLE>
<CAPTION>
2006 2005 2004
----------------------- ----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income $26,617 $24,549 $26,307 $22,546 $22,851 $18,768
Net Income per share-Basic $ 1.05 $ 0.97 $ 1.06 $ 0.91 $ 0.95 $ 0.78
Net Income per share-Diluted $ 1.02 $ 0.94 $ 1.03 $ 0.88 $ 0.92 $ 0.75
</TABLE>
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $8.11, $7.10 and $5.89 per
share in fiscal 2006, 2005 and 2004, respectively. The following
weighted-average assumptions were used for grants in 2006, 2005 and 2004:
dividend yield of 1.74% for fiscal 2006, 0.99% for fiscal 2005 and 0.87% for
fiscal 2004; expected volatility of 47% for fiscal 2006, 48% for fiscal 2005 and
52% for fiscal 2004; risk-free interest rates of 3.77% for fiscal 2006, 4.26%
for fiscal 2005 and 3.04% for fiscal 2004 and expected lives of three to seven
years for fiscal 2006, three to seven years for fiscal 2005 and four to seven
years for fiscal 2004.
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No.
F-15
<PAGE>
151"). The amendments made by SFAS No. 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, and is not expected to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure will no longer be an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company will be adopting SFAS No. 123(R) in the first quarter of
fiscal 2007 using the modified prospective application transition method. For
outstanding unvested options granted as of January 31, 2006, the adoption is
expected to have an impact of approximately $1.0 million, net of tax, on the
Company's consolidated results of operations for fiscal year ending January 31,
2007.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN 47 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the
F-16
<PAGE>
date the leasehold improvements are purchased. EITF 05-6 is effective for
periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 2 - ACQUISITION
On December 22, 2003, the Company entered into an agreement to acquire Ebel S.A.
and the worldwide business related to the Ebel brand (collectively "Ebel") from
LVMH Moet Hennessy Louis Vuitton ("LVMH"). On March 1, 2004, the Company
completed the acquisition of Ebel with the exception of the payment for the
acquired Ebel business in Germany, which was completed July 30, 2004.
Under the terms of the agreement, the Company acquired all of the outstanding
common stock of Ebel S.A. and the related worldwide businesses in exchange for:
- - 51.6 million Swiss francs in cash; and
- - the assumption of a short-term mortgage payable of 6.6 million Swiss
francs.
Under the purchase method of accounting, the Company recorded an aggregate
purchase price of approximately $45.0 million, which consisted of approximately
$40.6 million in cash and $4.4 million in deal costs and other incurred
liabilities, which primarily consisted of legal, accounting, investment banking
and financial advisory services fees.
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations", ("SFAS No. 141"), the Company allocated the purchase
price to the tangible assets, intangible assets, and liabilities acquired based
on their estimated fair values. The fair value assigned to tangible and
intangible assets acquired was based on an independent appraisal. The fair value
of assets acquired and liabilities assumed exceeds the purchase price. That
excess has been allocated as a pro rata reduction of the amounts that otherwise
would have been assigned to all of the acquired assets except for certain
specific types of assets as set forth in SFAS No. 141. The pro forma adjustments
were based upon an independent assessment of appraised values. The assessment is
complete. In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and
purchased intangibles with indefinite lives are not amortized but will be
reviewed annually for impairment. Purchased intangibles with finite lives are
amortized on a straight-line basis over their respective estimated useful lives.
In accordance with Emerging Issues Task Force No. 95-3 ("EITF 95-3"),
"Recognition of Liabilities in Connection with a Purchase Business Combination",
the Company recognized costs associated with exiting an activity of an acquired
company and involuntary termination of employees of an acquired company as
liabilities assumed in a purchase business combination and included the
liabilities in the allocation of the acquisition cost. The liability recognized
in connection with the acquisition of Ebel was comprised of approximately $2.4
million for employee severance, $0.2 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. For the years ended January 31, 2006 and
2005, payments against employee severance, lease terminations, exit costs and
other liabilities amounted to $2.3 million, $0.2 million, $1.7 million and $0.4
million, respectively. There were no further adjustments related to the
abovementioned accruals during the fiscal year ended January 31, 2006.
F-17
<PAGE>
As part of the acquisition, the Company recorded deferred tax assets resulting
from Ebel's net operating loss carryforwards amounting to approximately 165.0
million Swiss francs. The Company established a full valuation allowance on the
deferred tax assets. The total purchase price has been allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash $ 1,340
Accounts receivable 16,369
Property, plant and equipment 4,556
Inventories 35,834
Intangible assets 9,129
Other current assets 4,401
-------
Total assets acquired 71,629
Current liabilities 16,149
Short-term commitments and contingencies 5,269
Mortgage payable 5,185
-------
Total purchase price $45,026
=======
</TABLE>
In allocating the purchase price, the Company considered, among other factors,
its intention for future use of the acquired assets, analyses of historical
financial performance and estimates of future performance of Ebel's products.
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined
results of operations of the Company and Ebel, on a pro forma basis, as though
the acquisition had been completed as of the beginning of the fiscal year ended
January 31, 2005. This pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that would have been achieved had the acquisition taken place at the
beginning of the fiscal year ended January 31, 2005. The unaudited pro forma
condensed combined statement of income for the fiscal year ended January 31,
2005 combines the historical results for the Company for the fiscal year ended
January 31, 2005 and the historical results for Ebel for the period preceding
the acquisition of February 1 through February 29, 2004. The following amounts
are in thousands, except per share amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, 2005
-----------------
<S> <C>
Revenues $420,335
Net income $ 24,302
Basic income per share $ 0.98
Diluted income per share $ 0.95
</TABLE>
F-18
<PAGE>
NOTE 3 - INVENTORIES, NET
Inventories, net at January 31, consisted of the following (in thousands):
<TABLE>
<CAPTION>
2006 2005
-------- --------
<S> <C> <C>
Finished goods $129,921 $108,668
Component parts 64,563 72,260
Work-in-process 4,098 4,681
-------- --------
$198,582 $185,609
======== ========
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 31, at cost, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
2006 2005
-------- --------
<S> <C> <C>
Land and buildings $ 3,843 $ 6,543
Furniture and equipment 52,376 44,036
Computer software 29,611 29,169
Leasehold improvements 37,411 32,288
Design fees and tooling costs 24,029 23,846
-------- --------
147,270 135,882
Less: accumulated depreciation (95,102) (83,372)
-------- --------
$ 52,168 $ 52,510
======== ========
</TABLE>
Depreciation and amortization expense related to property, plant and equipment
for fiscal 2006, 2005 and 2004 was $15.4 million, $11.4 million and $9.0
million, respectively, which includes computer software amortization expense for
fiscal 2006, 2005 and 2004 of $4.4 million, $4.0 million and $2.9 million,
respectively.
NOTE 5 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
On June 30, 2005, the Company renewed its promissory note for a $5.0 million
unsecured working capital line with Bank of New York, originally dated June 27,
2000. The line expires on July 31, 2006. The Company had no outstanding
borrowings under the line as of January 31, 2006 and 2005.
On December 12, 2005, the Company executed a line of credit letter agreement
with Bank of America ("B of A") and an amended and restated promissory note in
the principal amount of up to $20.0 million payable to B of A. Pursuant to the
line of credit letter agreement, B of A will consider requests for short-term
loans and documentary letters of credit for the importation of merchandise
inventory, the aggregate amount of which at any time outstanding shall not
exceed $20.0 million. The Company's obligations under the agreement are
guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.
Pursuant to the amended and restated promissory note, the Company promised to
pay to B of A $20.0 million, or such lesser amount as may then be the unpaid
balance of all loans made by B of A to the Company thereunder, in immediately
available funds upon the maturity date of June 16, 2006. The Company has the
right to prepay all or part of any
F-19
<PAGE>
outstanding amounts under the promissory note without penalty at any time prior
to the maturity date. The amended and restated promissory note bears interest at
an annual rate equal to either (i) a floating rate equal to the prime rate or
(ii) such fixed rate as may be agreed upon by the Company and B of A for an
interest period which is also then agreed upon. The amended and restated
promissory note contains various representations and warranties and events of
default that are customary for instruments of that type. As of January 31, 2006,
there were no outstanding borrowings against this line.
On December 13, 2005, the Company executed a promissory note in the principal
amount of up to $37.0 million payable to JPMorgan Chase Bank, N.A. ("Chase").
Pursuant to the promissory note, the Company promised to pay to Chase $37.0
million, or such lesser amount as may then be the unpaid balance of each loan
made or letter of credit issued by Chase to the Company thereunder, upon the
maturity date of July 31, 2006; provided that during the period between January
31, 2006 and the maturity date, the maximum principal amount of all loans made
by Chase to the Company, and outstanding under the promissory note, shall not
exceed $2.0 million. The Company has the right to prepay all or part of any
outstanding amounts under the promissory note without penalty at any time prior
to the maturity date. The promissory note bears interest at an annual rate equal
to either (i) a floating rate equal to the prime rate, (ii) a fixed rate equal
to an adjusted LIBOR plus 0.625% or (iii) a fixed rate equal to a rate of
interest offered by Chase from time to time on any single commercial borrowing.
The promissory note contains various events of default that are customary for
instruments of that type. In addition, it is an event of default for any
security interest or other encumbrance to be created or imposed on the Company's
property, other than as permitted in the lien covenant of the Credit Agreement.
Chase issued 11 irrevocable standby letters of credit for retail and operating
facility leases to various landlords, for the administration of the Movado
Boutique private-label credit card and Canadian payroll to the Royal Bank of
Canada totaling $1.2 million with expiration dates through March 18, 2007. As of
January 31, 2006, there were no outstanding borrowings against this line.
On December 15, 2005, Movado Group, Inc., and its Swiss subsidiaries, MGI Luxury
Group S.A. and Movado Watch Company SA, entered into a credit agreement with
JPMorgan Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The
Bank of New York and Citibank, N.A. (the "Swiss Credit Agreement") which
provides for a revolving credit facility of 90.0 million Swiss francs and
matures on December 15, 2010. The obligations of the Company's two Swiss
subsidiaries under this credit agreement are guaranteed by the Company under a
Parent Guarantee, dated as of December 15, 2005, in favor of the lenders. The
credit agreement contains financial covenants including an interest coverage
ratio, average debt coverage ratio, limitations on capital expenditures and
certain non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. Until the date immediately preceding the first day
of the calendar month following the date of delivery of the first annual or
quarterly financial statements after December 15, 2005, the credit facility
bears interest at a rate equal to the LIBOR (as defined in the Swiss Credit
Agreement) plus .50% per annum, after which it will bear interest at a rate
equal to the LIBOR plus a margin ranging from .50% per annum to .875% per annum
(depending upon a leverage ratio). As of January 31, 2006, the Company was in
compliance with all financial and non-financial covenants and had 83.0 million
Swiss francs, with a dollar equivalent of $65.0 million, outstanding under this
revolving credit facility.
On December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "US Credit Agreement") which provides for a
revolving credit facility of $50.0 million (including a sublimit for borrowings
in Swiss francs of up to $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain
F-20
<PAGE>
terms and conditions. The US Credit Agreement will mature on December 15, 2010.
The obligations of MGI Luxury Group S.A. and Movado Watch Company SA are
guaranteed by the Company under a Parent Guarantee, dated as of December 15,
2005, in favor of the lenders. The obligations of the Company are guaranteed by
certain domestic subsidiaries of the Company under subsidiary guarantees, in
favor of the lenders. The credit agreement contains financial covenants
including an interest coverage ratio, average debt coverage ratio, limitations
on capital expenditures and certain non-financial covenants that restrict the
Company's activities regarding investments and acquisitions, mergers, certain
transactions with affiliates, creation of liens, asset transfers, payment of
dividends and limitation of the amount of debt outstanding. Until the date
immediately preceding the first day of the calendar month following the date of
delivery of the first annual or quarterly financial statements after December
15, 2005, the credit facility bears interest, at Borrower's option, at a rate
equal to the Adjusted LIBOR (as defined in the US Credit Agreement) plus .50%
per annum, or the Alternate Base Rate (as defined in the US Credit Agreement),
after which it will bear interest, at Borrower's option, at a rate equal to the
Adjusted LIBOR plus a margin ranging from .50% per annum to .875% per annum
(depending upon a leverage ratio), or the Alternate Base Rate. As of January 31,
2006, the Company was in compliance with all financial and non-financial
covenants and there were no outstanding borrowings against this line.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million Swiss francs, with dollar equivalents of $6.3 million and
$6.7 million at January 31, 2006 and 2005. As of January 31, 2006, the Swiss
bank has guaranteed the Company's Swiss subsidiary's obligations to certain
Swiss third parties in the amount of $3.3 million in various foreign currencies.
As of January 31, 2006, there were no outstanding borrowings against these
lines.
The Company pays a facility fee on the unused portion of the committed lines of
the Swiss Credit Agreement and the US Credit Agreement. The unused line of
credit of the committed lines was $55.5 million at January 31, 2006.
Aggregate maximum and average monthly outstanding borrowings against the
Company's lines of credit and related weighted-average interest rates during
fiscal 2006 and 2005 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-----------------------------
2006 2005
-------- -------
<S> <C> <C>
Maximum borrowings $100,745 $37,925
Average monthly borrowings $ 33,726 $21,711
Weighted-average interest rate 4.2% 2.3%
</TABLE>
Weighted-average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
F-21
<PAGE>
NOTE 6 - LONG-TERM DEBT
The components of long-term debt as of January 31, were as follows (in
thousands):
<TABLE>
<CAPTION>
2006 2005
-------- -------
<S> <C> <C>
Swiss Revolving Credit Facility $ 64,955 $ --
Series A Senior Notes 25,000 25,000
Senior Series A-2004 Notes 20,000 20,000
-------- -------
109,955 45,000
Less: current portion (5,000) --
-------- -------
Long-term debt $104,955 $45,000
======== =======
</TABLE>
For information related to the Swiss Revolving Credit Facility, see Note 5 on
Bank Credit Arrangements and Lines of Credit.
The Series A Senior Notes ("Series A Senior Notes") were issued on December 1,
1998 under a Note Purchase and Private Shelf Agreement and bear interest at
6.90% per annum. Interest is payable semiannually on April 30 and October 30.
These notes mature on October 30, 2010 and are subject to annual payments of
$5.0 million commencing on October 31, 2006. These notes contain financial
covenants including an interest coverage ratio, average debt ratio, maintenance
of tangible net worth, limitations on capital expenditures and certain
non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. At January 31, 2006, the Company was in compliance
with all financial and non-financial covenants and $25.0 million of these notes
were issued and outstanding.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes"), in
an aggregate principal amount of $20.0 million, which will mature on October 8,
2011 and are subject to annual repayments of $5.0 million commencing on October
8, 2008. Proceeds of the Senior Series A-2004 Notes will be used by the Company
for capital expenditures, repayment of certain of its debt obligations and
general corporate purposes. These notes contain financial covenants including an
interest coverage ratio, average debt ratio, maintenance of tangible net worth,
limitations on capital expenditures and certain non-financial covenants that
restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. As of January 31, 2006, the Company was in compliance with all
financial and non-financial covenants and $20.0 million of these notes were
issued and outstanding.
F-22
<PAGE>
Aggregate maturities of long-term obligations at January 31, 2006 are as follows
(in thousands):
<TABLE>
<S> <C>
Fiscal Year Ended January 31,
2007 $ 5,000
2008 5,000
2009 10,000
2010 10,000
2011 74,955
Thereafter 5,000
--------
$109,955
========
</TABLE>
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133 requiring that all derivative
financial instruments be recorded on the balance sheet at fair value.
As of January 31, 2006, the balance of deferred net losses on derivative
financial instruments documented as cash flow hedges included in accumulated
other comprehensive income ("AOCI") was $1.4 million in net losses, net of tax
benefit of $0.8 million, compared to $2.0 million in net gains at January 31,
2005, net of tax of $1.2 million and $1.6 million in net gains at January 31,
2004, net of tax of $1.0 million. The Company estimates that a substantial
portion of the deferred net losses at January 31, 2006 will be realized into
earnings over the next 12 months as a result of transactions that are expected
to occur over that period. The primary underlying transaction which will cause
the amount in AOCI to affect cost of goods sold consists of the Company's sell
through of inventory purchased in Swiss francs. The maximum length of time the
Company is hedging its exposure to the fluctuation in future cash flows for
forecasted transactions is 24 months. For the years ended January 31, 2006, 2005
and 2004, the Company reclassified net losses from AOCI to earnings of $1.8
million, net of tax benefit of $1.1 million, $1.4 million in net gains, net of
tax of $0.9 million, and $3.2 million in net gains, net of tax of $2.0 million,
respectively.
During fiscal 2006, the Company recorded a pre-tax loss of $1.6 million in other
expense, representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions would
occur by the end of the originally specified time period.
During fiscal 2006, 2005 and 2004, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio because of the
high degree of effectiveness between the hedging instrument and the underlying
exposure being hedged.
Changes in the contracts' fair value due to spot-forward differences are
excluded from the designated hedge relationship. The Company records these
transactions in the cost of sales of the Consolidated Statements of Income.
The balance of the net loss included in the cumulative foreign currency
translation adjustment associated with derivatives documented as net investment
hedges was $1.5 million, net of a tax benefit of $0.9 million as of both January
31, 2006 and 2005 and a net loss of $1.0 million, net of a tax benefit of $0.6
million as of January 31, 2004. Under SFAS No. 133, changes in fair value of
these instruments are recognized in currency
F-23
<PAGE>
translation adjustment, a component of AOCI, to offset the change in the value
of the net investment being hedged.
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of January 31, 2006 (in millions):
<TABLE>
<CAPTION>
Fair Value
of (Liability)
Asset Maturities
-------------- ----------
<S> <C> <C>
Forward exchange contracts ($2.5) 2006
Purchased foreign currency options 0.3 2006
-----
($2.2)
=====
</TABLE>
The Company estimates the fair value of its foreign currency derivatives based
on quoted market prices or pricing models using current market rates. These
derivative financial instruments are currently reflected in other current assets
or current liabilities.
NOTE 8 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 4.79% Senior Notes and 6.90% Series A Senior
Notes approximate 97% and 103% of the carrying value of the notes, respectively,
as of January 31, 2006. The fair value was calculated based upon the present
value of future cash flows discounted at estimated borrowing rates for similar
debt instruments or upon estimated prices based on current yields for debt
issues of similar quality and terms.
NOTE 9 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2006, 2005
and 2004 consists of the following components (in thousands):
<TABLE>
<CAPTION>
2006 2005 2004
------- ------- ------
<S> <C> <C> <C>
Current:
U.S. Federal $13,205 $ 3,980 $4,346
U.S. State and Local 1,364 810 (126)
Non-U.S. 4,238 5,254 1,282
------- ------- ------
18,807 10,044 5,502
------- ------- ------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local (458) -- --
Non-U.S. -- -- 2,186
------- ------- ------
(458) -- 2,186
------- ------- ------
Deferred:
U.S. Federal (1,806) (2,533) (351)
U.S. State and Local (155) (242) 60
Non-U.S. 1,931 (486) 1,489
------- ------- ------
(30) (3,261) 1,198
------- ------- ------
Provision for income taxes $18,319 $ 6,783 $8,886
======= ======= ======
</TABLE>
F-24
<PAGE>
Income before taxes for U.S. operations was $15.9 million, $8.3 million and
$2.0 million for periods ended January 31, 2006, 2005 and 2004, respectively.
Income before taxes for non-U.S. operations was $29.0 million, $24.8 million
and $29.7 million for periods ended January 31, 2006, 2005 and 2004,
respectively.
Significant components of the Company's deferred income tax assets and
liabilities for the fiscal year ended January 31, 2006 and 2005 consist of the
following (in thousands):
<TABLE>
<CAPTION>
2006 Deferred Taxes 2005 Deferred Taxes
---------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Operating loss carryforwards $ 30,770 $ -- $ 32,120 $ --
Inventory reserve 2,963 3,924 3,103 4,762
Receivable allowance 3,356 1,188 2,960 1,559
Deferred compensation 5,922 -- 4,627 --
Hedged derivatives 844 -- -- 323
Depreciation/amortization 305 34 2,247 267
Other 4,044 341 3,134 367
-------- ------ -------- ------
48,204 5,487 48,191 7,278
Valuation allowance (29,555) -- (33,393) --
-------- ------ -------- ------
Total $ 18,649 $5,487 $ 14,798 $7,278
======== ====== ======== ======
</TABLE>
As of January 31, 2006, the Company had foreign net operating loss carryforwards
of approximately $130.1 million, which are available to offset taxable income in
future years. The majority of the carryforward tax losses ($117.2 million) were
incurred in Switzerland in the Ebel business prior to the Company's acquisition
of the Ebel business on March 1, 2004. Effective March 1, 2004, Ebel S.A. was
merged into another wholly-owned Swiss subsidiary, and a Swiss tax ruling was
obtained that allows the Ebel tax losses to offset taxable income in the
surviving entity. As part of purchase accounting, the Company recorded net
deferred tax assets for the Swiss tax losses and for the temporary differences
between the Swiss tax basis and the assigned values of the net Ebel assets. The
Company has established a partial valuation allowance on the deferred tax assets
as a result of an evaluation of expected utilization of such tax benefits within
the expiry of the tax losses through fiscal 2011. The recognition of the tax
benefit has been applied to reduce the carrying value of acquired intangible
assets to $0.3 million; subsequent recognition of deferred tax assets, if any,
will be applied to reduce the carrying value of the intangible assets to zero
prior to being recognized as a reduction of income tax expense. The Company
recognized cash tax savings of $2.9 million on the utilization of the Swiss tax
losses during the year. The remaining tax losses ($12.9 million) are related to
the Company's former operations in Germany, and its current operations in
Germany, Japan, and the United Kingdom. A full valuation allowance has been
established on the deferred tax assets resulting from these losses due to the
Company's current assessment that it is more-likely-than-not that the deferred
tax assets will not be utilized. The Japan tax losses have a 7 year life while
the German and United Kingdom tax losses have unlimited lives.
Management will continue to evaluate the appropriate level of allowance on all
deferred tax assets, considering such factors as prior earnings history,
expected future earnings, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset.
F-25
<PAGE>
The provision for income taxes differs from the amount determined by applying
the U.S. federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-----------------------------
2006 2005 2004
------- ------- -------
<S> <C> <C> <C>
Provision for income taxes at the U.S. statutory rate $15,728 $11,582 $11,108
Lower effective foreign income tax rate (5,958) (5,137) (5,487)
Change in valuation allowance 901 101 (13)
Tax provided on repatriated earnings of foreign subsidiaries 7,506 -- 3,133
State and local taxes, net of federal benefit 652 250 (43)
Other, net (510) (13) 188
------- ------- -------
Total $18,319 $ 6,783 $ 8,886
======= ======= =======
</TABLE>
No provision has been made for federal income or withholding taxes which may be
payable on the remittance of the undistributed retained earnings of foreign
subsidiaries approximating $97.8 million at January 31, 2006, as those earnings
are considered permanently reinvested. As a result of various tax planning
strategies available to the Company, it is not practical to estimate the amount
of tax, if any, that may be payable on the eventual distribution of these
earnings.
The American Jobs Creation Act of 2004 (the "Act"), as enacted on October 22,
2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated during a one-year period. The deduction results in
an approximate 5.25% U.S. federal tax rate on any repatriated earnings. To
qualify for the deduction, the earnings must be reinvested in the United States
pursuant to a domestic reinvestment plan established by the Company's Chief
Executive Officer and approved by the Company's Board of Directors. Certain
other criteria in the Act, applicable Treasury Regulations and guidance
published (or that may be subsequently published) by the Internal Revenue
Service or Treasury Department must be satisfied as well. During the fourth
quarter of 2006, the Company approved a plan for reinvestment and repatriation
of up to $150.0 million. Under the executed plan, the Company repatriated
foreign earnings of $148.5 million. These earnings were previously considered to
be indefinitely reinvested outside the U.S. During the year, the effective tax
rate was increased to 40.8% principally as a result of the fourth quarter 2006
tax charge of $7.5 million associated with repatriated foreign earnings under
the American Jobs Creation Act of 2004. The effective tax rate excluding the
repatriation related tax charge was 24.06%. The fiscal 2005 effective tax rate
was 20.5%.
NOTE 10 - OTHER ASSETS
In fiscal 1996, the Company entered into an agreement with a trust which owned
an insurance policy issued on the lives of the Company's Chairman and his
spouse. Under this agreement, the trust assigned the insurance policy to the
Company as collateral to secure repayment by the trust of interest-free loans
made by the Company to the trust in amounts equal to the premiums on said
insurance policy (approximately $0.8 million per annum). The agreement required
the trust to repay the loans from the proceeds of the policy. At January 31,
2003, the Company had outstanding loans from the trust of $5.2 million. On April
4, 2003, the agreement was amended and restated to transfer the policy from the
trust to the Company in partial repayment of the loan
F-26
<PAGE>
balance. The Company is the beneficiary of the policy insofar as upon the death
of the Company's Chairman and his spouse, the proceeds of the policy would first
be distributed to the Company to repay the premiums paid by the Company with the
remaining proceeds distributed to the trust. As of January 31, 2006, total
premiums paid were $7.6 million and the cash surrender value of the policy was
$7.7 million.
NOTE 11 - LEASES
The Company leases office, distribution, retail and manufacturing facilities,
and office equipment under operating leases, which expire at various dates
through January 2017. Certain leases include renewal options and the payment of
real estate taxes and other occupancy costs. Some leases also contain rent
escalation clauses (step rents) that require additional rent amounts in the
later years of the term. Rent expense for leases with step rents is recognized
on a straight-line basis over the minimum lease term. Likewise, capital funding
and other lease concessions that are occasionally provided to the Company, are
recorded as deferred rent and amortized on a straight-line basis over the
minimum lease term as adjustments to rent expense. Rent expense for equipment
and distribution, factory and office facilities under operating leases was
approximately $13.3 million, $12.6 million and $9.7 million in fiscal 2006, 2005
and 2004, respectively. Minimum annual rentals at January 31, 2006 under
noncancelable operating leases, which do not include real estate taxes and
operating costs, are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ended January 31,
2007 $12,590
2008 11,083
2009 10,334
2010 9,906
2011 8,813
Thereafter 26,377
-------
$79,103
=======
</TABLE>
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses, such as misappropriation of
assets. The Company believes it is adequately insured against such losses.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At January 31, 2006, the Company had outstanding letters of credit totaling $1.2
million with expiration dates through March 18, 2007 compared to $0.6 million
with expiration dates through May 15, 2006 as of January 31, 2005. One bank in
the domestic bank group has issued irrevocable standby letters of credit for
retail and operating facility leases to various landlords, for the
administration of the Movado Boutique private-label credit card and for Canadian
payroll to the Royal Bank of Canada.
As of January 31, 2006, a Swiss bank guaranteed one of the Company's Swiss
subsidiary's obligations to certain Swiss third parties in the amount of $3.3
million in various foreign currencies compared to $2.8 million as of January 31,
2005.
F-27
<PAGE>
Pursuant to the Company's agreements with its licensors, the Company is required
to pay minimum royalties and advertising. As of January 31, 2006, the Company's
obligation related to its license agreements was $68.3 million.
The Company had outstanding purchase obligations of $40.3 million with suppliers
at the end of fiscal 2006 for raw materials, finished watches and packaging in
the normal course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid for
items required to be purchased under agreements that are enforceable, legally
binding and specify minimum quantity, price and term.
The Company is involved from time to time in legal claims involving trademarks
and intellectual property, licensing, employee relations and other matters
incidental to the Company's business. Although the outcome of such items cannot
be determined with certainty, the Company's general counsel and management
believe that the final outcome would not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. In addition, the Company maintains defined contribution
employee benefit plans for its employees located in Switzerland. Company
contributions and expenses of administering the plans amounted to $2.0 million,
$1.9 million and $1.1 million in fiscal 2006, 2005 and 2004, respectively.
Effective June 1, 1995, the Company adopted a defined contribution supplemental
executive retirement plan ("SERP"). The SERP provides eligible executives with
supplemental pension benefits in addition to amounts received under the
Company's other retirement plan. The Company makes a matching contribution which
vests equally over five years. During fiscal 2006, 2005 and 2004, the Company
recorded an expense related to the SERP of $0.7 million, $0.6 million and $0.5
million, respectively.
During fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not
in the SERP. Under the terms of this Stock Bonus Plan, the Company contributes a
discretionary amount to the trust established under the plan. Each plan
participant vests after five years in 100% of their respective prorata portion
of such contribution. For fiscal 2006, 2005 and 2004, the Company recorded an
expense of $0.3 million for each period related to this plan.
On September 23, 1994, the Company entered into a Death and Disability Benefit
Plan agreement with the Company's Chairman. Under the terms of the agreement, in
the event of the Chairman's death or disability, the Company is required to make
an annual benefit payment of approximately $0.3 million to his spouse for the
lesser of ten years or her remaining lifetime. Neither the agreement nor the
benefits payable thereunder are assignable and no benefits are payable to the
estates or heirs of the Chairman or his spouse. Results of operations for each
period include an actuarially determined charge related to this plan of $0.2
million for fiscal 2006, 2005 and 2004.
Effective concurrently with the consummation of the Company's public offering in
the fourth quarter of fiscal 1994, the Board of Directors and the shareholders
of the Company approved the adoption of the Movado Group, Inc. 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, as
F-28
<PAGE>
amended and restated as of April 8, 2004, the Compensation Committee of the
Board of Directors, which is comprised of the Company's four outside directors,
has the authority to grant incentive stock options and nonqualified stock
options, to purchase, as well as stock appreciation rights and stock awards, up
to 9,000,000 shares of Common Stock. Options granted to participants under the
Plan generally become exercisable in equal installments over three years and
remain exercisable until the tenth anniversary of the date of grant. The option
price may not be less than the fair market value of the stock at the time the
options are granted.
Transactions in stock options under the Plan since fiscal 2003 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted-
Outstanding Average
Options Exercise Price
----------- --------------
<S> <C> <C>
January 31, 2003 4,539,520 $ 8.76
Options granted 978,144 $12.03
Options exercised (1,639,710) $ 8.74
Options cancelled (153,976) $ 5.86
---------- ------
January 31, 2004 3,723,978 $ 8.71
Options granted 784,203 $16.44
Options exercised (821,957) $ 9.04
Options cancelled (65,190) $ 9.33
---------- ------
January 31, 2005 3,621,034 $11.66
Options granted 166,500 $18.30
Options exercised (596,221) $ 6.54
Options cancelled (21,700) $12.88
---------- ------
January 31, 2006 3,169,613 $12.96
========== ======
</TABLE>
Options exercisable at January 31, 2006, 2005 and 2004 were 2,507,382, 2,888,888
and 2,445,912, respectively.
The following table summarizes outstanding and exercisable stock options as of
January 31, 2006:
<TABLE>
<CAPTION>
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- --------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.12 - $ 6.22 170,290 4.1 $ 4.26 170,290 $ 4.26
$ 6.23 - $ 9.34 297,516 3.2 $ 7.06 273,816 $ 7.05
$ 9.35 - $12.45 811,963 4.1 $10.69 780,864 $10.73
$12.46 - $15.57 1,269,097 5.2 $14.46 958,997 $14.56
$15.58 - $18.68 614,747 7.0 $18.08 323,415 $18.37
$18.69 - $21.81 6,000 9.1 $18.85 -- --
--------- --- ------ --------- ------
3,169,613 5.1 $12.96 2,507,382 $12.34
--------- --- ------ --------- ------
</TABLE>
F-29
<PAGE>
Under the 1996 Stock Incentive Plan, the Company has the ability to grant
restricted stock to certain employees. In fiscal years 2006, 2005 and 2004, the
Company granted restricted stock shares of 96,160, 140,960 and 138,190,
respectively, with fair values at the date of grant of $1.7 million, $2.2
million and $1.4 million, respectively. Restricted stock grants vest three years
from the date of grant. Expense for these grants is recognized on a
straight-line basis over the vesting period. Included in the Company's
Consolidated Statements of Income for fiscal 2006, 2005 and 2004 is expense
related to restricted stock grants of $1.3 million, $0.9 million and $0.3
million, respectively.
NOTE 14 - TOTAL COMPREHENSIVE INCOME
The components of comprehensive income for the twelve months ended January 31,
2006, 2005 and 2004 are as follows (in thousands):
<TABLE>
<CAPTION>
2006 2005 2004
-------- ------- -------
<S> <C> <C> <C>
Net income $ 26,617 $26,307 $22,851
Net unrealized gain on investments,
net of tax 1 39 139
Net change in effective portion of
hedging contracts, net of tax (3,318) 366 (3,434)
Foreign currency translation adjustment (1) (17,716) 13,828 18,382
-------- ------- -------
Total comprehensive income $ 5,584 $40,540 $37,938
======== ======= =======
</TABLE>
(1) The currency translation adjustments are not adjusted for income taxes as
they relate to permanent investments in international subsidiaries.
NOTE 15 - SEGMENT INFORMATION
The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The statement requires disclosure of segment data
based on how management makes decisions about allocating resources to segments
and measuring their performance.
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches, in addition to revenue
generated from after sales service activities and shipping. The Retail segment
includes the Movado Boutiques and outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's International operations
are principally conducted in Europe, the Middle East and Asia. The Company's
International assets are substantially located in Switzerland.
F-30
<PAGE>
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
<TABLE>
<CAPTION>
Net Sales Operating Profit (1)
------------------------------ ---------------------------
2006 2005 2004 2006 2005 2004
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Wholesale $385,383 $345,028 $269,341 $42,289 $33,033 $31,098
Retail 85,558 73,938 60,873 5,748 2,043 3,683
-------- -------- -------- ------- ------- -------
Consolidated total $470,941 $418,966 $330,214 $48,037 $35,076 $34,781
======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Total Assets Capital Expenditures
------------------- ----------------------------
2006 2005 2006 2005 2004
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Wholesale $484,767 $415,863 $ 9,659 $ 6,785 $ 2,958
Retail 65,125 61,211 6,708 8,162 7,872
-------- -------- ------- ------- -------
Consolidated total $549,892 $477,074 $16,367 $14,947 $10,830
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Depreciation and Amortization
-----------------------------
2006 2005 2004
------- ------- ------
<S> <C> <C> <C>
Wholesale $11,880 $ 8,909 $7,500
Retail 4,900 3,694 2,473
------- ------- ------
Consolidated total $16,780 $12,603 $9,973
======= ======= ======
</TABLE>
Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
<TABLE>
<CAPTION>
Net Sales (2) Operating Profit (1)
------------------------------ ---------------------------
2006 2005 2004 2006 2005 2004
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Domestic $372,383 $330,269 $285,739 $22,656 $12,617 $ 7,227
International 98,558 88,697 44,475 25,381 22,459 27,554
-------- -------- -------- ------- ------- -------
Consolidated total $470,941 $418,966 $330,214 $48,037 $35,076 $34,781
======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Total Assets Long-Lived Assets
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Domestic $391,310 $282,142 $37,101 $35,765
International 158,582 194,932 15,067 16,745
-------- -------- ------- -------
Consolidated total $549,892 $477,074 $52,168 $52,510
======== ======== ======= =======
</TABLE>
(1) Fiscal 2005 Retail Operating Profit includes a non-cash impairment charge
of $2.0 million recorded in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144").
(2) The domestic and international net sales are net of intercompany sales of
$241.9 million, $272.1 million and $209.7 million for the twelve months
ended January 31, 2006, 2005 and 2004, respectively.
F-31
<PAGE>
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2006 and 2005 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
1st 2nd 3rd 4th
------- -------- -------- --------
<S> <C> <C> <C> <C>
FISCAL 2006
Net sales $87,756 $115,326 $141,736 $126,123
Gross profit (1) $52,838 $ 69,986 $ 86,173 $ 77,323
Net income (2) $ 997 $ 8,551 $ 14,108 $ 2,961
NET INCOME PER SHARE:
Basic $ 0.04 $ 0.34 $ 0.56 $ 0.12
Diluted $ 0.04 $ 0.33 $ 0.54 $ 0.11
FISCAL 2005
Net sales $74,187 $ 97,788 $127,023 $119,968
Gross profit $43,385 $ 57,978 $ 77,141 $ 71,644
Net income (3) $ 736 $ 7,057 $ 11,334 $ 7,180
NET INCOME PER SHARE:
Basic $ 0.03 $ 0.29 $ 0.46 $ 0.29
Diluted $ 0.03 $ 0.28 $ 0.44 $ 0.28
</TABLE>
(1) In the fourth quarter of fiscal year 2006, the Company recorded a one-time
out of period benefit adjustment of $0.8 million from a reversal of a
previously recorded liability. This adjustment was recorded in cost of
goods sold and the Company has concluded that the amount is not material to
the fourth quarter or any of the prior quarters impacted.
(2) Fourth quarter of fiscal year 2006 includes a $7.5 million charge
associated with repatriated foreign earnings under the American Jobs
Creation Act of 2004.
(3) Fourth quarter of fiscal year 2005 includes a non-cash impairment charge of
$2.0 million related to the Movado Boutique in Soho, New York City.
Additionally, income tax expense of $0.4 million recorded in the fourth
quarter of fiscal 2005 included $1.9 million of non-recurring favorable tax
benefits, including a retroactive favorable tax ruling and the tax benefit
associated with the previously mentioned impairment charge.
As each quarter is calculated as a discrete period, the sum of the four quarters
may not equal the calculated full year amount. This is in accordance with
prescribed reporting requirements.
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
------------------------
2006 2005 2004
------ ------ ------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $4,520 $2,950 $2,369
Income taxes $6,096 $7,434 $5,864
</TABLE>
F-32
<PAGE>
NOTE 18 - OTHER INCOME, NET
The components of other income, net for fiscal 2006 and 2005 are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal
Year Ended
January 31,
----------------
2006 2005
------- ------
<S> <C> <C>
Gain on sale of building (a) $ 2,630 $ --
Discontinued cash flow hedges (b) (1,622) --
Litigation settlement (c) -- 1,444
------- ------
Other income, net $ 1,008 $1,444
======= ======
</TABLE>
(a) The Company recorded a pre-tax gain for the fiscal year ended January 31,
2006 of $2.6 million on the sale of a building acquired on March 1, 2004 in
connection with the acquisition of Ebel. The Company received cash proceeds
from the sale of $4.0 million. The building was classified as an asset held
for sale in other current assets.
(b) The Company recorded a pre-tax loss for the fiscal year ended January 31,
2006 of $1.6 million in other expense, representing the impact of the
discontinuation of foreign currency cash flow hedges because it was not
probable that the forecasted transactions would occur by the end of the
originally specified time period.
(c) The Company recognized income for the fiscal year ended January 31, 2005
from a litigation settlement in the amount of $1.4 million.
NOTE 19 - JUICY COUTURE LICENSE AGREEMENT
On November 21, 2005, the Company entered into a License Agreement with L.C.
Licensing, Inc. ("L.C. Licensing"), with an effective date of November 18, 2005.
The Company received an exclusive worldwide license to use the trademarks "Juicy
Couture" and "Couture Couture Los Angeles", in connection with the manufacture,
advertising, merchandising, promotion, sale and distribution of timepieces and
components. The term of the license is November 18, 2005 through December 31,
2011, with a four-year renewal period at the option of the Company, provided
that certain sales thresholds are met.
NOTE 20 - SUBSEQUENT EVENT
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste, S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE name and the distinctive Lacoste "alligator" logo beginning in the
first half of 2007.
F-33
<PAGE>
SCHEDULE II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Acquired Provision
beginning Ebel charged to Currency Net Balance at
Description of year balance operations revaluation write-offs end of year
- ---------------------------------- ---------- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 2006:
Allowance for doubtful accounts $6,830 -- $2,399 ($ 45) ($2,194) $6,990
Year ended January 31, 2005:
Allowance for doubtful accounts $6,659 $2,192 $2,072 $ 68 ($4,161) $6,830
Year ended January 31, 2004:
Allowance for doubtful accounts $5,235 -- $2,290 $ 106 ($ 972) $6,659
</TABLE>
<TABLE>
<CAPTION>
Balance at Acquired Provision
beginning Ebel charged to Currency Net Balance at
of year balance operations revaluation write-offs end of year
---------- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 2006:
Inventory reserve $54,447 -- $1,529 ($ 3,623) ($3,103) $49,250
Year ended January 31, 2005:
Inventory reserve $ 2,408 $50,800 $3,221 $ 3,464 ($5,446) $54,447
Year ended January 31, 2004:
Inventory reserve $ 4,323 -- $ 993 ($ 645) ($2,263) $ 2,408
</TABLE>
<TABLE>
<CAPTION>
Balance at Provision/
beginning (benefit) Currency Balance at
of year to operation revaluation Adjustments end of year
---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 2006:
Deferred tax assets valuation (1) $33,393 $ 910 ($2,186) ($ 2,562) $29,555
Year ended January 31, 2005:
Deferred tax assets valuation (2) $ 795 $ 101 $ 488 $ 32,009 $33,393
Year ended January 31, 2004:
Deferred tax assets valuation $ 950 ($ 13) ($ 142) -- $ 795
</TABLE>
(1) The detail of adjustments is as follows:
<TABLE>
<S> <C>
Release of valuation allowance, Ebel NOL's ($3,843)
Ebel Germany pre-acquisition NOL's 1,141
UK and Germany tax return accrual adjustments 140
-------
($2,562)
=======
</TABLE>
(2) The detail of adjustments is as follows:
<TABLE>
<S> <C>
Ebel purchase accounting - NOL's $26,731
Ebel purchase accounting - other 3,261
Current year losses 1,201
Other 816
-------
$32,009
=======
</TABLE>
S-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>2
<FILENAME>y18915exv10w34.txt
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.34
EXECUTION COPY
CREDIT AGREEMENT
dated as of December 15, 2005
among
MOVADO GROUP, INC.,
MOVADO WATCH COMPANY SA and MGI LUXURY GROUP S.A.,
as Borrowers,
the Lenders signatory hereto
and
JPMORGAN CHASE BANK, N.A.,
as Administrative Agent, and as Swingline Bank,
and as Issuing Bank
----------
J.P. MORGAN SECURITIES, INC.,
as Sole Lead Arranger and Sole Bookrunner,
BANK OF AMERICA, N.A.,
as Syndication Agent
and
THE BANK OF NEW YORK
and
CITIBANK, N.A.,
as Documentation Agents
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS................................. 1
Section 1.1. Definitions............................................ 1
Section 1.2. Accounting Terms....................................... 15
Section 1.3. Terms Generally........................................ 15
Section 1.4. Determination of Exchange Rates........................ 16
ARTICLE 2. THE LOANS..................................................... 16
Section 2.1. Syndicated Loans....................................... 16
Section 2.2. Making of Syndicated Loans............................. 16
Section 2.3. Borrowing Procedure as to Syndicated Loans............. 18
Section 2.4. Swingline Loans........................................ 18
Section 2.5. Participations by All Lenders in Swingline Loans....... 19
Section 2.6. Repayment of Loans..................................... 20
Section 2.7. Certain Fees........................................... 21
Section 2.8. Interest on Loans...................................... 22
Section 2.9. Default Interest....................................... 22
Section 2.10. Termination and Reduction of Commitments............... 22
Section 2.11. Conversion and Continuation of Borrowings.............. 23
Section 2.12. Optional Prepayment.................................... 25
Section 2.13. Mandatory Prepayments.................................. 26
Section 2.14. Payments............................................... 28
Section 2.15. Purpose................................................ 29
Section 2.16. Increase of Total Revolving Credit Commitment.......... 29
ARTICLE 3. LETTERS OF CREDIT............................................. 30
Section 3.1. Letters of Credit...................................... 30
Section 3.2 Notice of Issuance, Amendment, Renewal, Extension;
Certain Conditions..................................... 30
Section 3.3. Minimum Amount; Expiration Date........................ 31
Section 3.4. Participations......................................... 31
Section 3.5. Reimbursement.......................................... 31
Section 3.6. Obligations Absolute................................... 32
Section 3.7. Disbursement Procedures................................ 33
Section 3.8. Interim Interest....................................... 34
Section 3.9. Letter of Credit Fees.................................. 34
Section 3.10. Resignation of the Issuing Bank........................ 34
Section 3.11. Not Fiduciary.......................................... 35
Section 3.12. Purpose................................................ 35
ARTICLE 4. YIELD PROTECTION; ILLEGALITY; ETC............................. 35
Section 4.1. Alternate Rate of Interest............................. 35
Section 4.2. Reserve Requirement; Change in Circumstances........... 36
Section 4.3. Change in Legality..................................... 37
Section 4.4. Indemnity.............................................. 38
Section 4.5. Taxes.................................................. 39
Section 4.6. Duty to Mitigate....................................... 40
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 4.7. Replacement of Lenders................................. 40
Section 4.8. Certain Additional Costs............................... 41
ARTICLE 5. CONDITIONS PRECEDENT.......................................... 42
Section 5.1. Documentary Conditions Precedent....................... 42
Section 5.2. Additional Conditions Precedent........................ 44
Section 5.3. Deemed Representations................................. 44
ARTICLE 6. REPRESENTATIONS AND WARRANTIES................................ 44
Section 6.1. Incorporation, Good Standing and Due Qualification..... 44
Section 6.2. Corporate Power and Authority; No Conflicts............ 45
Section 6.3. Legally Enforceable Agreements......................... 45
Section 6.4. Litigation............................................. 45
Section 6.5. Financial Statements................................... 45
Section 6.6. Ownership and Liens.................................... 46
Section 6.7. Taxes.................................................. 46
Section 6.8. ERISA.................................................. 46
Section 6.9. Subsidiaries and Ownership of Stock.................... 47
Section 6.10. Credit Arrangements.................................... 47
Section 6.11. Operation of Business.................................. 47
Section 6.12. Hazardous Materials.................................... 48
Section 6.13. No Default on Outstanding Judgments or Orders.......... 49
Section 6.14. No Defaults on Other Agreements........................ 49
Section 6.15. Labor Disputes and Acts of God......................... 50
Section 6.16. Governmental Regulation................................ 50
Section 6.17. Partnerships........................................... 50
Section 6.18. No Forfeiture.......................................... 50
Section 6.19. Solvency............................................... 50
Section 6.20. Certain Particular Assurances as to the Foreign
Subsidiary Borrowers................................... 51
ARTICLE 7. AFFIRMATIVE COVENANTS......................................... 52
Section 7.1. Maintenance of Existence............................... 52
Section 7.2. Conduct of Business.................................... 52
Section 7.3. Maintenance of Properties.............................. 52
Section 7.4. Maintenance of Records................................. 52
Section 7.5. Maintenance of Insurance............................... 52
Section 7.6. Compliance with Laws; Payment of Taxes................. 52
Section 7.7. Right of Inspection.................................... 53
Section 7.8. Reporting Requirements................................. 53
Section 7.9. Subsidiary Guarantee................................... 56
Section 7.10. Equal and Ratable Lien................................. 57
ARTICLE 8. NEGATIVE COVENANTS............................................ 57
Section 8.1. Debt................................................... 57
Section 8.2. Guaranties, Etc........................................ 58
Section 8.3. Liens.................................................. 58
Section 8.4. Leases................................................. 60
Section 8.5. Investments............................................ 60
Section 8.6. Dividends.............................................. 61
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 8.7. Sale of Assets......................................... 62
Section 8.8. Stock of Subsidiaries, Etc............................. 63
Section 8.9. Transactions with Affiliates........................... 63
Section 8.10. Mergers, Etc........................................... 64
Section 8.11. Acquisitions........................................... 64
Section 8.12. No Material Change in Business......................... 65
Section 8.13. No Restriction......................................... 65
Section 8.14. Swap and Exchange Agreements........................... 65
ARTICLE 9. FINANCIAL COVENANTS........................................... 65
Section 9.1. Interest Coverage Ratio................................ 65
Section 9.2. Average Debt Coverage Ratio............................ 65
Section 9.3. Capital Expenditures................................... 65
ARTICLE 10. EVENTS OF DEFAULT............................................ 65
Section 10.1. Events of Default...................................... 65
Section 10.2. Remedies............................................... 67
ARTICLE 11. THE ADMINISTRATIVE AGENT; RELATIONS AMONG LENDERS AND
PARENT....................................................... 68
Section 11.1. Appointment, Powers and Immunities of Administrative
Agent.................................................. 68
Section 11.2. Reliance by Administrative Agent....................... 69
Section 11.3. Defaults............................................... 69
Section 11.4. Rights of Administrative Agent as a Lender............. 69
Section 11.5. Indemnification of Administrative Agent................ 70
Section 11.6. Documents.............................................. 70
Section 11.7. Non-Reliance on Administrative Agent and Other
Lenders................................................ 70
Section 11.8. Failure of Administrative Agent to Act................. 71
Section 11.9. Resignation of Administrative Agent.................... 71
Section 11.10. Amendments Concerning Agency Function.................. 71
Section 11.11. Liability of Administrative Agent...................... 71
Section 11.12. Delegation of Agency Functions......................... 71
Section 11.13. Non-Receipt of Funds by the Administrative Agent....... 72
Section 11.14. Withholding Taxes...................................... 72
Section 11.15. Several Obligations and Rights of Lenders.............. 73
Section 11.16. Pro Rata Treatment of Syndicated Loans, Etc............ 73
Section 11.17. Sharing of Payments Among Lenders...................... 73
Section 11.18. Other Agents........................................... 74
ARTICLE 12. MISCELLANEOUS................................................ 74
Section 12.1. Amendments and Waivers; Remedies Cumulative............ 74
Section 12.2. Usury.................................................. 75
Section 12.3. Expenses; Indemnity; Damage Waiver..................... 75
Section 12.4. Survival............................................... 76
Section 12.5. Assignment; Participations............................. 77
Section 12.6. Notices................................................ 80
Section 12.7. Setoff................................................. 81
Section 12.8. JURISDICTION; JURY WAIVER; IMMUNITIES.................. 81
Section 12.9. Table of Contents; Headings............................ 82
Section 12.10. Severability........................................... 82
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 12.11. Authorization of Parent................................ 82
Section 12.12. Integration............................................ 83
Section 12.13. GOVERNING LAW.......................................... 83
Section 12.14. Confidentiality........................................ 83
Section 12.15. Treatment of Certain Information....................... 84
Section 12.16. Judgment Currency...................................... 84
Section 12.17. Counterparts........................................... 85
Section 12.18. USA PATRIOT Act........................................ 85
Section 12.19. Termination of Existing Credit Agreement............... 85
</TABLE>
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EXHIBITS
Exhibit A-1 Form of Syndicated Loan Note
Exhibit A-2 Form of Swingline Loan Note
Exhibit B Form of Authorization Letter
Exhibit C-1 Form of Opinion of Timothy F. Michno, Esq.
Exhibit C-2 Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
LLP
Exhibit C-3 Form of Opinion of Swiss Counsel for the Foreign Subsidiary
Borrowers
Exhibit D-1 Form of Subsidiary Guarantee
Exhibit D-2 Form of Parent Guarantee
Exhibit E Form of Assignment and Assumption Agreement
SCHEDULES
Schedule I Lenders and Revolving Credit Commitments
Schedule II Applicable Rates
Schedule III Subsidiaries of Parent
Schedule IV Credit Arrangements
Schedule V Environmental Matters
Schedule VI Affiliate Transactions
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CREDIT AGREEMENT dated as of December 15, 2005 among MOVADO GROUP,
INC., a corporation organized under the laws of New York (the "Parent"); MOVADO
WATCH COMPANY SA, a corporation organized under the laws of Switzerland ("MWC");
MGI LUXURY GROUP S.A., a corporation organized under the laws of Switzerland
("Luxury"); each of the lenders which is a signatory hereto (individually a
"Lender" and collectively the "Lenders"); and JPMORGAN CHASE BANK, N.A., as
administrative agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Administrative Agent"), and as swingline bank
(in such capacity, together with its successors in such capacity, the "Swingline
Bank"), and as issuing bank (in such capacity, together with its successors in
such capacity, the "Issuing Bank").
The Parent, MWC and Luxury desire that the Lenders, the Swingline Bank
and the Issuing Bank extend credit as provided herein, and the Lenders, the
Swingline Bank and the Issuing Bank are prepared to extend such credit.
Accordingly, the Parent, MWC, Luxury, the Lenders, the Swingline Bank, the
Issuing Bank and the Administrative Agent agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS.
Section 1.1. Definitions. As used in this Agreement the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa):
"ABR Borrowing" means a Borrowing comprised of ABR Loans that are
Syndicated Loans or a Borrowing of an ABR Loan that is a Swingline Loan.
"ABR Loan" means any Loan bearing interest at a rate determined by
reference to the Alternate Base Rate in accordance with the provisions of
Article 2.
"Acquisition" is defined in Section 8.11.
"Adjusted LIBO Rate" means, with respect to any LIBOR Borrowing for
any Interest Period, an interest rate per annum (rounded upwards, if necessary,
to the next 1/32nd of 1%) equal to (a) with respect to any LIBOR Borrowing by
the Parent, the product of (i) the LIBO Rate in effect for such Interest Period
and (ii) Statutory Reserves and (b) with respect to any LIBOR Borrowing by any
Foreign Subsidiary Borrower, the LIBO Rate in effect for such Interest Period.
"Administrative Agent" is defined in the initial paragraph of this
Agreement. If the Administrative Agent pursuant to Section 11.12 designates any
of its Affiliates to perform any of its duties or exercise any of its rights or
powers with respect to any Foreign Currency Loans or Foreign Currency
Borrowings, the term "Administrative Agent" shall include, as well, such
Affiliate with respect thereto.
"Administrative Agent Fees" is defined in Section 2.7(c).
"Administrative Questionnaire" means an Administrative Questionnaire
in a form supplied by the Administrative Agent.
<PAGE>
"Affiliate" means, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person
specified.
"Aggregate Credit Exposure" means, at any time, the sum at such time
of (i) the aggregate of the Lenders' Syndicated Loan Exposures, (ii) the L/C
Exposure and (iii) the outstanding principal balance of all Swingline Loans.
"Agreement" means this Credit Agreement, as amended, restated
supplemented or otherwise modified from time to time.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the greater of (a) the Prime Rate in effect on such day and (b) the Federal
Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the
Alternate Base Rate due to a change in the Prime Rate or the Federal Funds
Effective Rate shall be effective from and including the effective date of such
change in the Prime Rate or the Federal Funds Effective Rate, respectively.
"Applicable Rate" means, for any day, with respect to any LIBOR Loan,
or with respect to the Commitment Fees, as the case may be, the applicable rate
per annum set forth on Schedule II under the caption "LIBOR Loan Spread" or
"Commitment Fee Rate", as the case may be, based upon the Average Debt Coverage
Ratio. Each change in the Applicable Rate resulting from a change in the Average
Debt Coverage Ratio shall be effective with respect to all outstanding LIBOR
Loans and with respect to the Commitment Fees on and after the first day of the
calendar month following the date of delivery to the Administrative Agent of the
financial statements required by paragraph (a) or (b) (as the case may be) of
Section 7.8 indicating that a change in the Average Debt Coverage Ratio has
occurred, through the date immediately preceding the first day of the calendar
month following the next date of delivery of such financial statements
indicating that another change in the Average Debt Coverage Ratio has occurred.
Notwithstanding the foregoing, but subject to the next sentence, during the
period commencing on the Closing Date and ending on the date immediately
preceding the first day of the calendar month following the date of delivery of
the first such financial statements, the Average Debt Coverage Ratio shall be
deemed to be in Category 2 (as set forth on Schedule II) for purposes of
determining the Applicable Rate. Notwithstanding the foregoing, (a) at any time
during which the Parent has failed to deliver the financial statements required
by either such paragraph of Section 7.8, or (b) at any time after the occurrence
and during the continuance of an Event of Default, the Average Debt Coverage
Ratio shall be deemed to be in Category 4 (as set forth on Schedule II) for
purposes of determining the Applicable Rate.
"Approved Fund" means any Person (other than a natural person) that is
engaged in making, purchasing, holding or investing in bank loans and similar
extensions of credit in the ordinary course of its business and that is
administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an
entity or an Affiliate of an entity that administers or manages a Lender.
"Assignment and Assumption Agreement" means an assignment and
assumption entered into by a Lender and an assignee (with the consent of any
party whose consent is
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required by Section 12.5), and accepted by the Administrative Agent, in the form
of Exhibit E or any other form approved by the Administrative Agent.
"Augmenting Lender" is defined in Section 2.16.
"Authorization Letter" means the letter agreement executed by the
Borrowers in the form of Exhibit B.
"Availability Period" means the period from and including the Closing
Date to but excluding the earlier of the Maturity Date and the date of
termination of the Revolving Credit Commitments.
"Average Debt Coverage Ratio" means the ratio of (i) the sum of
indebtedness for borrowed money, indebtedness for the deferred purchase price of
property or services (excluding trade payables in the ordinary course of
business; and excluding wages or other compensation payable to employees of the
Parent or any of its Subsidiaries in the ordinary course of business),
obligations arising under acceptance facilities, and obligations as lessee under
Capital Leases (in all cases) of the Parent and its Consolidated Subsidiaries on
a consolidated basis as of the last day of each fiscal quarter for four
consecutive fiscal quarters, divided by four, to (ii) consolidated earnings
before interest expense, taxes, depreciation and amortization of the Parent and
its Consolidated Subsidiaries for such period of four consecutive fiscal
quarters. For purposes of this definition only, if such clause (ii) is less than
one dollar, it shall be deemed to be one dollar.
"Board" means the Board of Governors of the Federal Reserve System of
the United States of America.
"Borrower" means the Parent, MWC or Luxury (as applicable).
"Borrowing" means (a) Syndicated Loans made to a single Borrower of a
single Type made, converted or continued on the same date and in the same
currency, and as to which a single Interest Period is in effect or (b) a
Swingline Loan made by the Swingline Bank on a single date.
"Borrowing Request" means a Syndicated Loan Borrowing Request or a
Swingline Loan Borrowing Request.
"Breakage Event" is defined in Section 4.4.
"Business Day" means any day other than a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required by law
to close; provided, however, that: (a) when used in connection with a LIBOR
Loan, the term "Business Day" shall also exclude any day on which banks are not
open for dealings in dollar deposits in the London interbank market; (b) when
used in connection with any Loan denominated in Euros, the term "Business Day"
shall also exclude any day on which the TARGET payment system is not open for
settlement of payment in Euros; and (c) when used in connection with any Loan
denominated in a Foreign Currency other than Euros, the term "Business Day"
shall also exclude any day on which commercial banks and the London foreign
exchange market do not settle payments in the
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principal financial center where such Foreign Currency is cleared and settled
as reasonably determined by the Administrative Agent.
"Capital Expenditures" means, for any period, the dollar amount of
gross expenditures (including obligations under Capital Leases) during such
period made for fixed assets, real property, plant and equipment, and all
renewals, improvements and replacements thereto (but not repairs thereof) that
are required to be capitalized under, and determined in accordance with, GAAP.
"Capital Lease" means any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Cash Collateral Account" is defined in Section 2.13(f).
"Closing Date" means the date on which the conditions specified in
Section 5.1 are satisfied (or waived in accordance with Section 12.1).
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Commitment Fees" is defined in Section 2.7(b).
"Consolidated Capital Expenditures" means Capital Expenditures of the
Parent and its Consolidated Subsidiaries, as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Subsidiary" means any Subsidiary whose accounts are or
are required to be consolidated with the accounts of the Parent in accordance
with GAAP.
"Consolidated Tangible Net Worth" means Tangible Net Worth of the
Parent and its Consolidated Subsidiaries, as determined on a consolidated basis
in accordance with GAAP.
"Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a Person,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "Controlling" and "Controlled" shall have meanings correlative
thereto.
"Core Business" means the business of designing, manufacturing and
distributing watches, jewelry and other accessories (including the operation of
retail stores to distribute the same), other businesses related thereto, or
businesses that in the judgment of the board of directors of the Parent are
derived from the exploitation by the Parent of its trademarks, including the
operation of retail stores to distribute products utilizing the same.
"currency" is defined in the definition of the term "Type" in this
Section.
"Debt" means, with respect to any Person: (a) indebtedness of such
Person for borrowed money; (b) indebtedness for the deferred purchase price of
property or services (except trade payables in the ordinary course of business;
and except wages or other compensation payable to employees of such Person in
the ordinary course of business); (c) the face amount of
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any outstanding letters of credit issued for the account of such Person; (d)
obligations arising under acceptance facilities; (e) (without duplication of
other Debt) guaranties, endorsements (other than for collection in the ordinary
course of business) and other contingent obligations to purchase, to provide
funds for payment, to supply funds to invest in any Person, or otherwise to
assure a creditor against loss with respect to any Debt of the type referred to
in clauses (a), (b), (c), (d) and (g) of this definition; (f) Debt of others
secured by any Lien on property of such Person; and (g) obligations of such
Person as lessee under Capital Leases.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Default Rate" is defined in Section 2.9.
"Defaulted Amount" is defined in Section 2.9.
"Designated Sales" means (i) sales of assets of the Parent or any
Subsidiary that are prohibited by Section 8.7 (excluding clause (f) thereof),
and (ii) sales of all the shares of capital stock of any Subsidiary that are
prohibited by Section 8.8 (excluding clause (d) thereof); and (iii) cash mergers
of a Subsidiary into another entity (that is, where the outstanding shares of
such Subsidiary are entirely converted to cash upon such merger) that are
prohibited by Section 8.10 (excluding clause (c) thereof), provided that such
sales and mergers shall be for fair market value and on an arms'-length basis.
"Dollar Equivalent" means, on any date of determination, with respect
to any amount in a particular Foreign Currency, the equivalent in dollars of
such amount, as determined by the Administrative Agent pursuant to Section 1.4
using the Exchange Rate with respect to such Foreign Currency then in effect
under Section 1.4.
"dollars" or "$" means lawful money of the United States of America.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which is a member of any group of organizations (i) described in
Section 414(b) or (c) of the Code of which the Parent is a member, or (ii)
solely for purposes of potential liability under Section 302(c)(11) of ERISA and
Section 412(c)(11) of the Code and the lien created under Section 302(f) of
ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the
Code of which the Parent is a member.
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"Euro" means the single currency of the European Union as constituted
by the Treaty on European Union and as referred to in the legislative measures
of the European Union for the introduction of, changeover to or operation of the
Euro in one or more member states.
"Event of Default" is defined in Section 10.1.
"Exchange Rate" means, on any day, with respect to any determination
of the equivalent in dollars of a particular Foreign Currency (or in a
particular Foreign Currency of dollars), the rate at which such Foreign Currency
may be exchanged into dollars (or dollars into such Foreign Currency, as
applicable), as set forth at approximately 11:00 a.m., London time, on such day
on the Reuters World Currency Page for the relevant currency. In the event that
such rate does not appear on any Reuters World Currency Page, the Exchange Rate
shall be such exchange rate from such other source as reasonably selected by the
Administrative Agent as the rate at which such Foreign Currency may be exchanged
into dollars (or dollars into such Foreign Currency, as applicable), or, in the
absence of such other source, such Exchange Rate shall instead be the arithmetic
average of the spot rates of exchange of the Person serving as the
Administrative Agent in the market where its foreign currency exchange
operations in respect of such Foreign Currency are then being conducted, at or
about 10:00 a.m., local time of such market, on such date for the purchase of
dollars (or such Foreign Currency, as applicable) for delivery two Business Days
later; provided that if at the time of any such determination, for any reason,
no such spot rate is being quoted, the Administrative Agent may use any
reasonable method it deems appropriate to determine such rate, and such
determination shall be conclusive absent manifest error.
"Excluded Taxes" means, with respect to the Administrative Agent, any
Lender, the Swingline Bank, the Issuing Bank or any other recipient of any
payment to be made by or on account of any obligation of any Borrower hereunder,
(a) (i) income or franchise taxes imposed on (or measured by) its net income or
gross or net turnover, and (ii) any branch profits taxes or similar taxes
imposed, and (b) in the case of a Lender organized under the laws of a
jurisdiction other than the United States (a "Non-U.S. Lender"), any withholding
tax that is imposed on amounts payable hereunder to such Non-U.S. Lender to the
extent such tax is in effect and would apply as of the date such foreign Lender
becomes a party to this Agreement or designates a new Lending Office, or that is
attributable to such Non-U.S. Lender's failure to comply with Section 11.14.
"Facility Documents" means this Agreement, the Notes, the
Authorization Letter, the Parent Guarantee and each Subsidiary Guarantee.
"Federal Funds Effective Rate" means, for any day, the weighted
average (rounded upwards, if necessary, to the nearest 1/100th of 1%) of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average
(rounded upwards, if necessary, to the nearest 1/100th of 1%) of the quotations
for the day for such transactions received by the Administrative Agent from
three Federal funds brokers of recognized standing selected by it.
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"Fees" means the Commitment Fees, the Administrative Agent Fees, the
L/C Participation Fees and the Issuing Bank Fees.
"Foreign Currency" means Euros or Swiss francs (as applicable).
"Foreign Currency Borrowing" means a Borrowing comprised of Syndicated
Loans denominated in a particular Foreign Currency.
"Foreign Currency Equivalent" means, on any date of determination,
with respect to an amount in dollars, the amount of the applicable Foreign
Currency that may be purchased with such amount of dollars at the Exchange Rate
with respect to such Foreign Currency on such date, as reasonably determined by
the Administrative Agent.
"Foreign Currency Loan" means a Syndicated Loan denominated in a
particular Foreign Currency.
"Foreign Currency Sublimit Dollar Amount" means $25,000,000, as the
same may be increased from time to time pursuant to Section 2.16.
"Foreign Subsidiary Borrower" means MWC or Luxury (as applicable).
"Forfeiture Proceeding" means any action or proceeding against the
Parent or any of its Subsidiaries before any court, governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
the receipt of notice by any such party that any of them is a suspect in or a
target of any governmental investigation, as to which there is a reasonable
possibility of a determination adverse to the Parent or such Subsidiary and
which (if determined adversely to the Parent or such Subsidiary) would, in any
one case or in the aggregate, materially adversely affect the financial
condition, operations or business of the Parent and its Subsidiaries taken as a
whole or the ability of any Borrower or any Guarantor to perform its obligations
under the Facility Documents to which it is a party.
"Future Permitted Private Placement Debt" means unsecured indebtedness
for money borrowed by the Parent that is privately placed with one or more
institutional investors after the Closing Date (including the indebtedness
evidenced by the Prudential Shelf Notes), provided that (a) not more than 20% of
the original principal amount of any such indebtedness shall be scheduled to
mature or to be repaid in any fiscal year prior to the Maturity Date; and (b)
the terms and conditions associated with such indebtedness (whether in the notes
evidencing such indebtedness, or in the note purchase agreements or similar
agreements pursuant to which such indebtedness is issued, or otherwise) are not
more restrictive of the Parent or any of its Subsidiaries than the corresponding
terms and conditions of this Agreement (which determination as to
restrictiveness may be made by the Administrative Agent in its reasonable
judgment); provided, however, that the foregoing clause (a) shall not apply to
the indebtedness evidenced by the Prudential Shelf Notes; and provided further
that the foregoing clause (b) shall not apply to the indebtedness evidenced by
the Prudential Shelf Notes unless the Note Purchase and Private Shelf Agreement
dated March 21, 2001, as amended prior to the Closing Date, between the Parent
and The Prudential Insurance Company of America is hereafter amended.
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"GAAP" means generally accepted accounting principles in the United
States of America as in effect on the date hereof, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
Section 6.5.
"Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government.
"Grinberg Group" means the group consisting of Gedalio Grinberg, his
spouse, each of their estates and their issue; and Efraim Grinberg, his spouse,
each of their estates and their issue; and every Person (other than an
individual) Controlled by any of the foregoing.
"Guarantors" means the Parent as guarantor under the Parent Guarantee
and each Subsidiary Guarantor.
"Hazardous Material" is defined in Section 6.12(a).
"Inactive Subsidiary" means a Subsidiary of the Parent that has (and
only for so long as it has) assets of less than $1,000,000; provided, however,
that (i) there shall not be more than ten Inactive Subsidiaries at any time
during the term of this Agreement and (ii) the assets of all Inactive
Subsidiaries in the aggregate shall not exceed $4,000,000.
"Increasing Lender" is defined in Section 2.16.
"Indemnified Taxes" means Taxes arising from any payment made
hereunder or from the execution, delivery or enforcement of, or otherwise with
respect to, this Agreement other than Excluded Taxes and Other Taxes.
"Indemnitee" is defined in Section 12.3(b).
"Initial Subsidiary Guarantees" means the Subsidiary Guarantees
executed and delivered by the Initial Subsidiary Guarantors (respectively) on
the Closing Date in favor of the Lenders, the Swingline Bank, the Issuing Bank
and the Administrative Agent, in respect of the obligations of the Parent under
this Agreement and the other Facility Documents.
"Initial Subsidiary Guarantors" means, as of the Closing Date, Movado
Retail Group, Inc., a New Jersey corporation, and Movado LLC, a Delaware limited
liability company.
"Interest Coverage Ratio" for any period means the ratio of (a)
consolidated earnings before interest expense and taxes of the Parent and its
Consolidated Subsidiaries for such period, to (b) cash interest paid during such
period by the Parent and its Consolidated Subsidiaries on a consolidated basis.
"Interest Payment Date" means (a) with respect to any ABR Loan (other
than a Swingline Loan), the last day of each March, June, September and
December, and the Maturity Date; (b) with respect to any LIBOR Loan, the last
day of the Interest Period applicable to the
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Borrowing of which such Loan is a part and, in the case of a LIBOR Borrowing
with an Interest Period of more than three months' duration, each day that would
have been an Interest Payment Date had successive Interest Periods of three
months' duration been applicable to such Borrowing, and in addition, the date of
any prepayment of such Borrowing or the date of any conversion of such Borrowing
to a Borrowing of a different Type; and (c) with respect to a Swingline Loan,
the day that such Loan is required to be repaid.
"Interest Period" means, as to any LIBOR Borrowing, the period
commencing on the date of such Borrowing (or in the case of the conversion of
any ABR Borrowing into a LIBOR Borrowing, the date of such conversion or in the
case of a continuation of any LIBOR Borrowing as a LIBOR Borrowing, the date of
such continuation) and ending on the numerically corresponding day (or, if there
is no numerically corresponding day, on the last day) in the calendar month that
is 1, 2, 3, 6 or (subject to availability for each Lender) 9 or 12 months
thereafter, as the applicable Borrower may elect; provided, however, that (i) if
any Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless such next
succeeding Business Day would fall in the next calendar month, in which case
such Interest Period shall end on the next preceding Business Day. Interest
shall accrue from and including the first day of an Interest Period to but
excluding the last day of such Interest Period.
"Issuing Bank" means JPMCB. The Issuing Bank may, in its reasonable
discretion, arrange for one or more Letters of Credit to be issued by Affiliates
of the Issuing Bank, in which case the term "Issuing Bank" shall include any
such Affiliate with respect to Letters of Credit issued by such Affiliate.
"Issuing Bank Fees" is defined in Section 3.9.
"JPMCB" means JPMorgan Chase Bank, N.A. and its successors.
"Judgment Currency" is defined in Section 12.16(a).
"Judgment Currency Conversion Date" is defined in Section 12.16(a).
"L/C Commitment" means the commitment of the Issuing Bank to issue
Letters of Credit pursuant to Article 3.
"L/C Disbursement" means a payment or disbursement made by the Issuing
Bank pursuant to a Letter of Credit.
"L/C Exposure" means at any time the sum of (a) the aggregate undrawn
amount of all outstanding Letters of Credit at such time, plus (b) the aggregate
principal amount of all L/C Disbursements that have not yet been reimbursed at
such time. The L/C Exposure of any Lender at any time means its Pro Rata
Percentage of the aggregate L/C Exposure at such time.
"L/C Participation Fee" is defined in Section 3.9.
"Lenders" means (a) the Persons listed on Schedule I (other than any
such Person that has ceased to be a party hereto pursuant to an Assignment and
Assumption Agreement) and
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(b) any Person that has become a party hereto pursuant to an Assignment and
Assumption Agreement or pursuant to Section 2.16.
"Lending Office" means, for each Lender and for each Type of Loan to
each Borrower, the lending office of such Lender (or of an Affiliate of such
Lender) specified in writing by such Lender from time to time to the
Administrative Agent and the Parent as the office by which its Loans of such
Type to such Borrower are to be made and maintained.
"Letter of Credit" means any letter of credit issued pursuant to
Article 3.
"LIBO Rate" means (a) with respect to any LIBOR Borrowing denominated
in dollars, for any Interest Period, the rate appearing on Page 3750 of the
Telerate Service (or on any successor or substitute page of such Service, or any
successor to or substitute for such Service providing rate quotations comparable
to those currently provided on such page of such Service, as determined by the
Administrative Agent, in consultation with the Parent, from time to time for
purposes of providing quotations of interest rates applicable to dollar deposits
in the London interbank market) at approximately 11:00 a.m., London time, two
Business Days prior to the commencement of such Interest Period, as the rate for
dollar deposits with a maturity comparable to such Interest Period; and (b) with
respect to any LIBOR Borrowing denominated in a Foreign Currency, for any
Interest Period, the rate determined by reference to the British Bankers'
Association Interest Settlement Rates (as reflected on the applicable Telerate
service) at approximately 11:00 a.m., London time, two Business Days prior to
the commencement of such Interest Period, as the rate for deposits in such
Foreign Currency with a maturity comparable to such Interest Period. In the
event that such rate is not available at such time for any reason, then the
"LIBO Rate" with respect to such LIBOR Borrowing for such Interest Period shall
be the rate at which the Person serving as the Administrative Agent is offered
deposits in dollars of, or deposits in the applicable Foreign Currency for the
Foreign Currency Equivalent of, $5,000,000 and for a maturity comparable to such
Interest Period in immediately available funds in the London interbank market at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period.
"LIBOR Borrowing" means a Borrowing comprised of LIBOR Loans.
"LIBOR Loan" means any Syndicated Loan bearing interest at a rate
determined by reference to the Adjusted LIBO Rate in accordance with the
provisions of Article 2.
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, charge, conditional sale, title
retention agreement, financing lease or other encumbrance or similar right of
others, or any agreement to give any of the foregoing.
"Loans" means Syndicated Loans and Swingline Loans.
"Luxury" is defined in the initial paragraph of this Agreement.
"MWC" is defined in the initial paragraph of this Agreement.
"Maturity Date" means December 15, 2010.
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"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a Plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Parent or any ERISA Affiliate
and which is covered by Title IV of ERISA.
"Non-U.S. Lender" is defined in the definition of the term "Excluded
Taxes" in this Section.
"Notes" means the Syndicated Loan Notes and the Swingline Loan Note.
"Obligation Currency" is defined in Section 12.16(a).
"Other Credit Agreement" means the 90,000,000 Swiss franc Credit
Agreement dated as of the date hereof between MWC and Luxury, as borrowers, the
Parent, the lenders party thereto and JPMCB, as administrative agent for such
lenders.
"Other Taxes" means any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies or any
value added or similar tax arising from any payment made hereunder or from the
execution, delivery or enforcement of, or otherwise with respect to, this
Agreement.
"Parent" is defined in the initial paragraph of this Agreement.
"Parent Guarantee" means the guarantee executed and delivered by the
Parent on the Closing Date in favor of the Lenders and the Administrative Agent,
in respect of the obligations of MWC and Luxury under this Agreement and the
other Facility Documents, in substantially the form attached hereto as Exhibit
D-2.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Investments" means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed
by the full faith and credit of the United States of America), in each case
maturing within one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 270 days from the
date of acquisition thereof and having, at such date of acquisition, the
highest credit rating obtainable from S&P or from Moody's;
(c) investments in certificates of deposit, banker's acceptances and
time deposits maturing within one year from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts
issued or offered by, any domestic office of any commercial bank organized
under the laws of the United
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States of America or any State thereof that has a combined capital and
surplus and undivided profits of not less than $500,000,000; and
(d) other investment instruments approved in writing by the Required
Lenders and offered by financial institutions which have a combined capital
and surplus and undivided profits of not less than $500,000,000.
"Person" means an individual, partnership, corporation, business
trust, joint stock company, limited liability company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of whatever
nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by the Parent or any ERISA
Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer
Plan.
"Prime Rate" means the rate of interest per annum publicly announced
from time to time by the entity which is the Administrative Agent as its prime
rate in effect at its principal office in New York City; each change in such
prime rate shall be effective from and including the date such change is
publicly announced as being effective.
"Pro Rata Percentage" of any Lender at any time means the percentage
of the Total Revolving Credit Commitment represented by such Lender's Revolving
Credit Commitment (or, if the Lenders' Revolving Credit Commitments shall have
expired or been terminated in accordance with this Agreement and the Aggregate
Credit Exposure is greater than zero, such percentage immediately prior to such
expiration or termination, giving effect to any assignments by or to such Lender
pursuant to Section 12.5).
"Prudential Existing Notes" means (a) the promissory notes of the
Parent in the original aggregate principal amount of $40,000,000 issued pursuant
to the Note Agreement dated as of November 9, 1993, as amended prior to the
Closing Date, between the Parent and The Prudential Insurance Company of
America, and (b) the Series A promissory notes of the Parent in the original
aggregate principal amount of $25,000,000 issued pursuant to the Note Purchase
and Private Shelf Agreement dated as of November 30, 1998, as amended prior to
the Closing Date, between the Parent and The Prudential Insurance Company of
America.
"Prudential Shelf Notes" means, to the extent hereafter actually
issued, the shelf promissory notes of the Parent in the aggregate principal
amount of up to $40,000,000 authorized pursuant to the Note Purchase and Private
Shelf Agreement dated as of March 21, 2001, as amended prior to the Closing
Date, between the Parent and The Prudential Insurance Company of America.
"Qualifying Bank" means any legal entity which is recognized as a bank
by the banking laws in force in its country of incorporation and which exercises
as its main purpose a true banking activity, having bank personnel, premises,
communication devices of its own and the authority of decision-making.
"Rate" is defined in the definition of the term "Type" in this
Section.
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"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Related Parties" means, with respect to any specified Person, such
Person's Affiliates and the respective directors, officers, employees and agents
of such Person and such Person's Affiliates.
"Release" is defined in Section 6.12(a).
"Required Lenders" means, at any time, Lenders having Syndicated Loan
Exposure, L/C Exposure and unused Revolving Credit Commitments representing more
than 50% of the sum of all Syndicated Loan Exposure, L/C Exposure and unused
Revolving Credit Commitments at such time.
"Required Payment" is defined in Section 11.13.
"Revolving Credit Commitment" means, with respect to each Lender, the
commitment of such Lender to make Syndicated Loans, and to acquire
participations in Letters of Credit and Swingline Loans, hereunder as set forth
on Schedule I, or in the Assignment and Assumption Agreement pursuant to which
such Lender assumed its Revolving Credit Commitment, or pursuant to Section
2.16, as applicable, as the same may be (a) reduced from time to time pursuant
to Section 2.10, (b) reduced or increased from time to time pursuant to
assignments by or to such Lender pursuant to Section 12.5 and/or (c) increased
from time to time pursuant to Section 2.16.
"S&P" means Standard & Poor's Ratings Services.
"Statutory Reserves" means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve, liquid asset or similar
percentages (including any marginal, special, emergency or supplemental
reserves) expressed as a decimal established by any Governmental Authority of
the jurisdiction of such currency to which the entity which is the
Administrative Agent in such jurisdiction is subject for any category of
deposits or liabilities customarily used to fund loans in such currency or by
reference to which interest rates applicable to Loans in such currency are
determined. Such reserve, liquid asset or similar percentages shall, in the case
of dollars, include those imposed by the Board with respect to the Adjusted LIBO
Rate for Eurocurrency Liabilities (as defined in Regulation D of the Board).
LIBOR Loans shall be deemed to constitute Eurocurrency Liabilities and to be
subject to such reserve requirements without benefit of or credit from
proration, exemptions or offsets that may be available from time to time to any
Lender under such Regulation D or any other applicable law, rule or regulation.
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which at least a majority of the securities or other ownership
interests having ordinary voting
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power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by such Person. Unless the context otherwise requires, references in
this Agreement to a Subsidiary mean a Subsidiary of the Parent.
"Subsidiary Guarantee" means a guarantee executed and delivered by a
Subsidiary Guarantor in favor of the Lenders, the Swingline Bank, the Issuing
Bank and the Administrative Agent, in respect of the obligations of the Parent
under this Agreement and the other Facility Documents, in substantially the form
attached hereto as Exhibit D-1 (including the Initial Subsidiary Guarantees).
"Subsidiary Guarantors" means the Initial Subsidiary Guarantors and
each other Subsidiary that becomes a Subsidiary Guarantor pursuant to Section
7.9.
"Swingline Bank" means JPMCB.
"Swingline Loan Borrowing Request" means a request by the Parent for a
Swingline Loan in accordance with the terms of Section 2.4 in form satisfactory
to the Administrative Agent.
"Swingline Loan Note" is defined in Section 2.6(b).
"Swingline Loans" means the revolving loans made by the Swingline Bank
to the Parent pursuant to Section 2.4. Each Swingline Loan shall be an ABR Loan.
"Swiss francs" means the lawful money of Switzerland.
"Syndicated Loan Borrowing Request" means a request by the Parent (on
its own behalf or on behalf of the applicable Foreign Subsidiary Borrower) for
Syndicated Loans in accordance with the terms of Section 2.3 in form
satisfactory to the Administrative Agent.
"Syndicated Loan Exposure" means, with respect to any Lender at any
time, the aggregate principal amount at such time of all outstanding Syndicated
Loans of such Lender denominated in dollars plus the Dollar Equivalent at such
time of the aggregate principal amount at such time of all outstanding
Syndicated Loans of such Lender that are Foreign Currency Loans.
"Syndicated Loan Note" is defined in Section 2.6(a).
"Syndicated Loans" means the revolving loans made by the Lenders to
the Parent or a Foreign Subsidiary Borrower (as the case may be) pursuant to
Section 2.1. Each Syndicated Loan to the Parent shall be denominated in dollars
and shall be outstanding as a LIBOR Loan or an ABR Loan, and each Syndicated
Loan to a Foreign Subsidiary Borrower shall be outstanding as a Foreign Currency
Loan.
"Tangible Net Worth" of a Person means, at any date of determination
thereof, the excess of total assets of such Person over total liabilities of
such Person, excluding, however, (A) from the determination of total assets: (i)
all assets which would be classified as intangible assets under GAAP, including,
without limitation, goodwill (whether representing the excess of
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cost over book value of assets acquired or otherwise), patents, trademarks,
trade names, copyrights, franchises, and deferred charges (including, without
limitation, unamortized debt discount and expense, organization cost, and
research and development costs); and (ii) any write-up in the book value of any
asset since January 31, 2005; and (B) any foreign exchange translation
adjustment in the cumulative amount, and any adjustments to other comprehensive
income for derivative instruments and other hedging activities, that would (in
each case) be properly shown in the shareholders' equity section of such
Person's balance sheet prepared in accordance with GAAP.
"Taxes" means any and all present or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Total Revolving Credit Commitment" means, at any time, the aggregate
amount of the Revolving Credit Commitments, as in effect at such time.
"Type", when used in respect of any Syndicated Loan or Borrowing of
Syndicated Loans, shall refer to the Rate by reference to which interest on such
Loan or on the Loans comprising such Borrowing is determined and the currency in
which such Loan or the Loans comprising such Borrowing are denominated. For
purposes hereof, the term "Rate" means the Adjusted LIBO Rate or the Alternate
Base Rate, and the term "currency" means dollars, Euros or Swiss francs.
"Unfunded Benefit Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all benefit liabilities (within
the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair
market value of all Plan assets allocable to such benefit liabilities, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of the Parent or
any ERISA Affiliate under Title IV of ERISA.
Section 1.2. Accounting Terms. All accounting terms used herein and
not specifically defined herein shall be construed in accordance with GAAP, and
all financial data required to be delivered hereunder shall be prepared in
accordance with GAAP. If any change in GAAP, as in effect on the date hereof,
occurs after the date of this Agreement, compliance with all financial covenants
contained herein shall continue to be determined in accordance with GAAP as in
effect on the date hereof, except to the extent that the Parent and the Required
Lenders otherwise agree in writing.
Section 1.3. Terms Generally. The definitions of terms herein shall
apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to
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include such Person's successors and assigns, (c) the words "herein", "hereof"
and "hereunder", and words of similar import, shall be construed to refer to
this Agreement in its entirety and not to any particular provision hereof, (d)
all references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.
Section 1.4. Determination of Exchange Rates. Not later than 11:00
a.m., New York City time, on each date on which a calculation of the Exchange
Rate is to be made in connection with a Borrowing or a continuation or a
conversion of a Borrowing, the Administrative Agent shall (i) determine the
Exchange Rate as of such date and (ii) give prompt notice thereof to the Lenders
and the Parent (on behalf of itself and the Foreign Subsidiary Borrowers).
ARTICLE 2. THE LOANS.
Section 2.1. Syndicated Loans. Subject to the terms and conditions
hereof, each Lender agrees, severally and not jointly, to make, from time to
time during the Availability Period, (a) Syndicated Loans to the Parent
denominated in dollars, (b) Syndicated Loans to MWC denominated in a Foreign
Currency and (c) Syndicated Loans to Luxury denominated in a Foreign Currency,
in an aggregate principal amount at any time outstanding that will not result
in:
(i) the sum of (x) such Lender's Syndicated Loan Exposure, plus (y)
such Lender's L/C Exposure, plus (z) such Lender's Pro Rata Percentage of
all outstanding Swingline Loans exceeding such Lender's Revolving Credit
Commitment, or
(ii) the Dollar Equivalent of such Lender's outstanding Foreign
Currency Loans exceeding such Lender's Pro Rata Percentage of the Foreign
Currency Sublimit Dollar Amount; or
(iii) the Aggregate Credit Exposure exceeding the Total Revolving
Credit Commitment.
Within the limits set forth in the preceding sentence and subject to the terms,
conditions and limitations set forth herein, the Borrowers may borrow, pay or
prepay and reborrow Syndicated Loans.
Section 2.2. Making of Syndicated Loans. (a) Each Syndicated Loan
shall be made as part of a Borrowing consisting of Syndicated Loans made by the
Lenders ratably in accordance with their respective Revolving Credit
Commitments; provided, however, that the failure of any Lender to make any
Syndicated Loan shall not in itself relieve any other Lender of its obligation
to lend hereunder (it being understood, however, that no Lender shall be
responsible for the failure of any other Lender to make any Syndicated Loan
required to be made by such other Lender). The Syndicated Loans comprising any
Borrowing shall be in an
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aggregate principal amount that is an integral multiple of $250,000 and that is
not less than $1,000,000 (in the case of each ABR Borrowing) or $2,000,000 (in
the case of a LIBOR Borrowing denominated in dollars) or 3,000,000 units of a
particular Foreign Currency in the case of a LIBOR Borrowing denominated in such
Foreign Currency; provided, however, that an ABR Borrowing may be in an amount
that is equal to the remaining balance of the Total Revolving Credit Commitment.
Syndicated Loans that are made pursuant to any Foreign Currency Borrowing shall
be made in the particular Foreign Currency and in an aggregate principal amount
specified in the applicable Syndicated Loan Borrowing Request (and the dollar
amount thereof shall be determined by the Administrative Agent as of the day
that is three Business Days before the day such Loans are made using the current
Exchange Rate as of the day that is three Business Days before the day such
Loans are made, which determination shall be conclusive absent manifest error).
(b) Subject to Sections 4.1 and 4.3, each Borrowing of Syndicated
Loans denominated in dollars shall be comprised entirely of ABR Loans or LIBOR
Loans as the Parent may request pursuant to Section 2.3; and each Borrowing of
Syndicated Loans in a particular Foreign Currency shall be comprised entirely of
LIBOR Loans. Each Lender may at its option make any LIBOR Loan by causing any
domestic or foreign branch of such Lender or any Affiliate of such Lender which
is a Qualifying Bank to make such Loan; provided that any exercise of such
option shall not affect the obligation of the applicable Borrower to repay such
Loan in accordance with the terms of this Agreement. Borrowings of more than one
Type may be outstanding at the same time; provided, however, that no Borrower
shall be entitled to request any Borrowing that, if made, would result in more
than twelve LIBOR Borrowings outstanding hereunder at any time. Borrowings
having different Interest Periods (regardless of whether they commence on the
same date), or denominated in different currencies, or made by different
Borrowers, shall be considered separate Borrowings.
(c) Each Lender shall make each Syndicated Loan denominated in dollars
to be made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds by 12:00 noon, New York City time, on such date to
the account of the Administrative Agent most recently designated by it for such
purpose by notice to the Lenders. Each Lender shall make each Syndicated Loan
denominated in a Foreign Currency to be made by it hereunder on the proposed
date thereof by wire transfer of immediately available funds by 12:00 noon,
London time (or the time of such other city designated by the Administrative
Agent), on such date to the account of the Administrative Agent most recently
designated by it for such purpose by notice to the Lenders. The Administrative
Agent will make such Loans available to the applicable Borrower by promptly
crediting the amounts so received, in like funds, to an account of such Borrower
maintained with (i) the Administrative Agent in New York City in the case of
such Loans denominated in dollars or (ii) the Administrative Agent (or its
designee) in London (or such other city as the Administrative Agent may in its
reasonable judgment designate in respect of particular Foreign Currency Loans)
in the case of Foreign Currency Loans, in each case designated by the Parent (on
its own behalf or on behalf of the applicable Foreign Subsidiary Borrower) in
the applicable Syndicated Loan Borrowing Request; or if a Borrowing shall not
occur on such date because any condition precedent herein specified shall not
have been met, the Administrative Agent shall return the amounts so received to
the respective Lenders.
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(d) Notwithstanding any other provision of this Agreement, no Borrower
shall be entitled to request any Borrowing of Syndicated Loans that are LIBOR
Loans if the Interest Period requested with respect thereto would end after the
Maturity Date.
Section 2.3. Borrowing Procedure as to Syndicated Loans. In order to
request a Borrowing of Syndicated Loans, the Parent (on its own behalf or on
behalf of the applicable Foreign Subsidiary Borrower) shall hand deliver or
telecopy to the Administrative Agent a duly completed Syndicated Loan Borrowing
Request (a) in the case of a LIBOR Borrowing, not later than (i) 11:00 a.m., New
York City time (in the case of a Borrowing denominated in dollars) or (ii) 11:00
a.m., London time (in the case of a Borrowing denominated in a Foreign
Currency), three Business Days before a proposed Borrowing, and (b) in the case
of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business
Day before a proposed Borrowing. Notwithstanding the immediately preceding
sentence, the Administrative Agent agrees that it will (subject to the
Authorization Letter) accept from the Parent a Syndicated Loan Borrowing Request
by telephone by the applicable date and time specified in the immediately
preceding sentence, provided that the same is confirmed by the Parent to the
Administrative Agent in writing promptly (and in all events on the same day as
such telephone communication). Each Syndicated Loan Borrowing Request shall be
irrevocable, shall be signed by the Parent (on its own behalf or on behalf of
the applicable Foreign Subsidiary Borrower), shall refer to this Agreement and
shall specify the following information: (a) that such Request relates to
Syndicated Loans and not a Swingline Loan; (b) whether the Borrowing then being
requested is to be a LIBOR Borrowing or an ABR Borrowing; (c) the date of such
Borrowing (which shall be a Business Day); (d) the number and location of the
account to which funds are to be disbursed (which shall be an account that
complies with the requirements of Section 2.2(c)); (e) the amount of such
Borrowing (which shall be expressed in dollars, regardless of whether such
Borrowing is a Foreign Currency Borrowing); (f) whether such Borrowing is to be
a Borrowing denominated in dollars or in a Foreign Currency (and, if a Foreign
Currency, identifying the Foreign Currency); (g) if such Borrowing is to be a
LIBOR Borrowing, the Interest Period or Periods with respect thereto; and (h)
the identity of the applicable Borrower of such Borrowing; provided, however,
that notwithstanding any contrary specification in any Syndicated Loan Borrowing
Request, each requested Borrowing of Syndicated Loans shall comply with the
requirements set forth in Section 2.2. If no election (or an incomplete
election) as to the Type of Borrowing is specified in any such notice, then the
requested Borrowing shall be an ABR Borrowing if such Borrowing is denominated
in dollars. If no Interest Period with respect to any LIBOR Borrowing is
specified in any such notice, then the applicable Borrower shall be deemed to
have selected an Interest Period of one month's duration. The Administrative
Agent shall promptly advise the Lenders of any notice given pursuant to this
Section (and the contents thereof), and of each Lender's portion of the
requested Borrowing, and (in the case of a Foreign Currency Borrowing) of the
particular Foreign Currency in which it is to be denominated and the Foreign
Currency Equivalent of the specified dollar amount of such Borrowing and the
Exchange Rate utilized to determine such Foreign Currency Equivalent.
Section 2.4. Swingline Loans. (a) Subject to the terms and conditions
hereof, the Swingline Bank agrees to make Swingline Loans to the Parent, from
time to time during the Availability Period, in dollars, in an aggregate
principal amount at any time outstanding that will not result in:
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(i) the aggregate principal amount of Swingline Loans being in excess
of $10,000,000, or
(ii) the Aggregate Credit Exposure exceeding the Total Revolving
Credit Commitment;
provided, however, that the Swingline Bank shall not be required to make a
Swingline Loan to refinance an outstanding Swingline Loan. Within such limits,
and subject to the terms, conditions and limitations set forth herein, the
Parent may borrow, pay or prepay and reborrow Swingline Loans from the Swingline
Bank.
(b) The Swingline Loans shall be made in dollars and maintained as ABR
Loans.
(c) Each Borrowing of a Swingline Loan shall be in an amount not less
than $1,000,000 and shall be in integral multiples of $250,000.
(d) In order to request a Borrowing of a Swingline Loan, the Parent
shall hand deliver or telecopy to the Administrative Agent a duly completed
Swingline Loan Borrowing Request not later than 11:00 a.m., New York City time,
on the Business Day on which the proposed Borrowing is to be made.
Notwithstanding the immediately preceding sentence, the Administrative Agent
agrees that it will (subject to the Authorization Letter) accept from the Parent
a Swingline Loan Borrowing Request by telephone by the applicable date and time
specified in the immediately preceding sentence, provided that the same is
confirmed by the Parent to the Administrative Agent in writing promptly (and in
all events on the same day as such telephone communication). Each Swingline Loan
Borrowing Request shall be irrevocable, shall be signed on behalf of the Parent,
shall refer to this Agreement and shall state (i) that the requested Borrowing
is to be of a Swingline Loan, (ii) the amount of such Borrowing and (iii) the
date of such Borrowing (which is to be a Business Day). The Administrative Agent
shall promptly notify the Swingline Bank of such Swingline Loan Borrowing
Request. On the date so specified, the Swingline Bank shall make available the
amount of the Swingline Loan to be made by it on such date to the Administrative
Agent, in immediately available funds, at an account designated and maintained
by the Administrative Agent. The amount so received by the Administrative Agent
shall, subject to the terms and conditions of this Agreement, be made available
to the Parent by depositing the same in an account of the Parent maintained at
the Administrative Agent.
Section 2.5. Participations by All Lenders in Swingline Loans. The
Swingline Bank may by written notice given to the Administrative Agent not later
than 10:00 a.m., New York City time, on any Business Day require the Lenders to
acquire participations on such Business Day in all or a portion of the Swingline
Loans outstanding. Such notice shall specify the aggregate amount of Swingline
Loans in which the Lenders will participate. Promptly upon receipt of such
notice, the Administrative Agent will give notice thereof to each Lender,
specifying in such notice such Lender's Pro Rata Percentage of such Swingline
Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, upon
receipt of notice as provided above, to pay to the Administrative Agent, for the
account of the Swingline Bank, such Lender's Pro Rata Percentage of such
Swingline Loan or Loans. Each Lender acknowledges and agrees
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that its obligation to acquire participations in Swingline Loans pursuant to
this paragraph is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default
or an Event of Default or reduction or termination of the Revolving Credit
Commitments, and that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever. Each Lender shall comply with
its obligation under this paragraph by wire transfer of immediately available
funds to the Administrative Agent not later than 2:00 p.m., New York City time,
on the day it receives such notice (or, if such Lender shall have received such
notice later than 10:00 a.m. on any Business Day, then not later than 10:00 a.m.
on the following Business Day). If any Lender does not pay such amount to the
Administrative Agent on the date required by the immediately preceding sentence,
such Lender shall (independently of and in addition to the Parent's obligation
to pay interest on such amount) pay interest on such amount, for each day from
and including the date such amount is so required to be paid by such Lender to
but excluding the date such amount is paid, to the Administrative Agent for the
account of the Swingline Bank at (i) for the first such day, the Federal Funds
Effective Rate, and (ii) for each day thereafter, one percent per annum in
excess of the Federal Funds Effective Rate. The Administrative Agent shall
promptly pay to the Swingline Bank the amounts so received by it from the
Lenders. The Administrative Agent shall notify the Parent of any participations
in any Swingline Loan acquired pursuant to this paragraph. Any amounts received
by the Administrative Agent from the Parent (or other party on behalf of the
Parent) in respect of a Swingline Loan after receipt by the Swingline Bank of
the proceeds of a sale of participations therein shall be promptly remitted by
the Administrative Agent to the Lenders that shall have made their payments
pursuant to this paragraph and to the Swingline Bank, as their interests may
appear; provided that any such payment so remitted shall be repaid to the
Administrative Agent, if and to the extent such payment is required to be
refunded to the Parent for any reason. The purchase of participations in a
Swingline Loan pursuant to this paragraph shall not relieve the Parent of any
default in the payment thereof. Notwithstanding the foregoing, (x) a Lender
shall not have any obligation to purchase a participation in a Swingline Loan
pursuant to this paragraph if an Event of Default shall have occurred and be
continuing at the time such Swingline Loan was made and (aa) such Lender or any
other Lender shall have notified the Swingline Bank in writing, at least one
Business Day prior to the time such Swingline Loan was made, that such Event of
Default has occurred and that such notifying Lender will not acquire
participations in Swingline Loans made while such Event of Default is continuing
(unless the notifying Lender shall have withdrawn such notice), or (bb) the
Parent shall have notified the Swingline Bank in writing, at least one Business
Day prior to the time such Swingline Loan was made, that such Event of Default
has occurred; and (y) a Lender shall not have any obligation to purchase a
participation pursuant to this paragraph to the extent of its Pro Rata
Percentage of the aggregate amount of the excess (if any) of Swingline Loans
outstanding on the day of a Borrowing of any Swingline Loan over the limitation
in clause (i) or (ii) of Section 2.4(a), unless the Parent subsequently
eliminates such excess.
Section 2.6. Repayment of Loans. (a) Each Borrower hereby
unconditionally agrees to pay to the Administrative Agent for the account of
each Lender on the Maturity Date the then unpaid principal amount of each
Syndicated Loan of such Lender to such Borrower in the applicable currency of
such Syndicated Loan. Upon the request of any Lender at any time, such
obligation of each Borrower in favor of such Lender shall be evidenced by a
promissory note of such Borrower in favor of such Lender in substantially the
form of Exhibit A-1 hereto (the "Syndicated Loan Note" of such Lender as to the
applicable Borrower).
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(b) The Parent hereby unconditionally agrees to pay to the
Administrative Agent for the account of the Swingline Bank the unpaid principal
amount of each Swingline Loan on the earlier of the Maturity Date or the first
date after such Swingline Loan is made that is the 15th or last day of a
calendar month and is at least two Business Days after such Swingline Loan is
made; provided that on each day that a Syndicated Borrowing by the Parent is
made, the Parent shall pay all Swingline Loans then outstanding. Upon the
request of the Swingline Bank at any time, such obligation of the Parent in
favor of the Swingline Bank shall be evidenced by a single promissory note of
the Parent in favor of the Swingline Bank in the amount of $10,000,000 in
substantially the form of Exhibit A-2 hereto (the "Swingline Loan Note").
(c) Each Lender and the Swingline Bank shall maintain in accordance
with its usual practice an account or accounts evidencing the indebtedness of
each Borrower to such Lender or the Swingline Bank (as applicable) resulting
from each Loan made by such Lender or the Swingline Bank from time to time,
including the amounts of principal and interest payable and paid to such Lender
or the Swingline Bank from time to time under this Agreement.
(d) The Administrative Agent shall maintain accounts in which it will
record (i) the amount of each Loan made hereunder, the identity of the
applicable Borrower thereof, the Type thereof, the Interest Period applicable
thereto, the currency in which it is made, and whether such Loan is a Syndicated
Loan or a Swingline Loan, (ii) the amount of any principal or interest due and
payable or to become due and payable from each Borrower to each Lender or the
Swingline Bank hereunder and (iii) the amount of any sum received by the
Administrative Agent hereunder from any Borrower or any Guarantor and each
Lender's or the Swingline Bank's share thereof.
(e) The entries made in the accounts maintained pursuant to paragraphs
(c) and (d) above shall be prima facie evidence of the existence and amounts of
the obligations therein recorded; provided, however, that the failure of any
Lender or the Swingline Bank or the Administrative Agent to maintain such
accounts or any error therein shall not in any manner affect the obligations of
any Borrower to repay its Loans in accordance with their terms.
Section 2.7. Certain Fees. (a) The Parent agrees to pay to each
Lender, through the Administrative Agent, on the last day of March, June,
September and December in each year and on the date on which the Revolving
Credit Commitment of such Lender shall expire or be terminated as provided
herein, a commitment fee equal to the average daily unused amount of the
Revolving Credit Commitment of such Lender during the preceding quarter (or
other period commencing with the Closing Date or ending with the Maturity Date
or the date on which the Revolving Credit Commitment of such Lender shall expire
or be terminated) multiplied by the Applicable Rate for such quarter or other
period (appropriately pro-rated, if the Applicable Rate changes during such
quarter or other period). "Usage" of the Revolving Credit Commitment of a Lender
shall include the Syndicated Loans of such Lender and such Lender's Pro Rata
Percentage of the L/C Exposure, but shall exclude Swingline Loans.
(b) All commitment fees described in paragraph (a) of this Section
(the "Commitment Fees") shall be computed on the basis of the actual number of
days elapsed in a year of 360 days. The Commitment Fee due to each Lender shall
commence to accrue on the
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Closing Date and shall cease to accrue on the date on which the Revolving Credit
Commitment of such Lender shall expire or be terminated as provided herein.
(c) The Parent agrees to pay to the Administrative Agent, for its own
account, the fees with respect to the Administrative Agent's services hereunder
payable at the times and in the amounts separately agreed upon between the
Parent and the Administrative Agent (the "Administrative Agent Fees").
(d) The Commitment Fees and the Administrative Agent Fees shall be
paid on the dates due in dollars and in immediately available funds to the
Administrative Agent, for distribution, if and as appropriate, among the
Lenders. Once paid, none of such Fees shall be refundable under any
circumstances.
Section 2.8. Interest on Loans. (a) Subject to the provisions of
Section 2.9, the Loans comprising each ABR Borrowing (whether of Syndicated
Loans or of a Swingline Loan) shall bear interest at a rate per annum equal to
the Alternate Base Rate. Such interest shall be computed on the basis of the
actual number of days elapsed, over (if such interest is determined on the basis
of the Prime Rate) a year of 365 or 366 days, as the case may be, or (if such
interest is determined on the basis of the Federal Funds Effective Rate) a year
of 360 days.
(b) Subject to the provisions of Section 2.9, the Loans comprising
each LIBOR Borrowing of Syndicated Loans shall bear interest (computed on the
basis of the actual number of days elapsed over a year of 360 days) at a rate
per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for
such Borrowing plus the Applicable Rate in effect from time to time.
(c) Interest on each Loan shall be payable by the Borrower of such
Loan on the Interest Payment Dates applicable to such Loan except as otherwise
provided in this Agreement. The applicable Alternate Base Rate or applicable
Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as
the case may be, shall be determined by the Administrative Agent, and such
determination shall be conclusive absent manifest error.
Section 2.9. Default Interest. If any Borrower shall default in the
payment required to be made by it of the principal of or interest on any Loan or
any other amount becoming due under this Agreement (the "Defaulted Amount"), at
stated maturity, by acceleration or otherwise, or under any other Facility
Document, then each Borrower shall on demand from time to time pay interest, to
the extent permitted by law, on its Loans then or thereafter outstanding
(irrespective of whether or not such Loans are due) and on all other amounts
then or thereafter due from it under this Agreement, to but excluding the date
of actual payment (after as well as before judgment) of the Defaulted Amount, at
a rate (the "Default Rate") equal to (a) in the case of overdue principal of
each outstanding Loan, the rate otherwise applicable to such Loan pursuant to
Section 2.8 plus 2.0% per annum and (b) in all other cases, the Alternate Base
Rate plus 2.0% per annum.
Section 2.10. Termination and Reduction of Commitments. (a) The
Revolving Credit Commitments and the L/C Commitment shall automatically expire
and terminate on the Maturity Date.
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(b) Upon at least three Business Days' prior irrevocable written or
telecopy notice to the Administrative Agent, the Parent may at any time in whole
permanently terminate, or from time to time in part permanently reduce, the
Revolving Credit Commitments; provided, however, that (i) each partial reduction
of the Revolving Credit Commitments shall be an integral multiple of $1,000,000
and in a minimum amount of $5,000,000 and (ii) the Total Revolving Credit
Commitment shall not be reduced to an amount that is less than the Aggregate
Credit Exposure at the time (after giving effect to any concurrent prepayment of
Loans). If the Administrative Agent receives such a notice from the Parent, the
Administrative Agent shall promptly advise the Lenders thereof.
(c) If proceeds of the sale(s) of assets by the Parent or any of its
Subsidiaries are applied to the complete or partial retirement of the Prudential
Existing Notes or any Future Permitted Private Placement Debt (whether by
prepayment or reacquisition by the Parent or such Subsidiary or otherwise), each
Lender's Revolving Credit Commitment shall be reduced by the percentage
equivalent of a fraction whose numerator is the aggregate outstanding principal
amount of the Prudential Existing Notes and the Future Permitted Private
Placement Debt so retired and whose denominator is the aggregate outstanding
principal amount of the Prudential Existing Notes and the Future Permitted
Private Placement Debt immediately prior to such retirement. The Parent shall
give the Administrative Agent and the Lenders at least seven days' prior written
notice of any complete or partial retirement of the Prudential Existing Notes or
the Future Permitted Private Placement Debt out of proceeds of any such sale(s)
of assets.
(d) Each reduction in the Revolving Credit Commitments hereunder shall
be made ratably among the Lenders in accordance with their respective Revolving
Credit Commitments. The Parent shall pay to the Administrative Agent for the
account of the applicable Lenders, on the date of each termination or reduction,
the Commitment Fees on the amount of the Revolving Credit Commitments so
terminated or reduced accrued to but excluding the date of such termination or
reduction.
Section 2.11. Conversion and Continuation of Borrowings. (a) The
Parent (on its own behalf, in the case of a Borrowing denominated in dollars; or
on behalf of the applicable Foreign Subsidiary Borrower, in the case of a
Borrowing denominated in a Foreign Currency) or the applicable Foreign
Subsidiary Borrower (in the case of a Borrowing denominated in a Foreign
Currency) shall have the right at any time upon prior irrevocable notice to the
Administrative Agent (x) not later than 12:00 (noon), New York City time, one
Business Day prior to conversion, to convert any LIBOR Borrowing in dollars into
an ABR Borrowing, (y) not later than 11:00 a.m., New York City time (or 11:00
a.m., London time, if a Borrowing is being continued as or converted to a
Borrowing denominated in a Foreign Currency), three Business Days prior to
conversion or continuation, to convert any ABR Borrowing of Syndicated Loans
into a LIBOR Borrowing in dollars or to continue any LIBOR Borrowing as a LIBOR
Borrowing in the same currency for an additional Interest Period or Periods, and
(z) not later than 11:00 a.m., New York City time (or 11:00 a.m., London time,
if such Borrowing is denominated in a Foreign Currency), three Business Days
prior to conversion, to convert the Interest Period with respect to any LIBOR
Borrowing to another permissible Interest Period, subject in each case to the
following:
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(i) each conversion or continuation shall be made pro rata among the
Lenders in accordance with the respective principal amounts of the Loans
comprising the converted or continued Borrowing;
(ii) if less than all the outstanding principal amount of any
Borrowing shall be converted or continued, then each resulting Borrowing
shall satisfy the limitations specified in Sections 2.2(a) and 2.2(b)
regarding the principal amount and maximum number of Borrowings of the
relevant Type;
(iii) each conversion shall be effected by each Lender and the
Administrative Agent by recording for the account of such Lender the new
Loan of such Lender resulting from such conversion and reducing the Loan
(or portion thereof) of such Lender being converted by an equivalent
principal amount; accrued interest on any LIBOR Loan (or portion thereof)
being converted shall be paid by the applicable Borrower at the time of
conversion;
(iv) if any LIBOR Borrowing is converted at a time other than the end
of the Interest Period applicable thereto, the applicable Borrower shall
pay, upon demand, any amounts due the Lenders pursuant to Section 4.4;
(v) no ABR Borrowing may be converted into a LIBOR Borrowing during
the one-month period prior to the Maturity Date; and no LIBOR Borrowing
whose Interest Period ends during the one-month period prior to the
Maturity Date may be continued as a LIBOR Borrowing for an additional
Interest Period; and
(vi) any portion of a LIBOR Borrowing that cannot be continued as a
LIBOR Borrowing by reason of the immediately preceding clause shall at the
end of the Interest Period in effect for such Borrowing be automatically
converted into an ABR Borrowing (if such LIBOR Borrowing is denominated in
dollars) or repaid by the applicable Borrower (if such LIBOR Borrowing is
denominated in a Foreign Currency).
Each notice pursuant to this Section shall be irrevocable and shall
refer to this Agreement and specify (i) the identity of the Borrower of the
applicable Borrowing and the amount of the Borrowing that is requested to be
converted or continued, (ii) whether such Borrowing is to be converted to or
continued as a LIBOR Borrowing or an ABR Borrowing, (iii) if such notice
requests a conversion, the date of such conversion (which shall be a Business
Day), and (iv) if such Borrowing is to be converted to or continued as a LIBOR
Borrowing, the Interest Period with respect thereto. No such notice shall be
given more than seven Business Days prior to the effective date of the
applicable conversion or continuation. If no Interest Period is specified in any
such notice with respect to any conversion to or continuation as a LIBOR
Borrowing, the applicable Borrower shall be deemed to have selected an Interest
Period of one month's duration. The Administrative Agent shall advise the
Lenders of any notice given pursuant to this Section and of each Lender's
portion of any converted or continued Borrowing. If notice shall not have been
given in accordance with this Section to continue any LIBOR Borrowing of
Syndicated Loans into a subsequent Interest Period or (in the case of the
Borrowing denominated in dollars) to convert such Borrowing to an ABR Borrowing,
such
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Borrowing at the end of the Interest Period applicable thereto shall
automatically be converted to an ABR Borrowing (if such Borrowing is denominated
in dollars) or shall be repaid (if such Borrowing is denominated in a Foreign
Currency).
(b) Notwithstanding any contrary provision contained in this
Agreement, upon notice to the Parent from the Administrative Agent given at the
request of the Required Lenders, after the occurrence and during the continuance
of an Event of Default, (i) no outstanding Loan denominated in dollars may be
converted into, or continued as, a LIBOR Loan, and (ii) each LIBOR Borrowing
(unless such Borrowing is paid at or before the end of the Interest Period
applicable thereto) shall at the end of the Interest Period applicable thereto
(if such Borrowing is denominated in dollars) be converted to an ABR Borrowing
or (if such Borrowing is denominated in a Foreign Currency) be continued as a
LIBOR Borrowing with an Interest Period of one month's duration in the same
currency, subject to paragraph (c) of this Section.
(c) Notwithstanding anything to the contrary contained in this
Agreement, if an Event of Default described in paragraph (e) of Section 10.1
occurs (other than clause (i) thereof), or if the maturity of the Loans is
accelerated pursuant to Article 10, all Loans denominated in a Foreign Currency
shall on the date of such occurrence or acceleration be converted into, and all
amounts due thereunder shall accrue and be payable in, dollars at the current
Exchange Rate on such date, and on and after such date the interest rate
applicable thereto shall be the rate applicable to overdue ABR Loans.
(d) A Swingline Loan may not be converted into a LIBOR Loan.
Section 2.12. Optional Prepayment. (a) Each Borrower shall have the
right at any time and from time to time to prepay any Borrowing, in whole or in
part, upon at least three Business Days' (in the case of LIBOR Borrowings) or
one Business Day's (in the case of ABR Borrowings of Syndicated Loans) prior
written or telecopy notice to the Administrative Agent before 11:00 a.m., New
York City time (or 11:00 a.m., London time, if such Borrowing is denominated in
a Foreign Currency), or (in the case of a Borrowing of a Swingline Loan) upon
such notice to the Administrative Agent before 11:00 a.m., New York City time,
on the day of such prepayment; provided, however, that each partial prepayment
shall be in an amount that is an integral multiple of $500,000 (in the case of a
Borrowing denominated in dollars) and not less than $1,000,000 (or the Foreign
Currency Equivalent of $1,000,000, if such Borrowing is denominated in a Foreign
Currency). Notwithstanding the immediately preceding sentence, the
Administrative Agent agrees that it will (subject to the Authorization Letter)
accept from the Parent notice by telephone of prepayment by the dates and time
specified in the immediately preceding sentence, provided that the same is
confirmed by the Parent to the Administrative Agent in writing promptly (and in
all events on the same day as such telephone communication).
(b) Each notice of prepayment shall specify the identity of the
Borrower, the prepayment date and the principal amount of each Borrowing (or
portion thereof) to be prepaid, shall be irrevocable and shall commit the
applicable Borrower to prepay such Borrowing by the amount stated therein on the
date stated therein. All prepayments under this Section shall be subject to
Section 4.4 but otherwise without premium or penalty. All prepayments under this
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Section shall be accompanied by accrued interest on the principal amount being
prepaid to the date of payment.
Section 2.13. Mandatory Prepayments. (a) In the event of any
termination of all the Revolving Credit Commitments, each Borrower shall on the
date of such termination repay or prepay all its outstanding Borrowings of
Syndicated Loans and Swingline Loans and (if any L/C Exposure exists) the Parent
shall remit to the Administrative Agent for deposit in the Cash Collateral
Account cash in an amount equal to the L/C Exposure to secure the payment when
due of the reimbursement obligation of the Parent in respect of the aggregate
undrawn face amount of Letters of Credit.
(b) In the event of any partial reduction of the Revolving Credit
Commitments, then (x) at or prior to the effective date of such reduction, the
Administrative Agent shall notify the Parent and the Lenders of the Aggregate
Credit Exposure after giving effect thereto and (y) if the Aggregate Credit
Exposure would exceed the Total Revolving Credit Commitment after giving effect
to such reduction, then on the date of such reduction one or more Borrowers
shall prepay its or their respective Borrowings in an amount sufficient to
eliminate such excess, and (if the prepayment of Borrowings is not sufficient to
eliminate such excess) the Parent shall remit to the Administrative Agent for
deposit in the Cash Collateral Account cash in the remaining amount of such
excess to secure the payment when due of the reimbursement obligation of the
Parent in respect of the aggregate undrawn face amount of Letters of Credit.
Without limiting the generality of the reductions referred to in this paragraph
of the Revolving Credit Commitments, such reductions shall include reductions
referred to in Section 2.10(c).
(c) In addition, if as of the last Business Day of each calendar month
the Dollar Equivalent (computed by the Administrative Agent using the current
Exchange Rate as of such Business Day and promptly notified to the Lenders and
the Parent (on behalf of itself and the Foreign Subsidiary Borrowers)) of the
aggregate outstanding principal balance of Foreign Currency Loans shall exceed
110% of the Foreign Currency Sublimit Dollar Amount, one or more Foreign
Subsidiary Borrowers shall, within five Business Days after the Parent's receipt
of such notice, prepay Foreign Currency Loans in an amount sufficient so as to
reduce the Dollar Equivalent of the aggregate outstanding principal balance of
Foreign Currency Loans to an amount that is equal to or less than the Foreign
Currency Sublimit Dollar Amount.
(d) All prepayments of Borrowings under this Section shall be subject
to Section 4.4, but shall otherwise be without premium or penalty.
(e) Amounts to be applied pursuant to this Section to the prepayment
by the Parent of Swingline Loans and/or Syndicated Loans shall be applied, as
applicable, first to reduce outstanding Swingline Loans, then to reduce
outstanding Syndicated Loans that are ABR Loans. Any amounts remaining after
each such application shall be applied to prepay LIBOR Loans of the Parent
immediately and/or, if elected by the Parent so long as no Event of Default
exists, be deposited in the Cash Collateral Account; and any amount to be
remitted by the Parent pursuant to paragraph (a) or (b) of this Section in
respect of Letters of Credit shall be deposited in the Cash Collateral Account.
In the case of such an immediate prepayment of LIBOR Loans of the Parent, the
Parent shall (unless an Event of Default exists) be entitled to designate which
LIBOR Borrowings of the Parent are to be prepaid, by giving written notice of
such designation
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to the Administrative Agent at or before the remittance to the Administrative
Agent of the amounts to be applied in prepayment. Amounts to be applied pursuant
to this Section to the prepayment by a Foreign Subsidiary Borrower of Syndicated
Loans shall be applied to prepay LIBOR Loans of such Foreign Subsidiary Borrower
immediately and/or, if elected by the Parent (on behalf of such Foreign
Subsidiary Borrower) or such Foreign Subsidiary Borrower so long as no Event of
Default exists, be deposited in the Cash Collateral Account. In the case of such
an immediate prepayment by a Foreign Subsidiary Borrower of LIBOR Loans of such
Foreign Subsidiary Borrower, the Parent (on behalf of such Foreign Subsidiary
Borrower) or such Foreign Subsidiary Borrower shall (unless an Event of Default
exists) be entitled to designate which LIBOR Borrowings of such Foreign
Subsidiary Borrower are to be prepaid, by giving written notice of such
designation to the Administrative Agent at or before the remittance to the
Administrative Agent of the amounts to be applied in prepayment.
(f) The Administrative Agent shall apply any cash deposited in the
Cash Collateral Account (i) in respect of LIBOR Loans of the Parent, to prepay
LIBOR Loans of the Parent on the last day of their respective Interest Periods
(or, at the direction of the Parent, on any earlier date) until all such
outstanding Loans have been prepaid or until all the allocable cash on deposit
with respect to such Loans has been exhausted; (ii) in respect of L/C Exposure,
to pay as and when the same becomes due the reimbursement obligation of the
Parent in respect of Letters of Credit; and (iii) in respect of LIBOR Loans of a
Foreign Subsidiary Borrower, to prepay LIBOR Loans of such Foreign Subsidiary
Borrower on the last day of their respective Interest Periods (or, at the
direction of the Parent on behalf of such Foreign Subsidiary Borrower, on any
earlier date) until all such outstanding Loans of such Foreign Subsidiary
Borrower have been prepaid or until all the allocable cash on deposit with
respect to such Loans has been exhausted. If any Letter of Credit so secured by
such cash collateral expires without being drawn (or, if drawn, whose
reimbursement is paid by the Parent with funds other than such cash collateral),
the Administrative Agent shall remit to the Parent such cash collateral securing
such Letter of Credit promptly after a request by the Parent therefor, provided
that no Default or Event of Default exists. For purposes of this Agreement, the
term "Cash Collateral Account" shall mean an account established by the Parent
(on its own behalf or on behalf of the applicable Foreign Subsidiary Borrower)
with the Administrative Agent and over which the Administrative Agent shall have
exclusive dominion and control, including the exclusive right of withdrawal for
application in accordance with this paragraph. The Administrative Agent will, at
the request of the Parent (on its own behalf or on behalf of the applicable
Foreign Subsidiary Borrower), invest amounts on deposit in the Cash Collateral
Account in Permitted Investments; provided, however, that (i) the Administrative
Agent shall not be required to make any investment that, in its sole judgment,
would require or cause the Administrative Agent to be in, or would result in
any, violation of any law, statute, rule or regulation, and (ii) the
Administrative Agent shall have no obligation to invest amounts on deposit in
the Cash Collateral Account if an Event of Default shall have occurred and be
continuing, and (iii) as to amounts on deposit for the prepayment of LIBOR
Borrowings, such Permitted Investments shall mature prior to the last day of the
applicable Interest Periods of the LIBOR Borrowings to be prepaid. The Parent or
the applicable Foreign Subsidiary Borrower (as the case may be) shall indemnify
the Administrative Agent for any losses relating to the investments so that the
amount available to prepay LIBOR Borrowings of the Parent or the applicable
Foreign Subsidiary Borrower (as the case may be) on the last day of the
applicable Interest Period, and (in the case of the Parent) to pay L/C Exposure
as and when the same becomes due, is not less than the amount that would have
been available had no
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investments been made pursuant hereto. Other than any interest earned on such
investments, the Cash Collateral Account shall not bear interest. Interest or
profits, if any, on such investments shall be deposited in the Cash Collateral
Account and reinvested and disbursed as specified above. If the maturity of the
Loans has been accelerated pursuant to this Agreement, the Administrative Agent
may, in its sole discretion, apply all amounts on deposit in the Cash Collateral
Account to satisfy any of the amounts due under this Agreement or any other
Facility Document, except that amounts deposited in the Cash Collateral Account
by a Foreign Subsidiary Borrower in respect of LIBOR Loans of such Foreign
Subsidiary Borrower shall not be applied to the Loans or other amounts owing
under this Agreement by the other Foreign Subsidiary Borrower or to the Loans or
other amounts owing under this Agreement by the Parent. Each Borrower hereby
grants to the Administrative Agent, for the benefit of the Administrative Agent,
the Swingline Bank, the Issuing Bank and the Lenders, a security interest in the
Cash Collateral Account to secure all amounts due from such Borrower under this
Agreement and (in the case of the Parent) due from the Parent under the Parent
Guarantee.
Section 2.14. Payments. (a) Each Borrower shall make each payment
required to be made by it hereunder and under any Facility Document (whether of
principal, interest, fees, reimbursement of L/C Disbursements or otherwise) not
later than 12:00 noon, local time at the place of payment, on the date when due
in immediately available funds, without setoff, defense or counterclaim. Any
amounts received after such time on any date may, in the reasonable discretion
of the Administrative Agent, be deemed to have been received on the next
succeeding Business Day for purposes of calculating interest thereon. Each such
payment (other than Issuing Bank Fees, which shall be paid directly to the
Issuing Bank) shall be made to the Administrative Agent at its offices at 270
Park Avenue, New York, New York (or as otherwise instructed by the
Administrative Agent, in the case of amounts payable in a Foreign Currency) or
to such other address as the Administrative Agent may designate to the Parent in
writing. Each such payment shall be made in dollars, except that (subject to
Section 2.11(c)) (i) all principal of and interest on each Loan denominated in a
Foreign Currency shall be made in such Foreign Currency and (ii) any amounts
payable in respect of reimbursement of expenses or indemnification incurred in a
currency other than dollars shall be paid in such currency unless otherwise
agreed by the relevant parties. The Administrative Agent, or any Lender for
whose account any such payment is to be made, may (but shall not be obligated
to) debit the amount of any such payment which is not made by such time to any
ordinary deposit account of the Parent or the applicable Foreign Subsidiary
Borrower with the Administrative Agent or such Lender, as the case may be, and
any Lender so doing shall promptly notify the Administrative Agent; such Lender
or (if the Administrative Agent effects such debit) the Administrative Agent
shall promptly after effecting such debit give notice thereof to the Parent (on
behalf of itself or the applicable Foreign Subsidiary Borrower) as well,
provided, however, that a failure to give such notice to the Parent or the
applicable Foreign Subsidiary Borrower shall not affect the validity of such
debit or place such Lender or the Administrative Agent under any liability to
the Parent or the applicable Foreign Subsidiary Borrower. Each Borrower (or the
Parent on behalf of the applicable Foreign Subsidiary Borrower) shall, at the
time of making each payment under this Agreement or the Notes, specify to the
Administrative Agent the principal or other amount payable by the applicable
Borrower under this Agreement or the Notes to which such payment is to be
applied (and in the event that it fails to so specify, or if a Default or Event
of Default has occurred and is continuing), the Administrative Agent may apply
such payment as it may elect in its sole discretion (subject to Section 11.16)).
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(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Facility
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may, except as otherwise provided in the definition
of Interest Period, be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of interest
or Fees, if applicable.
Section 2.15. Purpose. Each Borrower shall use the proceeds of the
Loans borrowed by it for working capital and general corporate purposes. Such
proceeds shall not be used for the purpose, whether immediate, incidental or
ultimate, of buying or carrying "margin stock" within the meaning of Regulation
U in contravention of Regulation U.
Section 2.16. Increase of Total Revolving Credit Commitment. The
Parent may from time to time elect to increase the Total Revolving Credit
Commitment, provided that (i) each such increase is not less than $5,000,000 and
(ii) after giving effect to each increase that becomes effective, the aggregate
amount of increases of the Total Revolving Credit Commitment under this Section
does not exceed $50,000,000. The Parent may arrange for any such increase to be
provided by (a) one or more then-existing Lenders agreeing (in the sole
discretion of such Lenders) to an increase in their own respective Revolving
Credit Commitments (each Lender so agreeing to an increase in its Revolving
Credit Commitment being called herein an "Increasing Lender") and/or (b) one or
more banks, financial institutions or other entities becoming party to this
Agreement as Lenders and providing Revolving Credit Commitments (each such bank,
financial institution or other entity being called an "Augmenting Lender"),
provided that (x) each Augmenting Lender shall be subject to the approval of the
Parent, the Administrative Agent, the Issuing Bank and the Swingline Bank (such
approval, in each case, not to be unreasonably withheld) and (y) the Borrowers
and the relevant Increasing Lenders and Augmenting Lenders shall execute and
deliver all such documentation as the Administrative Agent shall reasonably
request (in form and substance reasonably satisfactory to the Administrative
Agent) solely to evidence (in the case of an Increasing Lender) the increased
Revolving Credit Commitment of such Increasing Lender or (in the case of an
Augmenting Lender) the status of the Augmenting Lender as a Lender and its new
Revolving Credit Commitment (which documentation, including an amendment to this
Agreement, shall not be required to be executed by any Lender other than such
Increasing Lender(s) and/or Augmenting Lender(s) as applicable). Increases in
Revolving Credit Commitments and new Revolving Credit Commitments shall become
effective on the date agreed by the Borrowers, the Administrative Agent and (as
applicable) the Increasing Lenders and Augmenting Lenders, and the
Administrative Agent shall notify the other Lenders thereof. Notwithstanding the
foregoing, no increase in the Total Revolving Credit Commitment shall become
effective pursuant to this Section unless (aa) on the proposed date of the
effectiveness of such increase, the conditions set forth in paragraphs (a) and
(b) of Section 5.2 are satisfied as of such date (and the Administrative Agent
shall have received a certificate to that effect dated such date executed by the
Borrowers) as if such increase were an extension of credit hereunder and (bb)
the Administrative Agent shall have received documents consistent with those
delivered on the Closing Date under paragraphs (d), (e) and (f) of Section 5.1
as to the corporate power and authority of each Borrower to borrow and otherwise
obtain extensions of credit hereunder after giving effect to such increase. Each
increase in the Total Revolving Credit Commitment that becomes effective shall
automatically effectuate an increase in the Foreign Currency Sublimit
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Dollar Amount by an amount equal to one-half of such increase in the Total
Revolving Credit Commitment. On the effective date of each such increase in the
Total Revolving Credit Commitment, each Borrower shall make such Borrowings and
repayments as shall, in the determination of the Administrative Agent, be
necessary to effect the reallocation of Pro Rata Percentages in outstanding
Syndicated Loans to each Borrower that is represented by the increase and/or
addition of Revolving Credit Commitments pursuant to this Section, and such
repayments shall be subject to indemnification by the applicable Borrower
pursuant to Section 4.4 if any repayment occurs on a day other than the last day
of the applicable Interest Period.
ARTICLE 3. LETTERS OF CREDIT
Section 3.1. Letters of Credit. Subject to the terms and conditions
hereof, the Parent may request, and the Issuing Bank shall issue, one or more
standby or commercial letters of credit (each a "Letter of Credit") denominated
in dollars, for the account of the Parent or any Foreign Subsidiary Borrower, in
form acceptable to the Issuing Bank, from time to time during the Availability
Period, provided that, after giving effect to the issuance thereof:
(a) the L/C Exposure shall not exceed $15,000,000, and
(b) the Aggregate Credit Exposure shall not exceed the Total Revolving
Credit Commitment.
Section 3.2 Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. In order to request the issuance of a Letter of Credit (or to amend,
renew or extend an existing Letter of Credit), the Parent (on its own behalf or
on behalf of the applicable Foreign Subsidiary Borrower) shall hand deliver or
telecopy to the Issuing Bank and the Administrative Agent (not later than two
Business Days in advance of the requested date of issuance, amendment, renewal
or extension) a notice requesting the issuance of a Letter of Credit (together
with, if requested by the Issuing Bank, a completed Letter of Credit application
in the Issuing Bank's then standard form), or identifying the Letter of Credit
to be amended, renewed or extended, the date of issuance, amendment, renewal or
extension, the date on which such Letter of Credit is to expire (which shall
comply with Section 3.3), the amount of such Letter of Credit, the name and
address of the beneficiary thereof, the account party thereof and such other
information as shall be necessary to prepare such Letter of Credit.
Notwithstanding the immediately preceding sentence, the Issuing Bank and the
Administrative Agent agree that they will (subject to the Authorization Letter)
accept from the Parent such notice by telephone by the date that is two Business
Days in advance as aforesaid, provided that such notice is confirmed in writing
promptly (and in all events on the same day as such telephone communication) and
that (in the case of a requested issuance of a Letter of Credit) such
confirmation is accompanied by such completed Letter of Credit application form.
In the event of any inconsistency between the terms and conditions of this
Agreement and the terms and conditions of any form of letter of credit
application or other agreement submitted by the Parent (on its own behalf or on
behalf of the applicable Foreign Subsidiary Borrower) to, or entered into by the
Parent with, the Issuing Bank relating to any Letter of Credit, the terms and
conditions of this Agreement shall control.
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Section 3.3. Minimum Amount; Expiration Date. (a) The stated amount of
each Letter of Credit shall not be less than $1,000,000 or such lesser amount as
is acceptable to the Issuing Bank.
(b) Each Letter of Credit shall expire by its terms not later than the
earlier of (A)(i) in the case of a commercial Letter of Credit, 180 days after
the issuance thereof (unless the Issuing Bank agrees to a more extended expiry
date) or (ii) in the case of a standby Letter of Credit, one year after the date
of issuance thereof (subject to an "evergreen" provision, if and to the extent
acceptable to the Issuing Bank); or (B) the day that is five Business Days
before the Maturity Date.
Section 3.4. Participations. By the issuance of each Letter of Credit
(or an amendment to a Letter of Credit increasing the amount thereof) and
without any further action on the part of the Issuing Bank or the Lenders, the
Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from
the Issuing Bank, a participation in such Letter of Credit equal to such
Lender's Pro Rata Percentage of the aggregate amount available to be drawn under
such Letter of Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Lender hereby absolutely
and unconditionally agrees to pay to the Administrative Agent, for the account
of the Issuing Bank, as provided in Section 3.5, such Lender's Pro Rata
Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed
by the applicable Borrower forthwith on the date due as provided in Section 3.5,
or of any reimbursement payment required to be refunded to such Borrower for any
reason. Each Lender acknowledges and agrees that its obligation to acquire
participations pursuant to this paragraph in respect of Letters of Credit is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of a Letter of Credit,
or the occurrence and continuance of a Default or an Event of Default, or a
reduction or termination of the Revolving Credit Commitments, and that each such
payment shall be made without any offset, abatement, withholding or reduction
whatsoever. The Administrative Agent and the Issuing Bank shall be entitled to
offset amounts received for the account of a Lender under this Agreement or any
of the other Facility Documents against unpaid amounts due from such Lender to
the Administrative Agent or the Issuing Bank hereunder.
Section 3.5. Reimbursement. If the Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, the applicable Borrower shall
reimburse such L/C Disbursement by paying to the Administrative Agent an amount
equal to such L/C Disbursement not later than 12:00 noon, New York City time, on
the date that such L/C Disbursement is made, if such Borrower shall have
received notice of such L/C Disbursement prior to 10:00 a.m., New York City
time, on such date, or, if such notice has not been received by such Borrower
prior to such time on such date, then not later than 12:00 noon, New York City
time, on (i) the Business Day that such Borrower receives such notice, if such
notice is received prior to 10:00 a.m., New York City time, on the day of
receipt, or (ii) the Business Day immediately following the day that such
Borrower receives such notice, if such notice is not received prior to such time
on the day of receipt; provided that, if such L/C Disbursement is not less than
$1,000,000, such Borrower may, subject to the conditions to borrowing set forth
herein, request in accordance with Section 2.3 or 2.4 that such payment be
financed with a Syndicated Borrowing of ABR Loans or a Swingline Loan in an
equivalent amount and, to the extent so financed, such Borrower's obligation to
make such payment shall be deemed reimbursed, discharged and replaced by the
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resulting Syndicated Borrowing of ABR Loans or such Swingline Loan. If such
Borrower fails to make such payment when due, the Administrative Agent shall
notify each Lender of the applicable L/C Disbursement, the payment then due from
such Borrower in respect thereof and such Lender's Pro Rata Percentage thereof.
Upon its receipt of such notice, each Lender shall pay to the Administrative
Agent such Lender's Pro Rata Percentage of the payment then due from such
Borrower, in immediately available funds not later than 2:00 p.m., New York City
time, on the day such Lender receives such notice (or if such Lender shall have
received such notice later than 12:00 noon, then not later than 10:00 a.m., New
York City time, on the next succeeding Business Day). If any Lender does not pay
to the Administrative Agent the amount of such Lender's Pro Rata Percentage of
the payment then due from the applicable Borrower as required by the immediately
preceding sentence, such Lender shall (independently of and in addition to such
Borrower's obligation to pay interest on such amount) pay interest on such
amount, for each day from and including the date such amount is so required to
be paid by such Lender to but excluding the date such amount is paid, to the
Administrative Agent for the account of the Issuing Bank at (i) for the first
such day, the Federal Funds Effective Rate, and (ii) for each day thereafter one
percent per annum in excess of the Federal Funds Effective Rate. The
Administrative Agent shall promptly pay to the Issuing Bank the amounts so
received by it from the Lenders. Promptly following receipt by the
Administrative Agent of any payment from the applicable Borrower pursuant to
this Section, the Administrative Agent shall distribute such payment to the
Issuing Bank or, to the extent that Lenders have made payments pursuant to this
paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing
Bank as their interests may appear. Any payment made by a Lender pursuant to
this paragraph to reimburse the Issuing Bank for any L/C Disbursement (other
than the funding of ABR Syndicated Loans or a Swingline Loan as contemplated
above) shall not constitute a Loan and shall not relieve the Parent of its
obligation to reimburse such L/C Disbursement. Notwithstanding anything in this
Article 3 to the contrary, the maximum amount that any Lender shall be required
to fund in respect of any L/C Disbursement, whether pursuant to Section 3.4 or
this Section or as an ABR Loan pursuant to this Section, shall not exceed such
Lender's Pro Rata Percentage of such L/C Disbursement.
Section 3.6. Obligations Absolute. Each Borrower's obligation to
reimburse L/C Disbursements as provided in Section 3.5 shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under any and all circumstances whatsoever,
and irrespective of:
(i) any lack of validity or enforceability of any Letter of Credit or
any Facility Document, or any term or provision therein;
(ii) any amendment or waiver of or any consent to departure from all
or any of the provisions of any Letter of Credit or any Facility Document;
(iii) the existence of any claim, setoff, defense or other right that
such Borrower, any other party guaranteeing, or otherwise obligated with,
such Borrower, any Subsidiary or other Affiliate thereof or any other
person may at any time have against the beneficiary under any Letter of
Credit, the Issuing Bank, the Administrative Agent or any Lender or any
other Person, whether in connection with this Agreement, any other Facility
Document or any other related or unrelated agreement or transaction;
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(iv) any draft or other document presented under a Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with the
terms of such Letter of Credit, provided that such draft and other
documents substantially comply with the terms of such Letter of Credit; and
(vi) any other act or omission to act or delay of any kind of the
Issuing Bank, the Lenders, the Administrative Agent or any other Person or
any other event or circumstances whatsoever, whether or not similar to any
of the foregoing, that might, but for the provisions of this Section,
constitute a legal or equitable discharge of such Borrower's obligations
hereunder.
Without limiting the generality of the foregoing, it is expressly
understood and agreed that the absolute and unconditional obligation of each
Borrower hereunder to reimburse L/C Disbursements will not be excused by the
gross negligence or willful misconduct of the Issuing Bank. However, the
foregoing shall not be construed to excuse the Issuing Bank from liability to
each Borrower to the extent of any direct damages (as opposed to consequential
damages, claims in respect of which are hereby waived by such Borrower to the
extent permitted by applicable law) suffered by such Borrower that are caused by
the Issuing Bank's gross negligence or willful misconduct in determining whether
drafts and other documents presented under a Letter of Credit comply with the
terms thereof; it is understood that the Issuing Bank may accept documents that
appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary and, in
making any payment under any Letter of Credit (i) the Issuing Bank's exclusive
reliance on the documents presented to it under such Letter of Credit as to any
and all matters set forth therein, including reliance on the amount of any draft
presented under such Letter of Credit, whether or not the amount due to the
beneficiary thereunder equals the amount of such draft and whether or not any
document presented pursuant to such Letter of Credit proves to be insufficient
in any respect, if such document on its face appears to be in order, and whether
or not any other statement or any other document presented pursuant to such
Letter of Credit proves to be forged or invalid or any statement therein proves
to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance
in any immaterial respect of the documents presented under such Letter of Credit
with the terms thereof shall, in each case, be deemed not to constitute willful
misconduct or gross negligence of the Issuing Bank.
Section 3.7. Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Issuing Bank shall as promptly
as possible give telephonic notification, confirmed by telecopy, to the
Administrative Agent and the applicable Borrower of such demand for payment and
whether the Issuing Bank has made or will make an L/C Disbursement thereunder;
provided that any failure to give or delay in giving such notice shall not
relieve such Borrower of its obligation to reimburse the Issuing Bank and the
Lenders with respect to any such L/C Disbursement. The Administrative Agent
shall promptly give each Lender notice thereof.
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Section 3.8. Interim Interest. If the Issuing Bank shall make any L/C
Disbursement in respect of a Letter of Credit, then, unless the applicable
Borrower shall reimburse such L/C Disbursement in full on the date on which such
L/C Disbursement is made, the unpaid amount thereof shall bear interest, for
each day from and including the date of such L/C Disbursement to but excluding
the date that such Borrower reimburses such L/C Disbursement, at the rate per
annum that would apply to such amount if such amount were an ABR Loan. Interest
accrued pursuant to this Section shall be for the account of the Issuing Bank,
except that interest accrued on and after the date of payment by any Lender
pursuant to Section 3.4 or 3.5 to reimburse the Issuing Bank shall be for the
account of such Lender to the extent of such payment.
Section 3.9. Letter of Credit Fees. Each Borrower agrees to pay (i) to
each Lender, through the Administrative Agent, on the last day of March, June,
September and December of each year and on the date on which the Revolving
Credit Commitment of such Lender shall be terminated as provided herein, a fee
(an "L/C Participation Fee") calculated on such Lender's Pro Rata Percentage of
the average daily aggregate L/C Exposure (excluding the portion thereof
attributable to unreimbursed L/C Disbursements) during the preceding quarter (or
shorter period commencing with the date hereof, or ending with the Maturity Date
or the date on which all Letters of Credit have been canceled or have expired
and the Revolving Credit Commitments of all Lenders have been terminated) at a
rate equal to (in the case of standby Letters of Credit) the same Applicable
Rate used to determine the interest rate applicable to LIBOR Loans and (in the
case of commercial Letters of Credit) 0.20% per annum, and (ii) to the Issuing
Bank with respect to each Letter of Credit, a facing fee at a rate equal to
0.0625% per annum in respect of each standby Letter of Credit (payable at the
same times that the L/C Participation Fee is payable) plus, in the case of any
Letter of Credit, the standard issuance and drawing fees specified from time to
time by the Issuing Bank (the "Issuing Bank Fees"). All L/C Participation Fees
and Issuing Bank Fees shall be computed on the basis of the actual number of
days elapsed in a year of 360 days. The L/C Participation Fee and the Issuing
Bank Fees shall be paid on the dates due in immediately available funds, (in the
case of the L/C Participation Fee) to the Administrative Agent for distribution
as appropriate among the Lenders and (in the case of the Issuing Bank Fees)
directly to the Issuing Bank.
Section 3.10. Resignation of the Issuing Bank. The Issuing Bank may
resign at any time by giving 180 days' prior written notice to the
Administrative Agent, the Lenders and the Parent. The Parent shall have the
right to appoint any Lender as successor Issuing Bank, subject to the consent of
the Required Lenders including the appointed Lender (which consent of the
appointed Lender shall be in such Lender's sole discretion, and which consent of
the other Required Lenders shall not be unreasonably withheld). Upon the
acceptance of any appointment as the Issuing Bank hereunder by a Lender that
shall agree to serve as successor Issuing Bank, such successor shall succeed to
and become vested with all the interests, rights and obligations of the retiring
Issuing Bank (except to the extent provided for in the last sentence of this
Section) and the retiring Issuing Bank shall be discharged from its obligations
to issue additional Letters of Credit hereunder. At the time such resignation
shall become effective, each Borrower shall pay to such retiring Issuing Bank
all accrued and unpaid Issuing Bank Fees on the Letters of Credit issued for
such Borrower's account. The acceptance of any appointment as the Issuing Bank
hereunder by a successor Lender shall be evidenced by an agreement entered into
by such successor, in a form satisfactory to the Parent and the Administrative
Agent, and from and after
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the effective date of such agreement (i) such successor Lender shall have all
the rights and obligations of the previous Issuing Bank under this Agreement and
the other Loan Documents and (ii) references herein and in the other Loan
Documents to the term "Issuing Bank" shall be deemed to refer to such successor
or to any previous Issuing Bank, or to such successor and all previous Issuing
Banks, as the context shall require. After the resignation of the Issuing Bank
hereunder, the retiring Issuing Bank shall remain a party hereto and shall
continue to have all the rights and obligations of an Issuing Bank under this
Agreement and the other Facility Documents with respect to Letters of Credit
issued by it prior to such resignation, but shall not be required to issue
additional Letters of Credit.
Section 3.11. Not Fiduciary. In no event shall the Issuing Bank be
deemed a fiduciary of the Lenders with respect to Letters of Credit. As between
the Issuing Bank (on the one hand) and the Lenders (on the other hand), the
Issuing Bank shall have in connection with the Letters of Credit all the rights
and protections that are afforded to the Administrative Agent in Article 11.
Section 3.12. Purpose. No Letter of Credit shall be used by any
Borrower for the purpose, whether immediate, incidental or ultimate, of buying
or carrying "margin stock" within the meaning of Regulation U in contravention
of Regulation U.
ARTICLE 4. YIELD PROTECTION; ILLEGALITY; ETC.
Section 4.1. Alternate Rate of Interest. If prior to the commencement
of any Interest Period for a LIBOR Borrowing denominated in any currency:
(a) the Administrative Agent determines (which determination, if made
on a reasonable and nondiscriminatory basis, shall be conclusive absent
manifest error) that adequate and reasonable means do not exist for
ascertaining the Adjusted LIBO Rate for such Borrowing for such Interest
Period; or
(b) the Administrative Agent is advised by the Required Lenders that
the Adjusted LIBO Rate for such Interest Period will not adequately and
fairly reflect the cost to such Lenders of making or maintaining their
Loans included in such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Parent (on behalf
of itself and the Foreign Subsidiary Borrowers, if applicable) and the Lenders
by telephone or telecopy as promptly as practicable thereafter and, until the
Administrative Agent notifies the Parent (on behalf of itself and the Foreign
Subsidiary Borrowers, if applicable) and the Lenders that the circumstances
giving rise to such notice no longer exist, (i) any request to convert any
Borrowing to, or to continue any Borrowing as, a LIBOR Borrowing in such
currency shall be ineffective, and any LIBOR Borrowing denominated in such
currency shall be repaid on the last day of the then current Interest Period
with respect thereto or (at the option of the Parent, in the case of a LIBOR
Borrowing denominated in dollars) shall be converted to an ABR Borrowing in
accordance with this Agreement on the last day of the then current Interest
Period with respect thereto, (ii) if any Syndicated Loan Borrowing Request
requests a LIBOR Borrowing denominated in such currency, (x) if such currency is
dollars, such Borrowing shall be made as
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an ABR Borrowing, and (y) if such currency is not dollars, such Borrowing
Request shall be ineffective.
Section 4.2. Reserve Requirement; Change in Circumstances. (a)
Notwithstanding any other provision of this Agreement, if after the date of this
Agreement any change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to any Lender or the
Swingline Bank or the Issuing Bank of the principal of or interest on any LIBOR
Loan made by such Lender or any Fees or other amounts payable hereunder (other
than changes in respect of taxes imposed on the overall net income of such
Lender or the Swingline Bank or the Issuing Bank by the jurisdiction in which
such Lender or the Swingline Bank or the Issuing Bank has its principal office
or by any political subdivision or taxing authority therein), or shall impose,
modify or deem applicable any reserve, special deposit or similar requirement
against assets of, deposits with or for the account of or credit extended by any
Lender or the Swingline Bank or the Issuing Bank (except only such reserve
requirement which is reflected in the Adjusted LIBO Rate) or shall impose on
such Lender or the Swingline Bank or the Issuing Bank or the London interbank
market (or other relevant interbank market) any other condition affecting this
Agreement or LIBOR Loans made by such Lender or any Letter of Credit or
participation therein, and the result of any of the foregoing shall be to
increase the cost to such Lender or the Swingline Bank or the Issuing Bank of
making or maintaining any LIBOR Loan or of issuing or maintaining any Letter of
Credit or purchasing or maintaining a participation therein or to reduce the
amount of any sum received or receivable by such Lender or the Swingline Bank or
the Issuing Bank hereunder in respect thereof (whether of principal, interest or
otherwise) by an amount deemed by such Lender or the Swingline Bank or the
Issuing Bank to be material, then the Parent or the applicable Foreign
Subsidiary Borrower shall pay to such Lender or the Swingline Bank or the
Issuing Bank, as the case may be, upon demand such additional amount or amounts
as will compensate such Lender or the Swingline Bank or the Issuing Bank, as the
case may be, for such additional costs incurred or reduction suffered. There
shall be no duplication of payments in respect of Indemnified Taxes and Other
Taxes required to be made by this Section and by Section 4.5.
(b) If any Lender or the Swingline Bank or the Issuing Bank shall have
determined that the adoption after the date hereof of any law, rule, regulation,
agreement or guideline regarding capital adequacy or any change after the date
hereof in any law, rule, regulation, agreement or guideline regarding capital
adequacy (whether or not such law, rule, regulation, agreement or guideline has
been adopted) or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or compliance by any Lender (or any lending office of such Lender) or
the Swingline Bank or the Issuing Bank or any Lender's or the Swingline Bank's
or the Issuing Bank's holding company with any request or directive regarding
capital adequacy (whether or not having the force of law) of any Governmental
Authority has or would have the effect of reducing the rate of return on such
Lender's or the Swingline Bank's or the Issuing Bank's capital or on the capital
of such Lender's or the Swingline Bank's or the Issuing Bank's holding company,
if any, as a consequence of this Agreement or the Loans made or participation in
Letters of Credit purchased by such Lender or by the Swingline Bank pursuant
hereto or the Letters of Credit issued by the Issuing Bank pursuant hereto to a
level below that which such Lender or the Swingline Bank or
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the Issuing Bank or such Lender's or the Swingline Bank's or the Issuing Bank's
holding company could have achieved but for such applicability, adoption, change
or compliance (taking into consideration such Lender's or the Swingline Bank's
or the Issuing Bank's policies and the policies of such Lender's or the
Swingline Bank's or the Issuing Bank's holding company with respect to capital
adequacy) by an amount deemed by such Lender or the Swingline Bank or the
Issuing Bank to be material, then from time to time the Parent or the applicable
Foreign Subsidiary Borrower shall pay to such Lender or the Swingline Bank or
the Issuing Bank, as the case may be, such additional amount or amounts as will
compensate such Lender or the Swingline Bank or the Issuing Bank or such
Lender's or the Swingline Bank's or the Issuing Bank's holding company for any
such reduction suffered.
(c) A certificate of a Lender or the Swingline Bank or the Issuing
Bank setting forth the amount or amounts necessary to compensate such Lender or
the Swingline Bank or the Issuing Bank or its holding company, as applicable, as
specified in paragraph (a) or (b) above shall be delivered to the Parent and
shall (if the determination of such amount or amounts is made on a reasonable
and nondiscriminatory basis) be conclusive absent manifest error. The Parent or
the applicable Foreign Subsidiary Borrower shall pay such Lender or the
Swingline Bank or the Issuing Bank the amount shown as due on any such
certificate delivered by it within 10 days after receipt by the Parent of the
same.
(d) Failure or delay on the part of any Lender or the Swingline Bank
or the Issuing Bank to demand compensation for any increased costs or reduction
in amounts received or receivable or reduction in return on capital shall not
constitute a waiver of such Lender's or the Swingline Bank or the Issuing Bank's
right to demand such compensation; provided, however, that if any Lender or the
Swingline Bank or the Issuing Bank demands such compensation in respect of a
period prior to the date on which written demand therefor is given to the
Parent, then the obligation of the Parent or the applicable Foreign Subsidiary
Borrower to pay such compensation in respect of such period shall be limited to
the three months prior to the giving of such written demand, plus (if such
demand results from a retroactive change in the aforesaid law, regulation,
interpretation, administration, or guideline) the period of such retroactivity;
however, such limitation shall not apply in respect of the period from and after
the giving of such written demand. The protection of this Section shall be
available to each Lender and the Swingline Bank or the Issuing Bank regardless
of any possible contention of the invalidity or inapplicability of the law,
rule, regulation, agreement, guideline or other change or condition that shall
have occurred or been imposed.
Section 4.3. Change in Legality. (a) Notwithstanding any other
provision of this Agreement, if, after the date hereof, any change in any law or
regulation or in the interpretation thereof by any Governmental Authority
charged with the administration or interpretation thereof shall make it unlawful
for any Lender to make or maintain any LIBOR Loan denominated in a particular
currency or to give effect to its obligations as contemplated hereby with
respect to any LIBOR Loan denominated in a particular currency, then, by written
notice to the Parent (on behalf of itself or a Foreign Subsidiary Borrower, as
applicable) and to the Administrative Agent:
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(x) such Lender may declare that LIBOR Loans in such currency will not
thereafter (for the duration of such unlawfulness) be made by such Lender
hereunder (or be continued for additional Interest Periods) and that Loans
of any other Type will not thereafter (for such duration) be converted into
LIBOR Loans denominated in such currency; whereupon (if such currency is
dollars) any request for a LIBOR Borrowing in dollars (or to convert an ABR
Borrowing into a LIBOR Borrowing in dollars or to continue a LIBOR
Borrowing in dollars for an additional Interest Period) shall as to such
Lender only be deemed a request for an ABR Loan unless such declaration is
subsequently withdrawn; and
(y) such Lender may require that all outstanding LIBOR Loans made by
it in such currency be converted to ABR Loans (if such currency is dollars)
or be repaid by the applicable Foreign Subsidiary Borrower (if such
currency is a Foreign Currency), in which event all such LIBOR Loans shall
be so converted or repaid (as applicable) as of the effective date of such
notice as provided in paragraph (b) of this Section.
In the case of any conversion pursuant to the exercise by any Lender of its
rights under clause (x) or (y) above, all payments and prepayments of principal
that would otherwise have been applied to repay the LIBOR Loans in dollars that
would have been made by such Lender or the converted LIBOR Loans in dollars of
such Lender shall instead be applied to repay the ABR Loans made by such Lender
in lieu of, or resulting from the conversion of, such LIBOR Loans in dollars.
(b) For purposes of this Section, a notice to the Parent by any Lender
shall be effective as to each LIBOR Loan made by such Lender, if lawful, on the
last day of the Interest Period then applicable to such LIBOR Loan; in all other
cases such notice shall be effective on the date of receipt by the Parent.
Section 4.4. Indemnity. As to the Loans of each Borrower, such
Borrower shall indemnify each Lender against any loss or expense that such
Lender may sustain or incur as a consequence of (a) any event, other than a
default by such Lender in the performance of its obligations hereunder, which
results in (i) such Lender receiving or being deemed to receive any amount on
account of the principal of any LIBOR Loan prior to the end of the Interest
Period in effect therefor, (ii) the conversion of any LIBOR Loan to an ABR Loan,
or the conversion of the Interest Period with respect to any LIBOR Loan, in each
case other than on the last day of the Interest Period in effect therefor, or
(iii) any LIBOR Loan to be made by such Lender (including any LIBOR Loan to be
made pursuant to a conversion or continuation under Section 2.11) not being made
after notice of such Loan shall have been given by the Parent or applicable
Foreign Subsidiary Borrower hereunder (any of the events referred to in this
clause (a) being called a "Breakage Event") or (b) any default in the making of
payment or prepayment required to be made hereunder. In the case of any Breakage
Event, such loss shall include an amount equal to the excess, as reasonably
determined by such Lender, of (i) its cost of obtaining funds for the LIBOR Loan
that is the subject of such Breakage Event for the period from the date of such
Breakage Event to the last day of the Interest Period in effect (or that would
have been in effect) for such Loan over (ii) the amount of interest likely to be
realized by such Lender in redeploying the funds released or not utilized by
reason of such Breakage Event for such period. A certificate of any Lender
setting forth any amount or amounts which such Lender is entitled to receive
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pursuant to this Section shall be delivered to the Parent (on behalf of itself
or the applicable Foreign Subsidiary Borrower) and shall (if the determination
of such amount or amounts is made on a reasonable and nondiscriminatory basis)
be conclusive absent manifest error.
Section 4.5. Taxes. (a) Any and all payments by or on account of any
obligation of any Borrower hereunder shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes except as otherwise required
by applicable law; provided that, if any Borrower shall be required by
applicable law to deduct any Indemnified Taxes or Other Taxes from such
payments, then (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) the Administrative Agent, each Lender, the
Swingline Bank or the Issuing Bank (as the case may be) receives an amount equal
to the sum it would have received had no such deductions been made, (ii) the
applicable Borrower shall make such deductions, and (iii) the applicable
Borrower shall pay the full amount deducted to the relevant Governmental
Authority in accordance with applicable law.
(b) In addition, each Borrower shall pay any Other Taxes payable by it
to the relevant Governmental Authority in accordance with applicable law.
(c) Each Borrower shall indemnify the Administrative Agent, each
Lender, the Swingline Bank and the Issuing Bank, within 10 days after written
demand therefor, for the full amount of any Indemnified Taxes or Other Taxes
paid by the Administrative Agent, such Lender, the Swingline Bank or the Issuing
Bank, as the case may be, on or with respect to any payment by or on account of
any obligation of such Borrower hereunder (including Indemnified Taxes or Other
Taxes imposed or asserted on or attributable to amounts payable under this
Section) and any penalties, interest and reasonable expenses arising therefrom
or with respect thereto, whether or not such Indemnified Taxes or Other Taxes
were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate as to the amount of such payment or liability delivered
to the Parent (on behalf of itself or the applicable Foreign Subsidiary
Borrower) by a Lender or the Swingline Bank or the Issuing Bank, or by the
Administrative Agent on its own behalf or on behalf of a Lender or the Swingline
Bank or the Issuing Bank, shall (if there is a reasonable basis for such payment
or liability, and if the determination of the amount thereof is made on a
reasonable basis) be conclusive absent manifest error.
(d) After payment by a Borrower to the demanding party of the amount
demanded pursuant to paragraph (c) of this Section, such Borrower shall be
entitled to commence a legal proceeding against the applicable Governmental
Authority to recover the Indemnified Taxes or Other Taxes so paid by the
demanding party; and (after such payment by such Borrower to the demanding
party) the demanding party shall at the sole expense of such Borrower cooperate
with such Borrower as such Borrower may reasonably request with respect to such
legal proceeding, provided that the demanding party may do so without material
risk of liability.
(e) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes by a Borrower to a Governmental Authority, such Borrower shall
deliver to the
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Administrative Agent written evidence thereof reasonably satisfactory to the
Administrative Agent.
(f) If the Administrative Agent or any Lender determines, in its sole
discretion, or becomes aware that it has received, or is entitled to, a refund
of any Taxes or Other Taxes as to which it has been indemnified by the
applicable Borrower or with respect to which such Borrower has paid additional
amounts pursuant to this Section, the Administrative Agent or such Lender, as
the case may be, shall pay over to such Borrower (i) such refund or (ii) if the
Administrative Agent or such Lender, as the case may be, has decided to not make
a claim for a refund to the relevant Governmental Authority, the amount of any
refund the Administrative Agent or such Lender, as the case may be, would have
been entitled, in its reasonable judgment, to receive had it made such claim
(but, in each case, only to the extent of indemnity payments made, or additional
amounts paid, by such Borrower under this Section with respect to the Taxes or
Other Taxes giving rise to such refund), net of all reasonable and documented
out-of-pocket expenses of the Administrative Agent or such Lender and without
interest (other than any interest paid by the relevant Governmental Authority
with respect to such refund); provided that each Borrower, upon the request of
the Administrative Agent or such Lender, agrees to repay the amount paid over to
such Borrower (plus any penalties, interest or other charges imposed by the
relevant Governmental Authority) to the Administrative Agent or such Lender in
the event the Administrative Agent or such Lender is required to repay such
refund to such Governmental Authority.
(g) This Section shall not be construed to require the Administrative
Agent or any Lender to make available its tax returns (or any other information
relating to its taxes which it deems confidential) to any Borrower or any other
Person.
Section 4.6. Duty to Mitigate. If (i) any Lender or the Swingline Bank
or the Issuing Bank shall request compensation under Section 4.2, (ii) any
Lender or the Swingline Bank or the Issuing Bank delivers a notice described in
Section 4.3 or (iii) a Borrower is required to pay any additional amount to any
Lender or the Swingline Bank or the Issuing Bank or any Governmental Authority
on account of any Lender or the Swingline Bank or the Issuing Bank, pursuant to
Section 4.5, then such Lender or the Swingline Bank or the Issuing Bank shall
use reasonable efforts (which shall not require such Lender or the Swingline
Bank or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or
expense or otherwise take any action inconsistent with its internal policies or
legal or regulatory restrictions or suffer any disadvantage or burden deemed by
it to be significant) (x) to file any certificate or document reasonably
requested in writing by the Parent or (y) to assign its rights and delegate and
transfer its obligations hereunder to another of its offices, branches or
affiliates, if such filing or assignment would reduce its claims for
compensation under Section 4.2 or enable it to withdraw its notice pursuant to
Section 4.3 or would reduce amounts payable pursuant to Section 4.5, as the case
may be, in the future. The Parent hereby agrees to pay all reasonable and
documented costs and expenses incurred by any Lender or the Swingline Bank or
the Issuing Bank in connection with any such filing or assignment, delegation
and transfer.
Section 4.7. Replacement of Lenders. If any Lender or the Swingline
Bank or the Issuing Bank requests compensation under Section 4.2, or if any
Lender or the Swingline Bank or the Issuing Bank delivers a notice described in
Section 4.3, or if a Borrower is required
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to pay any additional amount to any Lender, the Swingline Bank, the Issuing Bank
or any Governmental Authority for the account of any Lender or the Swingline
Bank or the Issuing Bank pursuant to Section 4.5, or if any Lender defaults in
its obligation to fund Loans hereunder, then the Parent may, at its sole expense
and effort, upon notice to such Lender or the Swingline Bank or the Issuing
Bank, as the case may be, and the Administrative Agent, require such Lender or
the Swingline Bank or the Issuing Bank, as the case may be, to assign and
delegate, without recourse (in accordance with and subject to the restrictions
contained in Section 12.5, which restrictions shall apply, for purposes of this
Section, with reference to the Swingline Bank and the Issuing Bank, as well as
with reference to a Lender) all its interests, rights and obligations under this
Agreement to an assignee that shall assume such obligations (which assignee may
be another Lender, if a Lender accepts such assignment); provided that (i) if
the assignee is not a Lender, the Parent shall have received the prior written
consent of the Administrative Agent (and the Swingline Bank and the Issuing
Bank), which consent shall not be unreasonably withheld; and (ii) such Lender or
the Swingline Bank or the Issuing Bank shall have received payment of an amount
equal to the outstanding principal of its Loans and unreimbursed L/C
Disbursements and funded participations in Swingline Loans, accrued interest
thereon and accrued fees and other amounts (including amounts under Sections
4.2, 4.3, 4.4 and 4.5) payable to it hereunder from the assignee or the
applicable Borrower, and (if the Issuing Bank is to be the assignor) the Issuing
Bank shall have received from the Parent cash collateral or other collateral
satisfactory to it, having a value not less than the aggregate undrawn face
amount of all Letters of Credit that are outstanding, as security for the
reimbursement obligation of the Parent in respect of such Letters of Credit; and
(iii) in the case of any such assignment resulting from a claim for compensation
under Section 4.2 or payments required to be made pursuant to Section 4.3 or
4.5, such assignment will result in a reduction in such compensation or
payments. A Lender, the Swingline Bank or the Issuing Bank (as the case may be)
shall not be required to make any such assignment and delegation if, prior
thereto, as a result of a waiver by such Lender, the Swingline Bank or the
Issuing Bank (as the case may be) or otherwise, the circumstances entitling the
Parent to require such assignment and delegation cease to apply. The interests,
rights and obligations hereunder of a Lender that serves as either or both of
the Issuing Bank or the Swingline Bank hereunder shall include its interests,
rights and obligations in all such capacities.
Section 4.8. Certain Additional Costs. (a) If and so long as any
Lender is required to comply with reserve assets, liquidity, cash margin or
other requirements of any monetary or other authority (including any such
requirement imposed by the European Central Bank or the European System of
Central Banks, but excluding requirements reflected in the Statutory Reserve
Rate) in respect of any of such Lender's Foreign Currency Loans, such Lender may
require the Borrower to which such Lender has made a Foreign Currency Loan to
pay, contemporaneously with each payment of interest on each of such Lender's
Foreign Currency Loans subject to such requirements, additional interest on such
Foreign Currency Loan at a rate per annum specified by such Lender to be the
cost to such Lender of complying with requirements in relation to such Foreign
Currency Loan. Any additional interest owed pursuant to this paragraph shall be
determined by the relevant Lender, which determination (if made on a reasonable
and nondiscriminatory basis) shall be conclusive absent manifest error, and
notified to the Parent (on behalf of the applicable Foreign Subsidiary Borrower)
(with a copy to the Administrative Agent) at least five Business Days before
each date on which interest is payable for the relevant Foreign Currency Loan,
and such additional interest so notified by such Lender
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shall be payable to the Administrative Agent for the account of such Lender on
each date on which interest is payable for such Foreign Currency Loan.
(b) If the cost to any Lender of making or maintaining any Loan to
either Foreign Subsidiary Borrower is increased (or the amount of any sum
received or receivable by any Lender (or its applicable lending office) is
reduced) by an amount deemed in good faith by such Lender to be material, by
reason of the fact that the applicable Foreign Subsidiary Borrower is
incorporated in, or conducts business in, a jurisdiction outside the United
States, such Foreign Subsidiary Borrower shall indemnify such Lender for such
increased cost or reduction. A certificate of a Lender setting forth the amount
or amounts necessary to indemnify such Lender as specified in this paragraph
shall be delivered to the Parent (on behalf of the applicable Foreign Subsidiary
Borrower) and shall (if made on a reasonable and nondiscriminatory basis) be
conclusive absent manifest error. The applicable Foreign Subsidiary Borrower
shall pay such Lender the amount shown as due on any such certificate within 10
days after receipt thereof by the Parent.
ARTICLE 5. CONDITIONS PRECEDENT.
Section 5.1. Documentary Conditions Precedent. The execution and
delivery of this Agreement by the Lenders, the Administrative Agent, the
Swingline Bank and the Issuing Bank are subject to the condition precedent that
the Administrative Agent shall have received not later than December 1, 2005
each of the following, in form and substance satisfactory to the Administrative
Agent and its counsel:
(a) if requested by any Lender prior to such date, a duly executed
Syndicated Loan Note of the Parent, MWC and
Luxury, payable in each case to such Lender;
(b) the Authorization Letter, duly executed by the Borrowers;
(c) the Parent Guarantee, duly executed by the Parent; and the Initial
Subsidiary Guarantees, duly executed by the Initial Subsidiary Guarantors;
(d) a certificate of the Secretary or Assistant Secretary of the
Parent, dated the Closing Date, attesting (i) to all corporate action taken by
the Parent, including resolutions of its Board of Directors, authorizing the
execution, delivery and performance of the Facility Documents to which it is a
party and each other document to be delivered pursuant to this Agreement; (ii)
to a true and complete copy of its certificate of incorporation and by-laws;
(iii) to the names and true signatures of officers of the Parent authorized to
sign the Facility Documents to which it is a party and the other documents to be
delivered by the Parent under this Agreement and (iv) to the good standing of
the Parent in the State of New York, which shall be evidenced by a certificate
of the appropriate Governmental Authority thereof;
(e) a certificate of the Secretary (or equivalent officer) of MWC,
dated the Closing Date, attesting (i) to all corporate action taken by MWC,
including resolutions of its shareholders and its Board of Directors,
authorizing the execution, delivery and performance of the Facility Documents to
which it is a party and each other document to be delivered pursuant to this
Agreement; (ii) to a true and complete copy of its organizational documents; and
(iii) to the
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names and true signatures of officers of MWC authorized to sign the Facility
Documents to which it is a party and the other documents to be delivered by MWC
under this Agreement;
(f) a certificate of the Secretary (or equivalent officer) of Luxury,
dated the Closing Date, attesting (i) to all corporate action taken by Luxury,
including resolutions of its shareholders and its Board of Directors,
authorizing the execution, delivery and performance of the Facility Documents to
which it is a party and each other document to be delivered pursuant to this
Agreement; (ii) to a true and complete copy of its organizational documents; and
(iii) to the names and true signatures of officers of Luxury authorized to sign
the Facility Documents to which it is a party and the other documents to be
delivered by Luxury under this Agreement;
(g) a certificate of the Secretary or Assistant Secretary of each
Initial Subsidiary Guarantor dated the Closing Date, attesting (i) to all
corporate action taken by such Initial Subsidiary Guarantor, including
resolutions of its Board of Directors and consents of its members, authorizing
the execution, delivery and performance of its Initial Subsidiary Guarantee;
(ii) to a true and complete copy of its certificate of incorporation and by-laws
or certificate of formation and operating agreement (as applicable); (iii) to
the names and true signatures of the officers of such Initial Subsidiary
Guarantor authorized to sign its Initial Subsidiary Guarantee and (iv) to the
good standing of such Subsidiary in the state of its organization, which shall
be evidenced by a certificate of the appropriate Governmental Authority thereof;
(h) a certificate of each of the Parent, MWC and Luxury, dated the
Closing Date, stating that the representations and warranties in Article 6 are
true and correct on such date as though made on and as of such date and that no
event has occurred and is continuing which constitutes a Default or an Event of
Default;
(i) opinions of domestic counsel for the Parent, the Foreign
Subsidiary Borrowers and the Initial Subsidiary Guarantors (Timothy F. Michno,
Esq. and Paul, Weiss, Rifkind, Wharton & Garrison LLP), dated the Closing Date,
in substantially the forms of Exhibit C-1 and Exhibit C-2 (respectively) and as
to such other matters as the Administrative Agent, any Lender, the Swingline
Bank or the Issuing Bank may reasonably request;
(j) an opinion of Swiss counsel for the Foreign Subsidiary Borrowers,
dated the Closing Date, in substantially the form of Exhibit C-3 and as to such
other matters as the Administrative Agent or any Lender may reasonably request;
(k) evidence that the Parent has paid in full (i) all fees that are
required to be paid by the Parent to the Lenders on the Closing Date; and (ii)
the reasonable and documented fees and disbursements of New York and Swiss
counsel for the Administrative Agent in connection with the closing of the
transaction contemplated by this Agreement;
(l) evidence that (i) the Borrowers have paid in full all amounts
owing under the Credit Agreement dated as of June 17, 2003 among the Parent,
Concord Watch Company, S.A., MWC, the lenders party thereto and JPMCB, as
administrative agent, swingline bank and issuing bank, (ii) all commitments of
such lenders thereunder have terminated and (iii) all letters
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of credit issued thereunder have been terminated, replaced or continued under
this Agreement; and
(m) such other approvals, opinions, certificates and documents as the
Administrative Agent may reasonably request.
Section 5.2. Additional Conditions Precedent. The obligations of the
Lenders to make any Syndicated Loans pursuant to a Borrowing which increases the
amount of Syndicated Loans outstanding hereunder (including the initial
Borrowing), and of the Swingline Bank to make any Swingline Loan (including the
initial Borrowing), and of the Issuing Bank to issue, amend, renew or extend any
Letter of Credit hereunder, shall be subject to the further conditions precedent
that on the date of such Syndicated Loans or such Swingline Loan or such
issuance, amendment, renewal or extension of such Letter of Credit (as the case
may be), the following statements shall be true:
(a) the representations and warranties contained in Article 6 are true
and correct in all material respects on and as of the date such Syndicated Loans
are made or such Swingline Loan is made or such Letter of Credit is issued,
amended, renewed or extended (as the case may be) as though made on and as of
such date, provided that (i) any representation and warranty contained in
Section 6.5 that specifically relates to January 31, 2005 (other than the last
sentence of Section 6.5) shall be true and correct as of January 31, 2005; and
(ii) any such representation or warranty which by its terms contains a
materiality qualification is true and correct in all respects on and as of such
date; and
(b) no Default or Event of Default has occurred and is continuing, or
would result from such Syndicated Loans or such Swingline Loans or the issuance,
amendment, renewal or extension of such Letter of Credit.
Section 5.3. Deemed Representations. Each Borrowing Request and each
acceptance by the applicable Borrower of the proceeds of such Borrowing, and
each request by the Parent for the issuance, amendment, renewal or extension of
a Letter of Credit and each issuance, amendment, renewal or extension of a
Letter of Credit, shall constitute a representation and warranty by the
Borrowers that the statements contained in Section 5.2 are true and correct both
on the date of such Borrowing Request or request with respect to a Letter of
Credit and, unless the Parent otherwise notifies the Administrative Agent prior
to such Borrowing or such issuance, amendment, renewal or extension, as of the
date of such Borrowing or such issuance, amendment, renewal or extension.
ARTICLE 6. REPRESENTATIONS AND WARRANTIES.
Each of the Borrowers hereby represents and warrants as follows (provided,
however, that such representations and warranties by each Foreign Subsidiary
Borrower shall be as to such Foreign Subsidiary Borrower and its Subsidiaries
only):
Section 6.1. Incorporation, Good Standing and Due Qualification. Each
of the Parent and its Subsidiaries is duly incorporated or formed, validly
existing and (where such concept exists) in good standing under the laws of the
jurisdiction of its incorporation or organization, has the corporate, limited
liability company or other power and authority to own its
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assets and to transact the business in which it is now engaged, and is duly
qualified as a foreign corporation, limited liability company or partnership and
in good standing under the laws of each other jurisdiction in which the failure
to be so qualified would have a material adverse effect on the business,
financial condition or operations of the Parent and its Subsidiaries taken as a
whole.
Section 6.2. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by each of the Borrowers and each Guarantor
of the Facility Documents to which it is a party are within its corporate,
limited liability company or other power and authority and have been duly
authorized by all necessary corporate, limited liability company or other action
and do not and will not: (a) require any consent or approval of its stockholders
or members; (b) contravene any of its organizational documents; (c) violate any
provision of, or require any filing, registration, consent or approval under,
any law, rule, regulation (including, without limitation, Regulation U), order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to the Parent or any Subsidiaries or Affiliates of the
Parent; (d) result in a breach of or constitute a default or require any consent
under any indenture or loan or credit agreement or any other agreement, lease or
instrument to which any Borrower or Guarantor is a party or by which it or its
properties may be bound or affected; (e) result in, or require, the creation or
imposition of any Lien upon or with respect to any of the properties now owned
or hereafter acquired by any Borrower or Guarantor; or (f) cause the Parent (or
any Subsidiary or Affiliate of the Parent, as the case may be) to be in default
under any such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
Section 6.3. Legally Enforceable Agreements. Each Facility Document to
which any Borrower or Guarantor is a party is a legal, valid and binding
obligation of such Borrower or Guarantor (as the case may be) enforceable
against such Borrower or Guarantor (as the case may be) in accordance with its
terms, except to the extent that such enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in equity or at law).
Section 6.4. Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of any Borrower, threatened, against or affecting
the Parent or any of its Subsidiaries before any court, governmental agency or
arbitrator, as to which there is a reasonable possibility of determination
adverse to the Parent or such Subsidiary and which (if determined adversely to
the Parent or such Subsidiary) would, in any one case or in the aggregate,
materially adversely affect the financial condition, operations or business of
the Parent and its Subsidiaries taken as a whole or the ability of any Borrower
or any Guarantor to perform its obligations under the Facility Documents to
which it is a party.
Section 6.5. Financial Statements. The consolidated and consolidating
balance sheet of the Parent and its Consolidated Subsidiaries as at January 31,
2005, and the related consolidated income statement and statements of cash flows
and changes in stockholders' equity and the related consolidating income
statement of the Parent and its Consolidated Subsidiaries for the fiscal year
then ended, and the accompanying footnotes, together with the accompanying
opinion of PricewaterhouseCoopers LLP, independent certified public accountants,
copies of which have been furnished or made available to each of the Lenders,
are complete and correct in
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all material respects and fairly present the financial condition of the Parent
and its Consolidated Subsidiaries as at such date and the results of the
operations of the Parent and its Consolidated Subsidiaries for the period
covered by such statements, all in accordance with GAAP consistently applied.
There are no liabilities of the Parent or any of its Consolidated Subsidiaries,
fixed or contingent, which are material in relation to the consolidated
financial condition of the Parent but are not reflected in the financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business since January 31, 2005. No information, exhibit or
report furnished by any Borrower to the Administrative Agent or any of the
Lenders in connection with the negotiation of this Agreement, when read together
with the financial statements referred to in this Section, contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not materially misleading.
Since January 31, 2005, there has been no material adverse change in the
condition (financial or otherwise), business or operations of the Parent and the
Consolidated Subsidiaries taken as a whole.
Section 6.6. Ownership and Liens. Each of the Parent and its
Consolidated Subsidiaries has title to, or valid leasehold interests in, all of
its properties and assets, real and personal, including the properties and
assets, and leasehold interests reflected in the financial statements referred
to in Section 6.5 (other than any properties or assets disposed of in the
ordinary course of business, and other than properties and assets that are not
material to the Parent and its Subsidiaries taken as a whole and other than any
other sales that are permitted by this Agreement), and none of the properties
and assets owned by the Parent or any of its Subsidiaries and none of its
leasehold interests is subject to any Lien, except as disclosed in such
financial statements or as may be permitted hereunder.
Section 6.7. Taxes. Each of the Parent and its Subsidiaries has filed
or has caused to be filed all tax returns (foreign, federal, state and local)
required to be filed and has paid all material taxes, assessments and
governmental charges and levies shown thereon to be due, including interest and
penalties, except for such taxes and other amounts as are being contested in
good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP and reflected on the consolidated balance
sheet of the Parent.
Section 6.8. ERISA. (a) No accumulated funding deficiency (as defined
in Section 302 of ERISA and Section 412 of the Code), whether or not waived,
exists with respect to any Plan (other than a Multiemployer Plan). No liability
to the PBGC has been or is expected by the Parent or any ERISA Affiliate to be
incurred with respect to any Plan (other than a Multiemployer Plan) by the
Parent, any Subsidiary or any ERISA Affiliate which is or would be materially
adverse to the business, financial condition or operations of the Parent and its
Subsidiaries taken as a whole. Neither the Parent, nor any Subsidiary nor any
ERISA Affiliate has incurred or presently expects to incur any withdrawal
liability under Title IV of ERISA with respect to any Multiemployer Plan which
is or would be materially adverse to the business, financial condition or
operations of the Parent and its Subsidiaries taken as a whole.
(b) Neither the Parent nor any of its Subsidiaries has breached the
fiduciary rules of ERISA or engaged in any prohibited transaction in connection
with which the Parent or any of its Subsidiaries or ERISA Affiliates could be
subjected to (in the case of any such breach)
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a suit for damages or (in the case of any such prohibited transactions) with a
civil penalty assessed under Section 502(i) of ERISA or a tax imposed by Section
4975 of the Code, which suit, penalty or tax, in any case, would be materially
adverse to the business, financial condition or operations of the Parent and its
Subsidiaries taken as a whole.
(c) There has been no reportable event (within the meaning of Section
4043(b) of ERISA) or any other event or condition with respect to any Plan
(other than a Multiemployer Plan) which presents a risk of termination of any
such Plan by the PBGC under circumstances which in any case could result in
liability which would be materially adverse to the business, financial condition
or operations of the Parent and its Subsidiaries taken as a whole.
(d) The present value of all vested accrued benefits under all Plans
(other than Multiemployer Plans), determined as of the end of the Parent's most
recently ended fiscal year on the basis of reasonable actuarial assumptions, did
not exceed the current value of the assets of such Plans allocable to such
vested accrued benefits by more than $20,000,000. The terms "present value",
"current value", and "accrued benefit" have the meanings specified in Section 3
of ERISA.
(e) Neither the Parent nor any of its Subsidiaries is or has ever been
obligated to contribute to any Multiemployer Plan.
Section 6.9. Subsidiaries and Ownership of Stock. Schedule III is a
complete and accurate list, as of the Closing Date, of the Subsidiaries of the
Parent, showing the jurisdiction of incorporation or organization of each
Subsidiary and showing the percentage of the Parent's ownership of the
outstanding stock or other interest of each such Subsidiary. All of the
outstanding capital stock or other interest of each such Subsidiary has been
validly issued, is fully paid and nonassessable and (to the extent owned by the
Parent or any other Subsidiary) is owned by the Parent or such other Subsidiary,
as the case may be, free and clear of all Liens.
Section 6.10. Credit Arrangements. Schedule IV is a complete and
correct list, as of the Closing Date, of all credit agreements, indentures,
purchase agreements, guaranties, Capital Leases and other investments,
agreements and arrangements presently in effect providing for or relating to
extensions of credit (including agreements and arrangements for the issuance of
letters of credit or for acceptance financing or for credit lines extended for
the purchase of foreign-exchange contracts) in respect of which the Parent or
any of its Subsidiaries is in any manner directly or contingently obligated to
pay money (excluding trade payables in the ordinary course of business, and
excluding other extensions of credit that do not exceed $500,000 in the
aggregate of all such other extensions of credit), including all modifications
thereof and amendments thereto; and the maximum principal or face amounts of the
credit in question, outstanding and which can be outstanding, are correctly
stated, and all Liens (if any) of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule.
Section 6.11. Operation of Business. Each of the Parent and its
Subsidiaries possesses all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, necessary in any material respect
to conduct the business substantially as now
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conducted of the Parent and its Subsidiaries taken as a whole, and neither the
Parent nor any of its Subsidiaries is in violation of any valid rights of others
with respect to any of the foregoing.
Section 6.12. Hazardous Materials. The Parent and each of its
Subsidiaries have obtained all permits, licenses and other authorizations which
are required under all Environmental Laws, except to the extent failure to have
any such permit, license or authorization would not have a material adverse
effect on the consolidated financial condition, operations or business of the
Parent and its Consolidated Subsidiaries taken as a whole. The Parent and each
of its Subsidiaries are in compliance with the terms and conditions of all such
permits, licenses and authorizations, and are also in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations schedules and timetables contained in any applicable Environmental
Law or in any regulation, code, plan, order, decree, judgment, injunction,
notice or demand letter issued, entered, promulgated or approved thereunder,
except to the extent failure to comply would not have a material adverse effect
on the consolidated financial condition, operations or business of the Parent
and its Consolidated Subsidiaries taken as a whole.
In addition, except as set forth in Schedule V and except to the
extent it would not have a material adverse effect on the consolidated financial
condition, operations or business of the Parent and its Consolidated
Subsidiaries taken as a whole:
(a) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been filed, no
penalty has been assessed and, to the best of the Parent's knowledge, no
investigation or review is pending or threatened by any governmental or other
entity with respect to any alleged failure by the Parent or any of its
Subsidiaries to have any permit, license or authorization required under the
Environmental Laws in connection with the conduct of the business of the Parent
or any of its Subsidiaries or with respect to any generation, treatment,
storage, recycling, transportation, release or disposal, or any release as
defined in 42 U.S.C. Section 9601(22) ("Release"), of any substance regulated
under Environmental Laws ("Hazardous Materials") generated by the Parent or any
of its Subsidiaries.
(b) Neither the Parent nor any of its Subsidiaries has handled any
Hazardous Material, other than as a generator, on any property now or previously
owned or leased by the Parent or any of its Subsidiaries; and
(i) no polychlorinated biphenyl is present at any property now or
owned or leased by the Parent or any of its Subsidiaries;
(ii) no asbestos is present at any property now owned or leased by the
Parent or any of its Subsidiaries;
(iii) there are no underground storage tanks for Hazardous Materials,
active or abandoned, at any property now owned or leased by the Parent or
any of its Subsidiaries.
No Hazardous Materials have been Released, in a reportable quantity, where such
a quantity has been established by statute, ordinance, rule, regulation or
order, at, on or under any property now owned by the Parent or any of its
Subsidiaries.
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(c) Neither the Parent nor any of its Subsidiaries has transported or
arranged for the transportation of any Hazardous Material to any location which
is listed on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), listed
for possible inclusion on the National Priorities List by the Environmental
Protection Agency in the Comprehensive Environmental Response and Liability
Information System as provided by 40 C.F.R. Section 300.5 ("CERCLIS") or on any
similar state list or which is the subject of federal, state or local
enforcement actions or other investigations which are reasonably expected to
lead to claims against the Parent or any of its Subsidiaries for clean-up costs,
remedial work, damages to natural resources or for personal injury claims,
including, but not limited to, claims under CERCLA.
(d) No Hazardous Material generated by the Parent or any of its
Subsidiaries has been recycled, treated, stored, disposed of or Released by the
Parent or any of its Subsidiaries at any location other than those listed in
Schedule V.
(e) No oral or written notification of a Release of a Hazardous
material has been filed by or on behalf of the Parent or any of its Subsidiaries
and no property now owned or leased by the Parent or any of its Subsidiaries is
listed or proposed for listing on the National Priorities List promulgated
pursuant to CERCLA, on CERCLIS or on any similar state list of sites requiring
investigation or clean-up.
(f) There are no Liens arising under or pursuant to any Environmental
laws which have been imposed on any of the real property or properties owned or
leased by the Parent or any of its Subsidiaries, and (to the best of the
Parent's knowledge) no government actions have been taken or are in process
which could subject any of such properties to such Liens and neither the Parent
nor any of its Subsidiaries would be required to place any notice or restriction
relating to the presence of Hazardous Materials at any property owned by it in
any deed to such property.
(g) There have been no environmental investigations, studies, audits,
test, reviews or other analyses conducted by or which are in the possession of
the Parent or any of its Subsidiaries in relation to any property or facility
now or previously owned or leased by the Parent or any of its Subsidiaries which
have not been made available to the Lenders, except to the extent prepared to
satisfy routine reporting obligations under the Environmental Laws.
Section 6.13. No Default on Outstanding Judgments or Orders. Each of
the Parent and its Subsidiaries has satisfied all judgments and neither the
Parent nor any of its Subsidiaries is in default with respect to any judgment,
writ, injunction, decree, rule or regulation of any court, arbitrator or
federal, state, municipal or other Governmental Authority, commission, board,
bureau, agency or instrumentality, domestic or foreign, except where any such
defaults in the aggregate would not result in a material adverse effect on the
business, financial condition or operations of the Parent and its Subsidiaries
taken as a whole.
Section 6.14. No Defaults on Other Agreements. Neither the Parent nor
any of its Subsidiaries is subject to any charter or corporate restriction which
is reasonably expected to have a material adverse effect on the business,
properties, assets, operations or conditions, financial or otherwise, of the
Parent or any of its Subsidiaries, or the ability of any Borrower or
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Guarantor to carry out its obligations under the Facility Documents to which it
is a party. Neither the Parent nor any of its Subsidiaries is a party to any
indenture, loan or credit agreement or any lease or other agreement or
instrument which is reasonably expected to have a material adverse effect on the
ability of any Borrower or Guarantor to carry out its obligations under the
Facility Documents to which it is a party. The Parent is not in default in any
respect under any of the Prudential Existing Notes (or under either note
agreement pursuant to which they were issued) or under any outstanding Future
Permitted Private Placement Debt (or under any note or other agreement pursuant
to which such Debt shall have been issued). Neither the Parent nor any of its
Subsidiaries is in default in any material respect under any other agreement or
instrument to which the Parent or such Subsidiary is a party, except where any
such defaults in the aggregate would not result in a material adverse effect on
the business, financial condition or operations of the Parent and its
Subsidiaries taken as a whole.
Section 6.15. Labor Disputes and Acts of God. Neither the business nor
the properties of the Parent or of any of its Subsidiaries are affected by any
fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance), materially and adversely
affecting the business, financial condition or operations of the Parent and its
Subsidiaries taken as a whole.
Section 6.16. Governmental Regulation. Neither the Parent nor any of
its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce
Act, the Federal Power Act or any statute or regulation limiting its ability to
incur indebtedness for money borrowed or to obtain letters of credit as
contemplated hereby.
Section 6.17. Partnerships. As of the Closing Date, neither the Parent
nor any of its Subsidiaries is a partner in any partnership.
Section 6.18. No Forfeiture. No Forfeiture Proceeding is pending.
Section 6.19. Solvency.
(a) The present fair saleable value of the assets of each Borrower
after giving effect to all the transactions contemplated by the Facility
Documents and the funding of all Revolving Credit Commitments hereunder exceeds
the amount that will be required to be paid on or in respect of the existing
debts and other liabilities (including contingent liabilities) of such Borrower
as they mature.
(b) The property of each Borrower does not constitute unreasonably
small capital for such Borrower to carry out its business as now conducted and
as presently proposed to be conducted including the capital needs of such
Borrower.
(c) No Borrower intends to, nor does any Borrower believe that it
will, incur debts beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be received by such Borrower, and
of amounts to be payable on or in respect of debt of such Borrower). The cash
available to each Borrower after taking into account all
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other anticipated uses of the cash of such Borrower, is anticipated to be
sufficient to pay all such amounts on or in respect of debt of such Borrower
when such amounts are required to be paid.
(d) No Borrower believes that final judgments against it in actions
for money damages will be rendered at a time when, or in an amount such that,
such Borrower will be unable to satisfy any such judgments promptly in
accordance with their terms (taking into account the maximum reasonable amount
of such judgments in any such actions and the earliest reasonable time at which
such judgments might be rendered). The cash available to each Borrower after
taking into account all other anticipated uses of the cash of such Borrower
(including the payments on or in respect of debt referred to in paragraph (c) of
this Section), is anticipated to be sufficient to pay all such judgments
promptly in accordance with their terms.
Section 6.20. Certain Particular Assurances as to the Foreign
Subsidiary Borrowers. (a) This Agreement and each of the other Facility
Documents to which a Foreign Subsidiary Borrower is intended to be a party are
in proper legal form under the law of Switzerland for the enforcement thereof
against such Foreign Subsidiary Borrower under such law. All formalities
required in Switzerland for the validity and enforceability of this Agreement
and each of such other Facility Documents (including, without limitation, any
necessary registration, recording or filing with any court or other authority in
Switzerland) have been accomplished, and no Taxes are required to be paid to
Switzerland, or any political subdivision thereof or therein, and no
notarization is required, for the validity and enforceability hereof or thereof.
(b) This Agreement and the other Facility Documents to which a Foreign
Subsidiary Borrower is intended to be a party and the obligations evidenced
hereby and thereby are and will at all times be direct and unconditional general
obligations of such Foreign Subsidiary Borrower, and rank and will at all times
rank in right of payment and otherwise at least pari passu with all other
unsecured Debt of such Foreign Subsidiary Borrower whether now existing or
hereafter outstanding, except for such preferences as are provided by any
mandatory applicable provision of law. There exists no Lien (including any Lien
arising out of any attachment, judgment or execution), nor any segregation or
other preferential arrangement of any kind, on, in or with respect to any of the
property or revenues of any Foreign Subsidiary Borrower or any of its
Subsidiaries, except as expressly permitted by Section 8.3.
(c) Each Foreign Subsidiary Borrower is subject to civil and
commercial law with respect to its obligations under this Agreement and each of
the other Facility Documents to which it is intended to be a party. The
execution, delivery and performance by each Foreign Subsidiary Borrower of this
Agreement and each of such other Facility Documents constitute private and
commercial acts rather than public or governmental acts. No Foreign Subsidiary
Borrower, nor any of its properties or revenues, is entitled to any right of
immunity in any jurisdiction from suit, court jurisdiction, judgment, attachment
(whether before or after judgment), set-off or execution of a judgment or from
any other legal process or remedy relating to the obligations of such Foreign
Subsidiary Borrower under this Agreement or any of such other Facility
Documents.
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(d) The inclusion in this Article of the representations and
warranties contained in this Section shall not limit the generality of the other
representations and warranties contained in this Article with reference to the
Foreign Subsidiary Borrowers.
ARTICLE 7. AFFIRMATIVE COVENANTS.
So long as any of the Notes shall remain unpaid, or any Letter of
Credit shall remain outstanding, or any Lender shall have any Revolving Credit
Commitment under this Agreement, the Parent shall:
Section 7.1. Maintenance of Existence. Preserve and maintain (except
as otherwise permitted by Section 8.7 or Section 8.8 or Section 8.10), and cause
each of its Subsidiaries (other than Inactive Subsidiaries) to preserve and
maintain (except as otherwise permitted by Section 8.7 or Section 8.8 or Section
8.10), its corporate, limited liability company or other existence and good
standing in the jurisdiction of its incorporation or organization, and qualify
and remain qualified, and cause each of its Subsidiaries to qualify and remain
qualified, as a foreign corporation, limited liability company or other entity
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on (a) the business, financial condition or operations
of the Parent and its Subsidiaries taken as a whole; (b) the ability of any
Borrower or any Guarantor to perform any of its obligations under any Facility
Document; (c) the legality, validity or enforceability of any Facility Document;
or (d) the rights of, or remedies available to the Administrative Agent and the
Lenders under any Facility Document.
Section 7.2. Conduct of Business. Continue, and cause each of its
Subsidiaries (other than Inactive Subsidiaries) to continue, to engage primarily
in the Core Business.
Section 7.3. Maintenance of Properties. Maintain, keep and preserve,
and cause each of its Subsidiaries to maintain, keep and preserve, all of the
properties (tangible and intangible) necessary or useful in the proper conduct
of the business of the Parent and its Subsidiaries in good working order and
condition (ordinary wear and tear excepted), except to the extent that such
properties are not material to the business, financial condition or operations
of the Parent and its Subsidiaries taken as a whole.
Section 7.4. Maintenance of Records. Keep, and cause each of its
Subsidiaries to keep, adequate records and books of account, in which complete
entries will be made in compliance with then-current guidelines as to generally
accepted accounting principles, reflecting all financial transactions of the
Parent and its Subsidiaries.
Section 7.5. Maintenance of Insurance. Maintain, and cause each of its
Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried by companies engaged in the same or a similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof.
Section 7.6. Compliance with Laws; Payment of Taxes. (a) Comply, and
cause each of its Subsidiaries to comply, with all applicable laws (including
all Environmental Laws), rules, regulations and orders, the noncompliance with
which would materially adversely
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affect (i) the business, financial condition or operations of the Parent and its
Subsidiaries taken as a whole, (ii) the ability of any Borrower or any Guarantor
to perform any of its obligations under any Facility Document, (iii) the
legality, validity or enforceability of any Facility Document, or (iv) the
rights of or remedies available to the Administrative Agent and the Lenders
under any Facility Document. Without limiting the generality of the foregoing,
the Parent shall cause each Foreign Subsidiary Borrower to obtain and maintain
at all times in effect all such governmental licenses, authorizations, consents,
permits and approvals as may be required for such Foreign Subsidiary Borrower to
borrow and repay the Borrowings of such Foreign Subsidiary Borrower and to
comply with all the other obligations of such Foreign Subsidiary Borrower under
this Agreement and the other Facility Documents to which such Foreign Subsidiary
Borrower is a party; and
(b) Pay or discharge, and cause each of its Subsidiaries to pay or
discharge, before the same become delinquent all taxes, assessments and
governmental charges imposed upon the Parent or any Subsidiary or any of their
respective properties; provided, however, that the Parent shall not be required
to pay or discharge or cause to be paid or discharged, any such tax, assessment
or governmental charge the applicability or validity of which is being contested
by the Parent or such Subsidiary in good faith by appropriate proceedings and
for which adequate reserves have been established in accordance with GAAP.
Section 7.7. Right of Inspection. At any reasonable time and from time
to time and upon reasonable prior notice, permit the Administrative Agent or any
Lender or any agent or representative thereof, to examine and make copies and
abstracts from the records and books of account of, and visit the properties of,
the Parent and any of its Subsidiaries, and to discuss the affairs, finances and
accounts of the Parent and any such Subsidiary with any of their respective
officers and directors and the Parent's independent accountants so long as the
Parent is afforded an opportunity to be present during such discussions with
such accountants; provided that each such visit or discussion shall be at the
sole expense of the Administrative Agent or any Lender, as applicable, unless a
Default or an Event of Default shall have occurred and be continuing at the time
thereof in which case the reasonable and documented expenses of the
Administrative Agent or any Lender, as applicable, in connection thereof shall
be paid or reimbursed by the Parent.
Section 7.8. Reporting Requirements. Furnish directly to each of the
Lenders:
(a) as soon as available and in any event within 120 days after the
end of each fiscal year of the Parent, a consolidated and consolidating balance
sheet of the Parent and its Consolidated Subsidiaries as of the end of such
fiscal year and a consolidated income statement and statements of cash flows and
changes in stockholders' equity and a consolidating income statement of the
Parent and its Consolidated Subsidiaries for such fiscal year, all in reasonable
detail and stating in comparative form the respective consolidated and
consolidating figures for the corresponding date and period in the prior fiscal
year and all prepared in accordance with GAAP and as to the consolidated
statements audited and accompanied by an opinion thereon by
PricewaterhouseCoopers LLP or other independent accountants of national standing
selected by the Parent and acceptable to the Required Lenders (without a "going
concern" or like qualification or exception and without any qualification or
exception as to the scope of such audit) to the effect that such consolidated
financial statements present fairly in all material
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respects the financial condition and results of operations of the Parent and its
consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied;
(b) as soon as available and in any event within 75 days after the end
of each of the first three quarters of each fiscal year of the Parent, a
consolidated and consolidating balance sheet of the Parent and its Consolidated
Subsidiaries as of the end of such quarter and a consolidated income statement
and statements of cash flows and changes in stockholders' equity and a
consolidating income statement of the Parent and its Consolidated Subsidiaries
for the period commencing at the end of the previous fiscal year and ending with
the end of such quarter, all in reasonable detail and stating in comparative
form the respective consolidated and consolidating figures for the corresponding
date and period in the previous fiscal year and all prepared in accordance with
GAAP and certified by the chief financial officer of the Parent (subject to
year-end adjustments);
(c) simultaneously with the delivery of the financial statements
referred to above, a certificate of the chief financial officer of the Parent
(i) certifying that to the best of his knowledge no Default or Event of Default
has occurred and is continuing or, if a Default or Event of Default has occurred
and is continuing, a statement as to the nature thereof and the action which is
proposed to be taken with respect thereto, and (ii) with computations
demonstrating whether there has been compliance with the covenants contained in
Article 9, and with the financial covenants contained in the agreements between
the Parent and The Prudential Insurance Company of America pursuant to which the
Prudential Existing Notes and (if applicable) the Prudential Shelf Notes have
been issued, and with the financial covenants contained in the agreements
pursuant to which all other Future Permitted Private Placement Debt shall have
been issued;
(d) promptly after the commencement thereof, notice of all actions,
suits, and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
Parent or any of its Subsidiaries which would reasonably be expected to have a
material adverse effect on (i) the business, financial condition or operations
of the Parent and its Subsidiaries taken as a whole, (ii) the ability of any
Borrower or any Guarantor to perform any of its obligations under any Facility
Document, (iii) the legality, validity or enforceability of any Facility
Document, or (iv) the rights of or remedies available to the Administrative
Agent and the Lenders under any Facility Document;
(e) as soon as possible and in any event within 10 days after the
occurrence of each Default or Event of Default a written notice setting forth
the details of such Default or Event of Default and the action which is proposed
to be taken by the Parent with respect thereto;
(f) as soon as possible, and in any event within ten days after the
Parent receives notice from the PBGC or any other Person, or otherwise acquires
knowledge, that any of the events or conditions specified below with respect to
any Plan or Multiemployer Plan have occurred or exist, a statement signed by a
senior financial officer of the Parent setting forth details respecting such
event or condition and the action, if any, which the Parent or its ERISA
Affiliate proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Parent or an ERISA
Affiliate with respect to such event or condition):
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(i) any reportable event, as defined in Section 4043(b) of ERISA, with
respect to a Plan, as to which PBGC has not by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event (provided that a failure to meet the
minimum funding standard of Section 412 of the Code or Section 302 of ERISA
including, without limitation, the failure to make on or before its due
date a required installment under Section 412(m) of the Code or Section
302(e) of ERISA, shall be a reportable event regardless of the issuance of
any waivers in accordance with Section 412(d) of the Code) and any request
for a waiver under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041 of ERISA of a notice of
intent to terminate any Plan or any action taken by the Parent or an ERISA
Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Parent or any ERISA Affiliate
of a notice from a Multiemployer Plan that such action has been taken by
PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan by
the Parent or any ERISA Affiliate that results in liability under Section
4201 or 4204 of ERISA (including the obligation to satisfy secondary
liability as a result of a purchaser default) or the receipt of the Parent
or any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or
that it intends to terminate or has terminated under Section 4041A of
ERISA;
(v) the institution of a proceeding by a fiduciary or any
Multiemployer Plan against the Parent or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30 days;
(vi) the adoption of an amendment to any Plan that pursuant to a
notification letter from the Internal Revenue Service under Section
401(a)(29) of the Code or Section 307 of ERISA would result in the loss of
tax-exempt status of the trust of which such Plan is a part if the Parent
or an ERISA Affiliate fails to timely provide security to the Plan in
accordance with the provisions of said Sections;
(vii) any event or circumstance exists which may reasonably be
expected to constitute grounds for the Parent or any ERISA Affiliate to
incur liability under Title IV of ERISA or under Sections 412(c)(11) or
412(n) of the Code with respect to any Plan; and
(viii) the Unfunded Benefit Liabilities of one or more Plans increase
after the date of this Agreement in an amount which is material in relation
to the financial condition of the Parent.
(g) promptly after the request of any Lender, copies of each annual
report filed pursuant to Section 104 of ERISA with respect to each Plan
(including, to the extent
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required by Section 104 of ERISA, the related financial and actuarial statements
and opinions and other supporting statements, certifications, schedules and
information referred to in Section 103) and each annual report filed with
respect to each Plan under Section 4065 of ERISA; provided, however, that in the
case of a Multiemployer Plan, such annual reports shall be furnished only if
they are available to the Parent or an ERISA Affiliate;
(h) upon the request of the Administrative Agent, promptly after the
furnishing thereof, copies of any statement or report furnished to any other
party pursuant to the terms of any indenture, loan or credit or similar
agreement and not otherwise required to be furnished to the Lenders pursuant to
any other clause of this Section;
(i) promptly after the sending or filing thereof, copies of all proxy
statements, financial statements and reports which the Parent or any of its
Subsidiaries sends to its stockholders, and copies of all regular, periodic and
special reports, and all registration statements which the Parent or any such
Subsidiary files with the Securities and Exchange Commission or any Governmental
Authority which may be substituted therefor, or with any national securities
exchange;
(j) promptly after the commencement thereof or promptly after the
Parent knows of the commencement or threat thereof, notice of any Forfeiture
Proceeding; and
(k) such other information respecting the condition or operations,
financial or otherwise, of the Parent or any of its Subsidiaries as the
Administrative Agent or any Lender may from time to time reasonably request.
Section 7.9. Subsidiary Guarantee. Cause:
(a) each domestic Subsidiary of the Parent whose assets at any time
represent (10% or more of the total assets of the Parent and its Consolidated
Subsidiaries, and
(b) each domestic Subsidiary of the Parent that owns any trademark,
tradename, tradedress or patent as a result of a transfer thereof by the Parent
or any of its Subsidiaries to such domestic Subsidiary, and
(c) each other domestic Subsidiary of the Parent, other than domestic
Subsidiaries whose combined assets represent less than 15% of the total assets
of the Parent and its Consolidated Subsidiaries,
to execute and deliver to the Administrative Agent a Subsidiary Guarantee,
together with written evidence satisfactory to the Administrative Agent that
such Subsidiary Guarantee has been duly authorized by all necessary action; the
same shall be delivered to the Administrative Agent (in multiple duplicate
original copies, one for each Lender, the Swingline Bank, the Issuing Bank and
the Administrative Agent) within 30 days after the date on which (in the case of
clause (a)) the assets of such Subsidiary first represent 10% or more of the
total assets of the Parent and its Consolidated Subsidiaries, or (in the case of
clause (b)) such Subsidiary acquires ownership of such trademark, tradename,
tradedress or patent, or (in the case of clause (c)) the 15% limit described in
clause (c) is exceeded.
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Section 7.10. Equal and Ratable Lien. Make or cause to be made, if any
property (whether now owned or hereafter acquired) is subjected to a Lien in
violation of Section 8.3, effective provision reasonably satisfactory in form
and substance to the Required Lenders whereby the obligations of the Borrowers
under this Agreement and the Notes will be secured by such Lien equally and
ratably with any and all other liabilities secured thereby. Such violation of
Section 8.3 shall be an Event of Default, whether or not any such provision is
made pursuant to this Section.
ARTICLE 8. NEGATIVE COVENANTS.
So long as any of the Notes shall remain unpaid, or any Letter of
Credit shall be outstanding, or any Lender shall have any Revolving Credit
Commitment under this Agreement, the Parent shall not:
Section 8.1. Debt. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist any Debt,
except:
(a) Debt of each Borrower under this Agreement, the other Facility
Documents (including, for the avoidance of doubt, any increase under Section
2.16) and the Other Credit Agreement;
(b) Debt described in Schedule IV (including the Prudential Shelf
Notes), including renewals, extensions or refinancings thereof (and including
refinancings by institutions other than those institutions identified on
Schedule IV), provided that the principal amount thereof does not increase;
(c) Debt of the Parent subordinated (on terms satisfactory to the
Administrative Agent and the Required Lenders) to the Parent's obligations under
this Agreement and the other Facility Documents;
(d) Debt of the Parent to any Subsidiary; and Debt of any Subsidiary
to the Parent or to another Subsidiary, provided that the aggregate amount at
any time outstanding of all Debt of Subsidiaries to the Parent or to other
Subsidiaries does not exceed 20% of the Consolidated Tangible Net Worth at the
time of determination;
(e) Debt consisting of leases permitted under Section 8.4 or of
guaranties permitted under subsections (a), (b), (c), (d) and (g) of Section
8.2;
(f) Future Permitted Private Placement Debt; and
(g) other Debt of the Parent or any Subsidiary of the Parent, provided
that (i) the aggregate amount of such Debt outstanding at any time shall not
exceed $25,000,000 (as to all of the Parent and its Subsidiaries) and (ii) the
aggregate amount of liability in respect of letters of credit (excluding Letters
of Credit issued under this Agreement) outstanding at any time shall not exceed
$10,000,000 (as to all of the Parent and its Subsidiaries) (which liability
shall include liability for outstanding letters of credit that have not been
drawn upon, as well as outstanding reimbursement obligations as to letters of
credit that have been drawn upon; and
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which $10,000,000 limitation shall be inclusive of the letters of credit
identified in Schedule IV and renewals and extensions thereof).
Section 8.2. Guaranties, Etc. Assume, guarantee, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
its Subsidiaries to assume, guarantee, endorse or otherwise be or become
directly or indirectly responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, asset, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net worth
or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person, except
(a) guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(b) guaranties by Subsidiaries pursuant to Section 7.9, the Parent
Guarantee and the guaranty of the Parent in respect of obligations under the
Other Credit Agreement;
(c) guaranties by the Parent of ordinary rent obligations incurred by
any of its Subsidiaries for the lease of retail stores; provided, however, that
the aggregate of the amount so guaranteed for foreign Subsidiaries shall not
exceed $5,000,000 at any time;
(d) guaranties by the Parent of obligations incurred by any of its
domestic Subsidiaries in the ordinary course of business other than for borrowed
money, letters of credit or acceptance financing;
(e) guaranties by the Parent in favor of any of its Subsidiaries, and
guaranties by any Subsidiary of the Parent in favor of the Parent or another
Subsidiary of the Parent, as to obligations owing to the guaranteed party by a
Subsidiary of the Parent or by the Parent; provided, however, that in no event
shall the outstanding guaranty liability permitted by this clause (e) exceed at
any time $20,000,000 as to the Parent and its Subsidiaries in the aggregate;
(f) letters of credit permitted under Section 8.1 (including Letters
of Credit issued hereunder);
(g) guaranties by the Subsidiary Guarantors of the Prudential Existing
Notes and any Future Permitted Private Placement Debt including renewals,
extensions or refinancings thereof; and
(h) other guaranties, provided, however, that in no event shall the
outstanding guaranty liability permitted by this clause (h) exceed at any time
$2,000,000 as to the Parent and its Subsidiaries in the aggregate.
Section 8.3. Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired (including, without limitation, any Lien upon any stock or other
securities issued by a Subsidiary), except:
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(a) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(b) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than 30 days, or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established;
(c) bankers' Liens, rights of setoff and other similar Liens existing
solely with respect to amounts on deposit in one or more bank accounts
maintained by the Parent and its Subsidiaries, in each case granted in the
ordinary course of business in favor of one or more banks or other depositary
institutions with which such accounts are maintained; provided that such Liens
shall not secure the repayment of any Debt for borrowed money;
(d) Liens under workmen's compensation, unemployment insurance, social
security or similar legislation (other than ERISA);
(e) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(f) judgment and other similar Liens arising in connection with court
proceedings; provided that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings;
(g) easements, rights-of-way, restrictions and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by the Parent or any such Subsidiary of the
property or assets encumbered thereby in the normal course of its business or
materially impair the value of the property subject thereto;
(h) Liens securing obligations of any Subsidiary to the Parent;
(i) purchase money Liens on any property hereafter acquired or the
assumption of any Lien on property existing at the time of such acquisition, or
a Lien incurred in connection with any conditional sale or other title retention
agreement or a Capital Lease; provided that:
(i) any property subject to any of the foregoing is acquired by the
Parent or any such Subsidiary in the ordinary course of its business and
the Lien on any such property is created contemporaneously with such
acquisition;
(ii) the obligation secured by any Lien so created, assumed or
existing shall not exceed 95% of the lesser of cost or fair market value as
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of the time of acquisition of the property covered thereby to the Parent or
such Subsidiary acquiring the same;
(iii) each such Lien shall attach only to the property so acquired and
fixed improvements thereon, attachments thereto and proceeds thereof; and
(iv) the related expenditure is permitted under Section 9.3;
(j) Liens identified on Schedule IV, including renewals, extensions or
refinancings thereof (and including refinancings by institutions other than
those institutions identified on Schedule IV), provided that the principal
amount secured by such Liens does not increase;
(k) other Liens, provided that in no event shall the outstanding
liabilities secured by Liens permitted by this clause (k) exceed at any time
$2,000,000 as to the Parent and its Subsidiaries in the aggregate.
Section 8.4. Leases. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except:
(a) leases existing on the date of this Agreement and any extensions
or renewals thereof;
(b) Capital Leases permitted by Sections 8.1 and 8.3; and
(c) other leases (excluding Capital Leases) that are, in the judgment
of the management of the Parent, appropriate for the business objectives of the
Parent and its Subsidiaries.
Section 8.5. Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets (except as otherwise permitted by this Agreement), obligations or other
securities of, make any capital contribution to, or otherwise invest in, or
acquire any interest in, any Person, except:
(a) direct obligations of the United States of America or any agency
thereof with maturities of two years or less from the date of acquisition;
(b) commercial paper of a domestic issuer rated at least "A-1" by S&P
or "P1" by Moody's;
(c) certificates of deposit and time deposits with maturities of one
year or less from the date of acquisition issued by any commercial bank whose
(or whose parent company's) short-term commercial paper rating is rated at least
"A-1" by S&P or "P-1" by Moody's.;
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(d) for stock, obligations or securities received in settlement of
debts (created in the ordinary course of business) owing to the Parent or any
such Subsidiary;
(e) inventory purchased in the ordinary course of business of the
Parent or such Subsidiary;
(f) any Acquisition permitted by Section 8.11;
(g) investments in shares of investment companies registered under the
Investment Company Act of 1940 which are no-load money-market funds and which
invest primarily in obligations of the type described in clauses (a), (b) and
(c) of this Section and which are classified as current assets in accordance
with GAAP, provided that any such investment company shall have an aggregate net
asset value of not less than $50,000,000;
(h) advances to employees of the Parent or any of its Subsidiaries
that do not exceed $500,000 outstanding at any time in the aggregate as to all
such employees of the Parent and its Subsidiaries;
(i) loans and advances permitted by Section 8.1(d), other investments
by any foreign Subsidiary of the Parent in any other foreign Subsidiary of the
Parent that is wholly owned by the Parent and other investments by the Parent or
any Subsidiary of the Parent in any other Subsidiary of the Parent;
(j) fully collateralized repurchase agreements with a term of not more
than 30 days for securities described in clause (a) above and entered into with
a financial institution satisfying the criteria described in clause (c) above;
(k) other investments of up to $15,000,000 in the aggregate as to all
of the Parent and its Subsidiaries;
(l) as permitted under Sections 8.7(c), 8.7(d) and 8.7(e);
(m) Permitted Investments made by the Administrative Agent for the
account of the Parent or a Foreign Subsidiary Borrower pursuant to Section
2.13(f); and
(n) taxable or tax-exempt municipal securities that have an
established secondary market, asset-backed securities and/or corporate bonds, in
each case which are rated "A2" or better by Moody's or "A" or better by S&P.
Section 8.6. Dividends. Declare or pay any dividends (other than
dividends payable solely in shares of its common stock), purchase, redeem,
retire or otherwise acquire for value any of its capital stock now or hereafter
outstanding, or make any distribution of assets to its stockholders as such
whether in cash, assets or in obligations of the Parent, or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock, or permit any of its Subsidiaries to
do any of the foregoing, or permit any of its Subsidiaries to purchase or
otherwise acquire for value any stock of the Parent or another such Subsidiary
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(except as permitted by Section 8.8(b)), except that the Parent may pay
dividends or acquire its stock (or both), provided that:
(x) no Default or Event of Default exists either immediately prior to
such payment or acquisition, or after giving effect to such payment or
acquisition; and
(y) the aggregate amount expended by the Parent after January 31, 2005
for all such dividends and acquisitions does not exceed the sum of (i)
$75,000,000, plu