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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, 2004,
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 0-22378
MOVADO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
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:
NONE
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT;
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 31, 2003 was approximately $221,134,937 (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, 2004 were 8,650,869 and 3,400,906, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to registrant's 2004
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference in Part III hereof.
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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 Operations" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission ("SEC"), 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, ability to secure and protect trademarks, patents and other
intellectual property rights, ability to lease new stores on suitable terms in
desired markets and to complete construction on a timely basis, 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.
Item 1. Business
CORPORATE ORGANIZATION
Movado Group, Inc. is a designer, manufacturer and distributor of quality
watches with prominent brands sold in almost every major category comprising the
watch industry. Unless the context indicates otherwise, all references to the
"Company" or "MGI" include Movado Group, Inc. and its subsidiaries. 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 fiscal 2000 and changed the
Company's name to Movado Group, Inc. in 1996.
1
In 1970, the Company acquired the Swiss manufacturer of Concord watches, which
had been manufacturing Concord watches since 1908, and in 1983, the Company
acquired the U.S. distributor of Movado watches and substantially all the assets
related to the Movado watch brand from the Swiss manufacturer of Movado watches.
The Movado brand, which was established in 1881, has become the Company's
largest brand.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share (the "Common Stock"). 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 Common Stock is
traded on the NYSE under the trading symbol MOV.
On December 22, 2003, the Company signed a definitive agreement with LVMH Moet
Hennessy Louis Vuitton ("LVMH") to acquire Ebel S.A. and the worldwide business
related to the Ebel brand. On March 1, 2004, the Company completed the
acquisition of Ebel with the exception of Ebel's business in Germany, which is
expected to be completed on or about May 1, 2004. The Ebel brand, one of the
world's premier luxury watch brands, was established in La Chaux-de-Fonds,
Switzerland in 1911.
The Company operates internationally through wholly-owned subsidiaries in
Switzerland, France, Hong Kong, Canada, Japan and Singapore. Its executive
offices are located in Paramus, New Jersey.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and Asia.
According to the Federation of the Swiss Watch Industry, Swiss finished watch
production was 25.9 million units or approximately 10.1 billion Swiss francs in
2003, a decrease of 4.4% or 461 million Swiss francs below 2002 production. The
Company's Swiss watch brands include Movado, Concord, ESQ, Coach and as of
March 1, 2004, Ebel.
2
The Company divides the watch market into six principal categories as set forth
in the following table:
Primary Category of
Suggested Retail Movado Group, Inc.
Market Category Price Range Brands
-------------------- ---------------- ------------------------
Exclusive $10,000 and over Concord and Ebel
Luxury $1,000 to $9,999 Concord, Ebel and Movado
Premium $500 to $999 Movado
Moderate $126 to $499 ESQ and Coach
Fashion Watch Market $55 to $125 Tommy Hilfiger
Mass Market Less than $55 --
The Company's Concord and Ebel watches compete primarily in the Luxury category
of the market, although certain Concord and Ebel watches compete in the
Exclusive category. The Company's Movado watches compete primarily in the
Premium category of the market, although certain Movado watches compete in the
Luxury category. The Company's Coach and ESQ brands compete in the Moderate
category. The Company entered the Fashion Watch Market category in March 2001
with the launch of the Tommy Hilfiger line of watches manufactured, distributed
and marketed under a license agreement with Tommy Hilfiger Licensing, Inc. The
Company does not sell watches in the Mass Market category.
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and may be set with precious gems, including diamonds, emeralds,
rubies and sapphires. 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 Concord and Ebel 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 Concord and Ebel 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.
3
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 and Coach brands, well-known
brand names of watches in the Moderate category include Anne Klein, Bulova,
Citizen, Gucci, Guess, Seiko and Wittnauer.
Fashion Watch Market Watches
Watches comprising the Fashion Watch Market are primarily quartz-analog watches
but also include some digital watches. Digital watches, unlike quartz-analog
watches, have no moving parts. Instead, time is kept by electronic microchips
and is displayed as discrete Arabic digits illuminated on the watch face by
light emitting diodes (LED's) or liquid crystal displays (LCD's). Watches in the
Fashion Watch Market category are generally made with stainless steel, gold
finish, brass and/or plastic and are manufactured primarily in Asia. Fashion
Watch Market watches are based on designs and use features that attempt to
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 Watch Market 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.
PRODUCTS
During fiscal 2004, the Company marketed five distinctive brands of watches:
Movado, Concord, ESQ, Coach and Tommy Hilfiger, which compete in the Exclusive,
Luxury, Premium, Moderate and Fashion Watch Market categories. The Company
designs, manufactures and contracts for the assembly of Movado and Concord
watches primarily in Switzerland for sale throughout the world. ESQ and Tommy
Hilfiger watches are manufactured to the Company's specifications by independent
contractors located in Asia. ESQ watches are presently sold primarily in North
America and the Caribbean. Tommy Hilfiger watches are presently sold throughout
the world. Coach watches are assembled in Switzerland by independent contractors
and sold primarily in North America, the Caribbean and Asia.
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, the Movado brand today
includes a line of watches based on the design of 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 10 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 $850 and
$4,100.
4
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 $1,700 and $14,000.
Coach
During fiscal 1999, the Company introduced Coach watches under an exclusive
license with Coach, Inc. All 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 ranging from $230 to
$460.
ESQ
ESQ was launched in the second half of fiscal 1993 under an exclusive license
agreement with The Hearst Corporation. 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 ESQ brand consists of sport and fashion watches with
features and styles comparable to more expensive watches. The majority of ESQ
watches have suggested retail prices ranging from $195 to $325.
Tommy Hilfiger
The Company launched Tommy Hilfiger watches in March 2001, under an exclusive
agreement with Tommy Hilfiger Licensing, Inc., marketed under the TOMMY
HILFIGER(R) and TOMMY(R) labels. 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 ranging from
$65 to $125.
RETAIL OPERATIONS
The Company operates in two retail sectors, the luxury boutique market and the
outlet market. At January 31, 2004, the Company's retail operations consisted of
17 Movado Boutiques and 26 outlet stores. Three additional Movado Boutiques are
scheduled to open in the first half of fiscal year 2005. The Movado Boutiques,
the first of which opened in 1998, sell selected models of Movado watches as
well as proprietary jewelry, tabletop and accessory products. The jewelry,
tabletop and accessory products are sold exclusively in the Movado Boutiques.
The outlet stores serve as an effective vehicle to sell discontinued models and
factory seconds of all of the Company's watches, jewelry, tabletop and accessory
products.
5
WARRANTY AND REPAIR
The Company has service facilities around the world including five Company-owned
service facilities and 208 authorized independent service centers worldwide. In
addition, as part of the acquisition of the Ebel business on March 1, 2004, the
Company acquired the after-sale service operations of Ebel S.A. located in La
Chaux-de-Fonds, Switzerland, those of its French subsidiary and contracts with
approximately 85 independent Ebel service centers worldwide. The Company
conducts training sessions for and distributes technical information and updates
to repair personnel in order to maintain consistency and quality at its service
facilities and authorized independent service centers. The Company's products
are covered by limited warranties against defects in materials and workmanship
for periods ranging from two to ten years from the date of purchase for
movements and up to five years for the gold plating on Movado watch casings 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 from its core range line.
ADVERTISING
Advertising is important to the successful marketing of the Company's watches.
Hence, 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. The Company utilizes the creative development of
advertising campaigns from outside agencies. Advertising expenditures totaled
approximately 16.1%, 16.8% and 19.0% of net sales in fiscal 2004, 2003 and 2002,
respectively. Advertising is developed individually for each of the Company's
watch brands 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 predominately in magazines and other
print media, but are also created for radio and television campaigns,
catalogues, outdoor and promotional materials.
BACKLOG
Historically, the Company has generated a significant portion of its backlog
during the international trade fair held annually in Basel, Switzerland. The
Basel Watch and Jewelry Fair is held in March or April every year and is the
showcase for all global watch and jewelry companies where new product offerings
are introduced and orders are taken for delivery throughout the course of the
year. The 2004 Fair began on April 15, 2004 and the 2003 Fair was also in April.
Therefore, there are no unfilled orders from the Fair included in the amounts of
either year. At March 31, 2004, the Company had unfilled orders of approximately
$ 20.2 million compared to $15.0 million at March 31, 2003. The 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.
SOURCES AND AVAILABILITY OF SUPPLIES
Concord and Movado watches are generally assembled in Switzerland by independent
third party subcontract assemblers with some assembly at the Concord
manufacturing facility in Bienne, Switzerland. Movado and Concord watches are
assembled using Swiss movements and other components obtained from third party
suppliers. Coach watches are assembled in Switzerland by independent assemblers
using Swiss movements and other components obtained from third party suppliers
in Switzerland and elsewhere. ESQ and Tommy Hilfiger watches are assembled by
independent contractors in Asia. ESQ watches are manufactured using Swiss
6
movements and other components purchased from third party suppliers principally
located in Asia. Tommy Hilfiger watches are manufactured using movements and
other components purchased from third party suppliers located in Asia.
Ebel watches are currently assembled at the Ebel facility in La Chaux-de-Fonds,
Switzerland using Swiss movements and other components from third party
suppliers.
A majority of the watch movements used in the manufacture of Movado, Concord and
ESQ watches are purchased from two suppliers. The Company obtains other watch
components for all of its manufactured brands, including movements, cases,
hands, dials, bracelets and straps from a number of other suppliers. Precious
stones used in the Company's watches are purchased from various suppliers and
are set in Switzerland. The Company does not have long-term supply contract
commitments with any of its component parts suppliers.
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, substantially 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.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks MOVADO(R), CONCORD(R) and, as of March 1, 2004,
EBEL(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
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, 2006, 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 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
been granted 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 North America, Europe,
Hong Kong, Australia, Southeast Asia (excluding Japan and Korea), the Caribbean,
duty free and U.S. military shops worldwide. In addition, the Company has been
granted the right to sell such watches in Latin and South America. The initial
term of the license agreement with THLI expires December 31, 2006, but can be
extended at the request of the Company through December 31, 2011, if the Company
is in compliance with all material terms of the agreement.
7
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 the United
States Customs Service 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(R) and
CONCORD(R) 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 or Concord watches because the Company is the
manufacturer of such watches. All of the Company's exclusion orders are
renewable.
EMPLOYEES
As of January 31, 2004, the Company had 943 full-time employees in its domestic
and international operations. With the acquisition of the worldwide Ebel
business, the Company also employed approximately 250 employees dedicated to
Ebel production, distribution, marketing and sales, of whom 175 are employed in
Ebel's La Chaux-de-Fonds facility. The Company has announced that it plans to
reduce its La Chaux-de-Fonds workforce by approximately 70 employees. 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.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS AND SEASONALITY
Overview
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 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 Europe.
Domestic Wholesale
The Company sells all of its brands in the domestic market primarily through
major jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc. and
Zales Corporation; department stores, such as Finlay Fine Jewelry, Macy's,
Neiman-Marcus and Saks Fifth Avenue; and independent jewelers. Sales to trade
customers in the United States, Canada and the Caribbean are made directly by
the Company's sales organization of approximately 130 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
8
salary and incentives. In South America, the Company sells Tommy Hilfiger
watches through an independent distributor.
The Company's domestic sales are traditionally greater during the Christmas and
holiday season and are significantly more seasonal than its international sales.
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
approximately 58.6%, 56.8% and 55.0% of the Company's net sales for the fiscal
years ended January 31, 2004, 2003 and 2002, respectively. The amount of net
sales and operating income 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.
International Wholesale
The Company sells Movado, Concord and Coach watches and, as of March 1, 2004,
Ebel watches, internationally through its own sales force of approximately 60
employees operating from the Company's sales and distribution offices in Hong
Kong, Japan, Singapore and Switzerland. In addition, the Company sells Movado,
Concord, Coach, Ebel and Tommy Hilfiger watches through a network of
approximately 90 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. International sales
tend to be less seasonal than domestic sales, particularly those derived from
the Middle Eastern and Asian markets.
Retail
The Company operates in two retail sectors, the luxury boutique market and the
outlet market. The Company operates 17 Movado Boutiques in the luxury boutique
market where Movado watches are sold as well as Movado jewelry, tabletop,
accessories and other product line extensions. In the outlet market the Company
operates 26 outlet stores, which sell the Company's discontinued models and
factory seconds, and provide the Company with an organized and efficient method
of reducing inventory without competing directly with trade customers.
AVAILABLE INFORMATION
The Company's Internet address is www.movadogroupinc.com and it makes available
through that website its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the Securities and Exchange
Commission.
The Company has adopted and will post on its website at www.movadogroupinc.com,
prior to its 2004 annual meeting of shareholders, 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. 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 will also be posted on the Company's website prior to the Company's
2004 annual meeting of shareholders.
9
Item 2. Properties
The Company leases various facilities in the United States, Canada, Switzerland
and Asia for its corporate, manufacturing, distribution and sales operations. As
of January 31, 2004, the Company's leased facilities were as follows:
Square Lease
Location Function Footage Expiration
- -------- -------- ------- ----------
Moonachie, New Jersey Watch assembly, distribution and 100,000 May 2010
repair
Paramus, New Jersey Executive offices 80,400 June 2013
Bienne, Switzerland Corporate functions, watch sales, 53,600 January 2007
distribution, assembly and repair
Markham, Canada Office, distribution and repair 11,200 June 2007
Kowloon, Hong Kong Watch sales, distribution and repair 4,100 March 2009
Hackensack, New Jersey Warehouse 6,600 July 2004
Chang An Dongguan, China China office (market research) 9,600 March 2009
New York, New York Public relations office 2,700 April 2008
Grenchen, Switzerland Watch sales 2,800 December 2005
Coral Gables, Florida Caribbean office, watch sales 1,500 November 2006
Tokyo, Japan Watch sales 1,200 June 2004
Singapore Watch sales, distribution and repair 1,100 August 2004
The Company believes that its existing facilities are suitable and adequate for
its current operations. The Company leases retail space averaging 1,600 square
feet per store with leases expiring from July 2004 to June 2013 for the
operation of the Company's 26 outlet stores. The Company also leases retail
space for the operation of its Movado Boutiques, each of which averages 2,300
square feet (with the exception of the Company's flagship Movado Boutique in New
York City which is 4,700 square feet) under leases expiring from January 2005 to
January 2015.
With the acquisition of the Ebel worldwide business on March 1, 2004, the
Company acquired a number of properties located in La Chaux-de-Fonds,
Switzerland used in the production process, as well as an architecturally
significant building in La Chaux-de-Fonds, and a building in Basel, Switzerland.
The Company also owns approximately 2,400 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions. The Company is currently leasing out this facility.
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.
10
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 2004.
11
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of March 31, 2004, there were 46 holders of record of Class A Common Stock
and, the Company estimates, approximately 2,124 beneficial owners of the Common
Stock represented by 410 holders of record. The Common Stock is traded on the
New York Stock Exchange under the symbol "MOV" and on March 31, 2004, the
closing price of the Common Stock was $29.94. The quarterly high and low closing
prices for the fiscal years ended January 31, 2004 and 2003 were as follows:
Fiscal 2004 Fiscal 2003
----------- -----------
Quarter Ended Low High Low High
------------- --- ---- --- ----
April 30 $17.61 $20.50 $17.19 $22.69
July 31 $19.88 $24.34 $18.04 $25.03
October 31 $20.65 $24.25 $14.69 $19.92
January 31 $25.14 $31.50 $16.52 $19.84
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, 2003, the Board of Directors approved
four $0.03 per share quarterly cash dividends on the Common Stock and Class A
Common Stock. During the fiscal year ended January 31, 2004, the Board of
Directors approved a $0.03 per share dividend in the first quarter and a $0.06
per share dividend in the second, third and fourth quarters. On March 10, 2004,
the Board approved an increase in the quarterly cash dividend rate from $0.06 to
$0.08 per share and approved a 2 for 1 stock split to be effected by means of a
stock dividend distributable on June 25, 2004, to shareholders of record as of
June 11, 2004, subject to shareholder approval of an increase in the number of
authorized shares of Common Stock and Class A Common Stock at the annual
shareholders meeting. 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 4 and 5 to the Consolidated
Financial Statements regarding contractual restrictions on the Company's ability
to pay dividends.
12
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:
Fiscal Year Ended January 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------------------
Statement of income data:
Net sales $330,214 $300,077 $299,725 $320,841 $295,067
Cost of sales 129,908 115,907 115,653 123,392 126,667
Selling, general and administrative 165,525 152,394 157,799 163,317 152,631
------------ ------------ ------------- ------------- -------------
Total costs and expenses 295,433 268,301 273,452 286,709 279,298
------------ ------------ ------------- ------------- -------------
Operating income 34,781 31,776 26,273 34,132 15,769
Interest expense, net 3,044 3,916 5,415 6,443 5,372
Gain on disposition of business - - - - 4,752
Income before taxes and cumulative
effect of a change in accounting
principle 31,737 27,860 20,858 27,689 15,149
Provision for income taxes (1) 8,886 7,801 3,735 6,922 1,428
------------ ------------ ------------- ------------- -------------
Income before cumulative effect of a
change in accounting principle 22,851 20,059 17,123 20,767 13,721
Cumulative effect of a change in
accounting principle - - (109) - -
------------ ------------ ------------- ------------- -------------
Net income (2) (3) $22,851 $20,059 $17,014 $20,767 $ 13,721
============ ============ ============= ============= =============
Net income per share-Basic (2) (3) $1.90 $1.69 $1.46 $1.78 $1.10
Net income per share-Diluted (2) (3) $1.84 $1.65 $1.42 $1.75 $1.06
Basic shares outstanding 12,050 11,870 11,683 11,651 12,527
Diluted shares outstanding 12,439 12,190 12,007 11,866 12,890
Cash dividends declared per share $0.21 $0.12 $0.12 $0.105 $0.10
Balance sheet data (end of period):
Working capital $242,970 $219,420 $153,932 $154,637 $157,465
Total assets $390,967 $345,154 $290,676 $290,405 $259,649
Long-term debt $25,000 $35,000 $35,000 $40,000 $45,000
Shareholders' equity $274,712 $236,212 $172,470 $159,470 $147,815
(1) Reflects a lower estimated tax rate adjustment in fiscal 2002 due to a
shift in global earnings mix.
(2) Fiscal 2000 includes an $8.3 million pre-tax or $0.46 per share after tax
one-time charge and $4.8 million pre-tax or $0.28 per share after tax gain
from the sale of the Company's Piaget business. Excluding these items, net
income would have been $15.9 million or $1.24 per share on a diluted basis.
(3) Fiscal 2002 includes a pre-tax expense of $2.7 million relating to a
one-time severance and early retirement charge. Excluding the one-time
severance and early retirement charge and income tax rate adjustment, net
income would have been $16.9 million or $1.40 per diluted share.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 13% of the Company's total sales are from international markets
and therefore reported sales made in those markets are affected by foreign
exchange rates. Significant portions of the Company's international sales are
billed in Swiss francs and translated to U.S. dollars at average exchange rates
for financial reporting purposes. With the acquisition of Ebel, the Company
expects that a slightly 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 domestic 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. These markets are a
less significant portion of the Company's business and, therefore, their impact
is far less than that of the selling seasons in North America.
Retail Sales. The Company's retail operations consist of 17 Movado Boutiques and
26 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 vary among the brands included in the Company's portfolio and also
among watch models within each brand. Luxury and premium retail price point
models generally earn lower gross margins 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 from the sale of watches
in the Movado Boutiques exceed those of the wholesale business since the Company
earns full channel 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.
Manufacturing costs of the Company's brands consist primarily of component
costs, internal and subcontractor assembly costs and unit overhead costs
associated with the Company's supply chain operations in Switzerland and Asia.
The Company seeks to control and reduce component and subcontractor labor costs
through a combination of negotiations with existing suppliers and alternative
sourcing. 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. 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.
14
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 production costs 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 has, in the
recent past, been reasonably successful in helping to stabilize product costs
and gross margins despite exchange rate fluctuations.
Selling, General and Administrative ("SG&A") Expenses. The Company's SG&A
expenses consist primarily of advertising, selling, distribution and general and
administrative expenses. Annual advertising 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 entertainment, expenses associated with the Basel Watch and Jewelry
Fair 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 SG&A expenses consist primarily of salaries and store rents.
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, bad debts, patent and trademark expenses and various
other general corporate expenses.
SG&A expenses over the last three years reflect the net effect of the Company's
efforts to reduce spending, implement productivity improvements, and at the same
time, invest in strategic growth initiatives, including the Movado Boutique
expansion and the launch of the Tommy Hilfiger watch line.
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 MGI'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 reevaluates its estimates and
judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, financing operations, 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.
Revenue Recognition
The Company recognizes its revenue upon transfer of title and risk of loss, or
in the case of retail sales, at the time of register receipt. The Company
records estimates for returns and sales and cash discount allowances in the same
period the revenue is recorded. These estimates are based upon historical
analysis, customer agreements and/or currently known factors that arise in the
normal course of business. While such returns and
15
allowances have historically been within management's expectations and the
provisions established, future actual experience may differ from that
experienced in the past.
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 the Company's on-going credit evaluations of
the customers and customer payment history and account aging. 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, 2004, there were
no known 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 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 and components are unsaleable in the
Company's outlet stores, 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 reviews its long-lived assets for impairment when 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 present value
of estimated net cash flows or comparable market values, giving consideration to
recent operating performance and pricing trends. In Fiscal 2004, 2003 and 2002,
there were no impairment losses related to long-lived assets.
Warranty
All watches sold by the Company are covered by limited warranties against
defects in material and workmanship for periods ranging from two to ten years
from the date of purchase for movements and up to 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
16
expectations and the provisions established. If such costs were to substantially
exceed estimates, this could have an adverse affect 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.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2004
compared to fiscal 2003 and fiscal 2003 compared to fiscal 2002 along with a
discussion of the changes in financial condition during fiscal 2004.
The following are net sales by business segment (in thousands):
Fiscal Years Ended January 31,
-------------------------------------------
2004 2003 2002
----------- ----------- -----------
Wholesale:
Domestic $224,866 $207,819 $204,685
International 44,475 38,376 47,868
Retail 60,873 53,882 47,172
----------- ----------- -----------
Net Sales $330,214 $300,077 $299,725
=========== =========== ===========
The following table presents the Company's results of operations expressed as a
percentage of net sales for the fiscal years indicated:
Fiscal Years Ended January 31,
------------------------------
2004 2003 2002
---------------------------------------------------------
% of net sales % of net sales % of net sales
---------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 39.3% 38.6% 38.6%
Selling, general and administrative
expenses
50.1% 50.8% 52.6%
Interest expense, net 0.9% 1.3% 1.8%
Net income 6.9% 6.7% 5.7%
17
Fiscal 2004 Compared to Fiscal 2003
Net Sales
Net sales in fiscal 2004 were $330.2 million, or 10.0% above fiscal 2003 sales
of $300.1 million. For the year, sales increases were recorded in all brands and
business segments.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 8.2%, or $17.0 million, to $224.9
million. Double-digit sales increases were recorded in the Concord, Coach and
Tommy Hilfiger brands and mid single-digit increases were recorded in Movado and
ESQ. The increase in Concord sales was fueled by higher unit sales volume with
the introduction of new more accessibly priced steel luxury products. The
increase in sales in the Coach brand was attributable to the introduction of
fashion newness in tandem with Coach's new product offerings. The Company
intends to continue to focus on providing a seamless accessory to the Coach
leather goods customer. The increases in Tommy Hilfiger brand sales reflect
continued door expansion in North America as well as positive sell through at
retail.
International Wholesale Net Sales
The international wholesale business was $44.5 million and was above prior year
by 15.9%, or $6.1 million. The effect of currency translation and the weak U.S.
dollar resulted in an increase in net sales of $3.9 million. Significant
increases were recorded in Tommy Hilfiger as a result of international market
expansion. Coach was above prior year in double digits with higher volume in the
Asian and duty free business. The Movado business was below prior year as a
result of difficult economic conditions in Europe and South America.
Retail Net Sales
Sales in the Company's retail segment increased by $7.0 million, or 13.0%, to
$60.9 million. Strong comparable store sales increases of 20.1% were recorded in
the Movado Boutiques. In addition, increases were recorded as a result of the
expansion into seven new Movado Boutiques opened in fiscal 2004. At January 31,
2004, the Company operated 17 Movado Boutiques and 26 outlet stores as compared
to 10 Movado Boutiques and 26 outlet stores at January 31, 2003.
Gross Margin
Gross margin for the year was $200.3 million, an increase of $16.1 million over
prior year due to the higher sales volume. As a percent of sales, gross margin
was 60.7% versus 61.4% prior year. The lower gross profit percentage is the
result of a few factors. The continued negative effect of the weak U.S. dollar
on Swiss purchases was the major factor. In addition, there was an unfavorable
mix of sales within the business.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses of $165.5 million reflect an 8.6% increase from $152.4 million in
fiscal 2003. As a percentage of sales, SG&A expenses were 50.1% as compared to
50.8% prior year. Included in the $13.1 million increase in SG&A expenses is
approximately $2.7 million in higher costs as a result of the translation impact
of the weak U.S. dollar. In addition, there was increased marketing spending of
$2.6 million, which included the new Movado television campaign, increased
operating costs of $4.4 million to support the seven new Movado Boutiques, and
higher payroll and related costs.
18
Interest Expense
Interest expense in fiscal 2004 declined by $0.9 million from $3.9 million in
fiscal 2003 to $3.0 million in fiscal 2004. The decrease was due to
significantly lower weighted average bank borrowings. The average borrowings for
fiscal 2004 were $50.5 million or 25.7% lower than fiscal 2003 borrowings of
$68.0 million. This was due to favorable cash flow and working capital
management.
Income Taxes
The Company's income tax provision amounted to $8.9 and $7.8 million in fiscal
2004 and 2003, respectively. This represents a 28% effective tax rate in both
fiscal years. Management believes that with the acquisition of Ebel, a slightly
higher percentage of its total sales will be derived from lower tax rate
international markets; thereby slightly reducing the Company's overall effective
rate in fiscal 2005.
Fiscal 2003 Compared to Fiscal 2002
Net Sales
Net sales in fiscal 2003 were $300.1 million, slightly above fiscal 2002 sales
of $299.7 million. The wholesale business overall decreased by $6.4 million or
2.5%.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 1.5% or $3.1 million, to $207.8
million. The domestic sales increase was fueled by door expansion and strong
retail sell through of Tommy Hilfiger watches, double-digit growth in the Coach
brand with the introduction of successful new products and higher sales in the
Movado brand driven by strong new product introductions and solid marketing
support. The increases were offset by lower volume in the luxury Concord brand
and the moderately priced ESQ brand.
International Wholesale Net Sales
The international wholesale business was $38.4 million and was below fiscal 2002
by $9.5 million, or 19.8%. The effect of currency translation and the weak U.S.
dollar resulted in an increase of $3.0 million. The weak economic environment in
Europe and Asia resulted in sales declines in the Concord and Movado brands of
$12.0 million, or 28.3%. This was partially offset by sales increases in the
Tommy Hilfiger brand as a result of the launch in four European markets and
higher sales in the Coach brand in Japan and the duty free business in Asia.
Retail Net Sales
Sales in the Company's retail segment increased by $6.7 million, or 14.2%, to
$53.9 million, due mainly to year-on-year increases of three new Movado
Boutiques and three new outlet stores opened in the latter half of fiscal 2002,
plus the opening of one new outlet store in the latter part of fiscal 2003. In
addition, comparable store sales increased by 4.2% and 5.5% in the Movado
Boutiques and outlet stores, respectively. At January 31, 2003, the Company
owned and operated 10 Movado Boutiques and 26 outlets as compared to 10 Movado
Boutiques and 25 outlets at January 31, 2002.
Gross Margin
Gross margin for the year remained strong at 61.4% and was consistent with
fiscal 2002 results.
19
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses of $152.4 million reflect a 3.4% decline from $157.8 million in
fiscal 2002. As a percentage of sales, SG&A expenses were 50.8% as compared to
52.6% prior year. The effect of currency translation and the weak U.S. dollar
resulted in an increase of $1.6 million. The decrease in SG&A expenses of $5.4
million was the result of a $6.4 million reduction, or 11.3%, in marketing and
advertising mainly due to decreased media and co-op spending in the
international wholesale business, slight reductions in distribution expense and
general and administrative expenses of $1.1 million, or 2.0%, from a $2.7
million one-time severance and early retirement charge in fiscal 2002, partially
offset by higher rental expense and higher legal and bad debt expenses. In
addition, selling expense increased by $2.1 million, or 4.7%, primarily to
support the expansion of the Movado Boutiques.
Interest Expense
Interest expense in fiscal 2003 declined by $1.5 million from $5.4 million in
fiscal 2002 to $3.9 million in fiscal 2003. The decrease was due to
significantly lower weighted average bank borrowings in addition to a lower
effective interest rate on the borrowings. The average borrowings for fiscal
2003 were $67.9 million or 17.6% lower than fiscal 2002 borrowings of $82.4
million. This was due to favorable cash flow and working capital management.
Income Taxes
The Company's income tax provision amounted to $7.8 million and $3.7 million in
fiscal 2003 and 2002, respectively. This represents a 28% effective tax rate in
fiscal 2003 versus an 18% rate for fiscal 2002. The effective tax rate in fiscal
2003 of 28% is more indicative of the Company's expected effective tax rate from
its future operations. The 18% effective tax rate in fiscal 2002 reflected a
decrease in the Company's U.S. source earnings as a percentage of the overall
earnings mix.
LIQUIDITY AND FINANCIAL POSITION
At January 31, 2004, the Company had $82.1 million of cash and cash equivalents
as compared to $38.4 million in the prior year. The $43.7 million increase in
cash was primarily derived from $51.6 million of cash generated from operating
activities, somewhat offset by $11.5 million in cash used in investing
activities primarily for capital expenditures to support the Movado Boutique
expansion and normal information systems spending and $1.9 million of cash used
in financing activities, primarily related to amounts associated with dividends
paid to shareholders.
The Company's major source of funds has been cash generated from operations. In
fiscal 2004, 2003 and 2002, the Company generated cash from operations of $51.6
million, $33.3 million and $16.5 million, respectively. This positive cash flow
has been the source to fund the Company's growth initiatives, as well as to pay
down short-term and long-term debt and to pay dividends.
Accounts receivable at January 31, 2004 were $88.8 million as compared to $94.4
million in the prior year. The decrease is the result of a shift in the mix of
business as well as improved global cash collections. These decreases more than
offset the negative effects of currency translation. Inventories at January 31,
2004 were $121.7 million as compared to $111.7 million in the prior year. Since
48.3% of the inventory is held in Switzerland and Canada, the year-on-year
translation in the balance sheet includes the effect of the weaker U.S. dollar
in fiscal 2004. The effect of the currency translation was an
20
increase of $4.8 million. The reason for the remaining growth was higher
inventory to support the seven new Movado Boutiques slightly offset by lower
wholesale inventory.
The Company used cash of $11.5 million in fiscal 2004, $7.0 million in fiscal
2003 and $14.7 million in fiscal 2002 for investing activities, primarily for
capital expenditures.
Capital expenditures totaled $10.8 million in fiscal 2004. The spending was
primarily for the build out of the seven new Movado Boutiques ($6.5 million),
systems hardware and software investment ($2.2 million) and remodeling of
existing retail operations ($1.4 million). In fiscal 2003, capital expenditures
were $6.5 million and related primarily to the build out of new Movado Boutiques
opened in the Miami, Florida area in February 2003, various information systems
projects and enhancements, the addition of a state-of-the-art jewelry vault in
the Company's Moonachie, New Jersey distribution center and the addition of a
new outlet store. Capital expenditures amounting to $13.9 million in fiscal 2002
relate primarily to the relocation of the Company's U.S. headquarters, opening
two new Movado Boutiques and the flagship Movado Boutique in New York City,
various information systems projects and expansion of the Company's network of
outlet stores. The Company expects that annual capital expenditures in the near
term will approximate the fiscal year 2002 levels. These expenditures will
relate primarily to leasehold improvements, furniture and fixtures for new
Movado Boutiques, management information systems projects and store renovations.
Cash used in financing activities amounted to $1.9 million in fiscal 2004. This
compares to $11.1 million and $6.9 million of cash used in financing activities
in fiscal 2003 and 2002, respectively. Cash used in financing activities during
fiscal 2004 was primarily for dividends paid to shareholders. In fiscal 2003 and
2002, cash was used primarily to pay short-term and long-term debt.
At January 31, 2004, the Company had two series of Senior Notes outstanding.
Senior Notes due January 31, 2005 were originally issued in a private placement
completed in fiscal 1994. These notes have required annual principal payments of
$5.0 million since January 1998 and bear interest of 6.56% per annum. The
Company did not repay any principal in fiscal 2004 due to timing of when
principal payment is due. The Company repaid $5.0 million in principal of these
notes in each of fiscal 2003 and 2002. At January 31, 2004, $10.0 million in
principal of these notes remained outstanding, of which $5.0 million was paid on
February 2, 2004, with the remaining $5.0 million to be paid on January 31,
2005.
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. The
$25.0 million Series A Senior Notes bear interest at 6.90%, mature on October
30, 2010, and are subject to annual repayments of $5.0 million commencing
October 31, 2006.
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. As
of January 31, 2004 and 2003, there were no amounts outstanding under the
agreement.
On June 17, 2003, the Company completed the renewal of its revolving credit line
with its bank group. The agreement provides for a three year $75.0 million
unsecured revolving line of credit and $15.0 million of uncommitted working
capital lines. The line of credit expires on June 17, 2006. The Company had no
outstanding borrowings under its bank lines at January 31, 2004 and January 31,
2003, respectively.
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program. There
were no shares repurchased under the repurchase program
21
during fiscal 2004 or fiscal 2003. As of January 31, 2004, the Company had
authority to repurchase additional shares for up to $4.5 million against an
aggregate authorization of $30.0 million.
For fiscal 2004, treasury shares increased by 493,435 as the result of cashless
exercises of stock options for 642,900 shares of stock.
Cash dividends in fiscal 2004 amounted to $2.5 million compared to $1.6 million
in fiscal 2003 and $1.4 million in fiscal 2002.
At January 31, 2004, the Company had working capital of $243.0 million as
compared to $219.4 million in the prior year. The increase in working capital
was predominantly the result of higher cash, lower debt and an increase in
assets related to hedging derivatives and the translation of Swiss and Canadian
inventories. The Company ended fiscal 2004 with no short-term borrowings and
negative net debt of $47.1 million as compared to no short-term borrowings and
negative net debt of $3.4 million ending fiscal 2003. Net debt is calculated
as cash and cash equivalents less short-term and long-term notes.
In summary, the Company made significant progress in generating positive cash
flow from operating activities in each of the fiscal years 2004, 2003 and 2002.
The Company believes it will continue to generate positive cash flow from
operations in the future.
On March 1, 2004, the Company used 47.9 million Swiss francs in cash
(approximately $37.8 million based on exchange rates as of that date), to
complete the acquisition of the Ebel business from LVMH Moet Hennessy Louis
Vuitton pursuant to a Share Purchase and Transfer of Assets and Liabilities
Agreement, dated December 22, 2003.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments due by period (in thousands):
Less than 1 1-3 4-5 More than 5
Total year years years years
------- ------- ------- ------- -------
Contractual Obligations:
Long-Term Debt Obligations $35,000 $10,000 $ 5,000 $10,000 $10,000
Operating Lease Obligations 67,508 9,456 17,883 14,304 25,865
Revolving Credit Lines - - - - -
------- ------- ------- ------- -------
Total Contractual Obligations $102,508 $19,456 $22,883 $24,304 $35,865
======= ======= ======= ======= =======
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
22
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company's
consolidated financial position, results of operations or cash flows as the
Company does not currently have any such instruments.
In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities" was issued. FIN 46 provides guidance on consolidating
variable interest entities and applies immediately to variable interests created
after January 31, 2003. In December 2003, the FASB revised and superceded FIN 46
with the issuance of FIN 46R in order to address certain implementation issues
which will be adopted in the first reporting period ending after March 15, 2004.
The interpretation requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity to finance its
activities without support from other parties or the equity investors lack
certain specified characteristics. The adoption of FIN 46 did not have an impact
on the Company's consolidated financial position, results of operations or cash
flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104 supercedes SAB 101,
Revenue Recognition in Financial Statements to include the guidance from
Emerging Issues Task Force EITF 00-21 "Accounting for Revenue Arrangements with
Multiple Deliverables." The adoption of SAB 104 did not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
23
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 6 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 purchases various financial instruments,
predominately forward and option contracts. These derivatives are used either to
(a) hedge the Company's Swiss franc liabilities and are fair valued with the
change in fair value reflected in earnings or (b) are documented as SFAS No. 133
cash flow hedges, and the gains and losses on this latter hedging activity are
first reflected in other comprehensive income, and then later classified to
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, 2004, the Company's entire net forward contracts hedging portfolio
consisted of 150.0 million Swiss francs equivalent for various expiry dates
ranging through December 30, 2004. The Company did not hold any Swiss franc
option contracts related to cash flow hedges as of January 31, 2004.
In November 2002, 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, 2004, the
Company's purchased option hedge portfolio related to net investment hedging
amounted to 50.0 million Swiss francs with various expiry dates ranging through
September 27, 2006.
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 to 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 future contracts in its gold hedge portfolio related to
cash flow hedges as of January 31, 2004.
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 January 31, 2004, and the fixed rates were unfavorable.
The Company believes that a 1% change in interest rates will affect the
Company's net income by approximately $0.1 million, which is not material.
24
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule Page
Number Number
------ ------
Report of Independent Auditors F-1
Consolidated Statements of Income for the fiscal years ended
January 31, 2004, 2003 and 2002 F-2
Consolidated Balance Sheets at January 31, 2004 and 2003 F-3
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 31, 2004, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6 to F-23
Valuation and Qualifying Accounts and Reserves II S-1
25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 design and operation of the Company's "disclosure
controls and procedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
making known to them, in a timely manner, material information relating to the
Company and the Company's consolidated subsidiaries required to be disclosed in
the Company's reports filed or submitted under the Exchange Act.
There has been no change in the Company's internal control over financial
reporting during the quarter ended January 31, 2004, 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.
26
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 2004 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
2004 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 2004 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 will post on its website at www.movadogroupinc.com,
prior to its 2004 annual meeting of shareholders, 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 2004 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
The information required by this item is included in the Company's Proxy
Statement for the 2004 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 2004 annual meeting of shareholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item is included in the Company's Proxy
Statement for the 2004 annual meeting of shareholders under the captain "Fees
Paid to PricewaterhouseCoopers LLP" and is incorporated herein by reference.
27
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
--------------------------------------
1. Financial Statements:
See Financial Statements Index on page 25 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 31 through 36 of this annual report.
(b) Current Reports on Form 8-K
---------------------------
The Company filed a report on Form 8-K (Item 7) on December 22, 2003 for
a press release, dated December 22, 2003, announcing the execution of an
agreement to acquire Ebel from LVMH Moet Hennessy Louis Vuitton.
The Company furnished a report on Form 8-K (Item 12) on December 2, 2003
for a press release, dated December 2, 2003, announcing financial results
for the quarter ended October 31, 2003.
28
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 15, 2004 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 15, 2004 /s/ Gedalio Grinberg
-----------------------
Gedalio Grinberg
Chairman of the Board of Directors
Dated: April 15, 2004 /s/ Efraim Grinberg
-----------------------
Efraim Grinberg
President and Chief Executive Officer
Dated: April 15, 2004 /s/ Richard J. Cote
-----------------------
Richard J. Cote
Executive Vice President and
Chief Operating Officer
Dated: April 15, 2004 /s/ Eugene J. Karpovich
-----------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
Dated: April 15, 2004 /s/ Margaret Hayes Adame
------------------------
Margaret Hayes Adame
Director
Dated: April 15, 2004 /s/ Donald Oresman
-----------------------
Donald Oresman
Director
29
Dated: April 15, 2004 /s/ Leonard L. Silverstein
-----------------------
Leonard L. Silverstein
Director
Dated: April 15, 2004 /s/ Alan H. Howard
-----------------------
Alan H. Howard
Director
Dated: April 15, 2004 /s/ Nathan Leventhal
-----------------------
Nathan Leventhal
Director
30
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
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 Agreement, dated as of November 9, 1993, by and
between the Registrant and the Prudential Insurance
Company of America. Incorporated herein by reference
to Exhibit 4.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1993.
4.3 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.
4.4 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. *
4.5 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.
10.1 Amendment Number 1 to License Agreement dated December
9, 1996 between 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
31
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
Report on Form 10-Q for the quarter ended October 31,
1998.
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 January 1,
1998. Incorporated herein by reference to Exhibit
10.25 to the Registrant's Annual Report on Form 10-K
for the year ended January 31, 1998. *
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.
32
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
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.
33
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
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.
10.15 Second Amendment of Lease dated July 26, 2001 between
Mack-Cali Reality, 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, NJ.
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.
34
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.20 Amended and Restated Master Promissory Note Agreement
dated June 21, 2001 between the Registrant and Fleet
National Bank. Incorporated herein by reference to
Exhibit 10.30 to the Registrant's Annual Report on
Form 10-K for the year ended January 31, 2002.
10.21 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.
10.22 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.
10.23 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.
10.24 Amendment dated June 17, 2003 to Line of Credit
Agreement between the Registrant and the Bank of New
York dated August 20, 2001. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 31, 2003.
10.25 Line of Credit Letter Agreement dated June 24, 2003
between the Registrant and Fleet National Bank, as
amended July 28, 2003. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 31, 2003.
35
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.26 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.
10.27 Revolving Credit Agreement dated June 17, 2003 between
the Registrant, Concord Watch Company S.A., Movado
Watch Company S.A., the Lenders signatory thereto and
JP Morgan Chase Bank as Administrative Agent,
Swingline Bank and Issuing Bank. Incorporated herein
by reference to Exhibit 10.3 to the Registrant's
quarterly report on Form 10-Q for the quarter ended
July 30, 2003.
10.28 Waiver and Amendment dated as of February 27, 2004
among the Registrant, Concord Watch Company S.A.,
Movado Watch Company S.A., each of the Lenders
signatory to the Credit Agreement and JP Morgan Chase
Bank as Administrative Agent, Swingline Bank and
10.29 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.
21.1 Subsidiaries of the Registrant
23.2 Consent of PricewaterhouseCoopers LLP
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Constitutes a compensatory plan or arrangement.
36
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Shareholders of Movado Group, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Movado Group, Inc. and its subsidiaries at January 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2004 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 index
appearing under Item 15(a)(2) 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 the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 10, 2004
F-1
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended January 31,
----------------------------------
2004 2003 2002
--------- --------- ---------
Net sales $ 330,214 $ 300,077 $ 299,725
--------- --------- ---------
Costs and expenses:
Cost of sales 129,908 115,907 115,653
Selling, general and administrative 165,525 152,394 157,799
--------- --------- ---------
Total costs and expenses 295,433 268,301 273,452
--------- --------- ---------
Operating income 34,781 31,776 26,273
Interest expense, net 3,044 3,916 5,415
--------- --------- ---------
Income before income taxes and cumulative effect of a
change in accounting principle 31,737 27,860 20,858
Provision for income taxes 8,886 7,801 3,735
--------- --------- ---------
Income before cumulative effect of a change in
accounting principle 22,851 20,059 17,123
Cumulative effect of a change in accounting
principle, net of a tax benefit of $42 -- -- (109)
--------- --------- ---------
Net income $ 22,851 $ 20,059 $ 17,014
========= ========= =========
Basic income per share
Income before cumulative effect of a change in
accounting principle $ 1.90 $ 1.69 $ 1.47
Cumulative effect of a change in accounting
principle -- -- (0.01)
--------- --------- ---------
Net income per share $ 1.90 $ 1.69 $ 1.46
========= ========= =========
Weighted basic average shares outstanding 12,050 11,870 11,683
========= ========= =========
Diluted income per share
Income before cumulative effect of a change in
accounting principle $ 1.84 $ 1.65 $ 1.43
Cumulative effect of a change in accounting
principle -- -- (0.01)
--------- --------- ---------
Net income per share $ 1.84 $ 1.65 $ 1.42
========= ========= =========
Weighted diluted average shares outstanding 12,439 12,190 12,007
========= ========= =========
See Notes to Consolidated Financial Statements
F-2
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31,
----------------------
2004 2003
--------- ---------
ASSETS
Current assets:
Cash $ 82,083 $ 38,365
Trade receivables, net 88,800 94,438
Inventories, net 121,678 111,736
Other 27,932 36,646
--------- ---------
Total current assets 320,493 281,185
Property, plant and equipment, net 42,112 39,939
Other assets 28,362 24,030
--------- ---------
Total assets $ 390,967 $ 345,154
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,000 $ --
Accounts payable 23,631 22,712
Accrued payroll and benefits 8,033 6,010
Accrued liabilities 17,748 16,725
Current taxes payable 12,150 11,467
Deferred income taxes 5,961 4,851
--------- ---------
Total current liabilities 77,523 61,765
Long-term debt 25,000 35,000
Deferred and noncurrent income taxes 2,282 4,229
Other liabilities 11,449 7,948
--------- ---------
Total liabilities 116,254 108,942
--------- ---------
Commitments and contingencies (Notes 10 and 16)
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued -- --
Common Stock, $0.01 par value, 20,000,000 shares
authorized; 10,861,631 and 10,057,367 shares issued,
respectively 109 101
Class A Common Stock, $0.01 par value, 10,000,000 shares
authorized; 3,400,906 and 3,428,277 shares issued and
outstanding, respectively 34 34
Capital in excess of par value 89,491 72,145
Retained earnings 192,601 172,287
Accumulated other comprehensive income 34,473 19,386
Treasury Stock, 2,040,591 and 1,547,156 shares at cost,
respectively (41,995) (27,741)
--------- ---------
Total shareholders' equity 274,713 236,212
--------- ---------
Total liabilities and shareholders' equity $ 390,967 $ 345,154
========= =========
See Notes to Consolidated Financial Statements
F-3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended January 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net income $ 22,851 $ 20,059 $ 17,014
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,973 8,369 7,550
Deferred and noncurrent income taxes 188 (294) (1,859)
Provision for losses on accounts receivable 2,290 1,987 1,384
Provision for inventories 993 830 756
Loss on disposition of leasehold improvements, furniture
and fixtures 109 -- 492
Tax benefit from stock options exercised 2,511 489 685
Changes in current assets and liabilities:
Trade receivables 4,583 (2,602) 4,185
Inventories (6,248) (4,815) (5,372)
Other current assets 12,179 14,236 64
Accounts payable 160 (2,989) (4,443)
Accrued liabilities 987 (2,734) (2,177)
Accrued payroll and benefits 2,023 (811) (198)
Deferred and current taxes payable 543 2,465 (3,051)
Other noncurrent assets (4,997) (248) (6,234)
Other noncurrent liabilities 3,502 (636) 7,750
-------- -------- --------
Net cash provided by operating activities 51,647 33,306 16,546
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (10,830) (6,525) (13,902)
Trademarks (653) (514) (807)
-------- -------- --------
Net cash used in investing activities (11,483) (7,039) (14,709)
-------- -------- --------
Cash flows from financing activities:
Repayment of Senior Notes -- (5,000) (5,000)
Net payment of current bank borrowings -- (6,500) (2,300)
Stock options exercised and other changes 589 2,037 1,780
Dividends paid (2,537) (1,602) (1,360)
-------- -------- --------
Net cash used in financing activities (1,948) (11,065) (6,880)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 5,502 6,192 (1,045)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 43,718 21,394 (6,088)
Cash and cash equivalents at beginning of year 38,365 16,971 23,059
-------- -------- --------
Cash and cash equivalents at end of year $ 82,083 $ 38,365 $ 16,971
======== ======== ========
See Notes to Consolidated Financial Statements
F-4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumulated
Other
Compre-
Class A Capital in hensive
Preferred Common Common Excess of Retained Income Treasury
Stock Stock Stock Par Value Earnings (Loss) Stock
-------- -------- -------- --------- -------- -------- --------
Balance, January 31, 2001 $ -- $ 96 $ 35 $ 67,242 $138,176 ($18,169) ($27,910)
Net income 17,014
Dividends ($0.12 per share) (1,360)
Stock options exercised, net of tax
of $685 2 1,863
Employee stock bonus plan 219
Supplemental executive retirement plan 379
Accounting change, net of tax of $143 367
Net unrealized gain on investments,
net of tax of $77 199
Net change in effective portion of
hedging contracts, net of tax
of $99 (449)
Foreign currency translation adjustment (5,234)
-------- -------- -------- -------- -------- -------- --------
Balance, January 31, 2002 $ -- $ 98 $ 35 $ 69,484 $153,830 ($23,286) ($27,691)
Net income 20,059
Dividends ($0.12 per share) (1,602)
Stock options exercised, net of tax
of $489 2 2,631 (135)
Employee stock bonus plan 85
Supplemental executive retirement plan 30
Net unrealized loss on investments,
net of tax of $25 (82)
Net change in effective portion of
hedging contracts, net of tax
of $2,709 4,584
Foreign currency translation adjustment 38,170
Conversion of Class A Common Stock
to Common Stock 1 (1)
-------- -------- -------- -------- -------- -------- --------
Balance, January 31, 2003 $ -- $ 101 $ 34 $ 72,145 $172,287 $ 19,386 ($27,741)
Net income 22,851
Dividends ($0.21 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)
======== ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
F-5
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 2004, the Company marketed five
distinctive brands of watches: Movado, Concord, ESQ, Coach and Tommy Hilfiger,
which compete in most segments of the watch market.
The Company designs, manufactures and contracts for the assembly of Movado and
Concord watches primarily in Switzerland for sale throughout the world. ESQ and
Tommy Hilfiger watches are manufactured to the Company's specifications by
independent contractors located in Asia. ESQ watches are presently sold
primarily in North America and the Caribbean. Tommy Hilfiger watches are
presently sold throughout the world. Coach watches are assembled in Switzerland
by independent contractors and sold primarily in North America, the Caribbean
and Asia.
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 a number
of outlet stores throughout the United States, through which it sells
discontinued and second merchandise.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances have been eliminated.
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 average exchange
rates for the year. Foreign currency transaction gains and losses are charged or
credited to income 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).
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
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Concord 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,
estimated
F-6
returns and sales and cash discounts of $26.0 million and $22.2 million at
January 31, 2004 and 2003, 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 department store chains. 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, 2004, there were no known situations with any of
the Company's major customers which indicate the customer's inability to make
the required payments.
Inventories
The Company values its inventory at the lower of cost or market 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 and components are unsaleable in the
Company's outlet stores, 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
expectations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of furniture and equipment is provided using the straight-line
method based on the estimated useful lives of assets, which range from three to
ten 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. 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 reviews its long-lived assets for impairment when 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 present value
of estimated net cash flows or comparable market values, giving consideration to
recent operating
F-7
performance and pricing trends. In fiscal 2004, 2003 and 2002, there were no
impairment losses related to long-lived assets.
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 three to seven years.
Intangibles
Intangible assets consist primarily of trademarks and are recorded at cost.
Trademarks are generally 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, 2004 and 2003, intangible assets at cost were
$7.5 million and $6.9 million, respectively, and related accumulated
amortization of intangibles was $3.5 million and $3.0 million, respectively.
Amortization expense for fiscal 2004, 2003 and 2002 was $0.7 million, $0.6
million and $0.5 million, respectively.
Derivative 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 ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. 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.
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 effects earnings, and then are later
reclassified to 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 which is being hedged. 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
F-8
these derivatives are recognized in 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.
Revenue Recognition
The Company recognizes its revenue upon transfer of title and risk of loss or,
in the case of retail sales, at the time of register receipt. The Company
records estimates for returns and sales and cash discount allowances in the same
period the revenue is recorded. These estimates are based upon historical
analysis, customer agreements and/or currently known factors that arise in the
normal course of business.
Preopening Costs
Costs associated with the opening of new boutique and outlet stores are expensed
in the period incurred.
Advertising
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Advertising expense for fiscal
2004, 2003 and 2002 amounted to $53.1 million, $50.5 million and $56.9 million,
respectively.
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.
Warranty Costs
The Company has warranty obligations in connection with the sale of its watches.
The Company's products are covered by limited warranties against defects in
materials and workmanship for periods ranging from two to ten years from the
date of purchase for movements and up to five years for the gold plating on
Movado watch casings and bracelets. The costs incurred to provide for these
warranty obligations are estimated and recorded as an accrued liability based on
historical failure rates and related costs to repair. As of January 31, 2004 and
2003, the reserve balances for warranty costs were $0.9 million for each year.
F-9
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 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 12,050,000, 11,870,000 and 11,683,000 for fiscal 2004, 2003 and 2002,
respectively. For diluted earnings per share, these amounts were increased by
389,000, 320,000 and 324,000 in fiscal 2004, 2003 and 2002, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans.
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 and net income per share
would have been reduced to pro forma amounts as follows:
2004 2003 2002
---- ---- ----
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net Income $22,851 $18,768 $20,059 $16,439 $17,014 $14,249
Net Income per share-Basic $1.90 $1.56 $1.69 $1.38 $1.46 $1.22
Net Income per share-Diluted $1.84 $1.51 $1.65 $1.35 $1.42 $1.19
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $11.78, $9.71 and $7.74
per share in fiscal 2004, 2003 and 2002, respectively. The following
weighted-average assumptions were used for grants in 2004, 2003 and 2002:
dividend yield of 0.87% for
F-10
fiscal 2004, 0.62% for fiscal 2003 and 0.71% for fiscal 2002; expected
volatility of 52% for fiscal 2004, 46% for fiscal 2003 and 50% for fiscal 2002;
risk-free interest rates of 3.04% for fiscal 2004, 5.23% for fiscal 2003 and
4.81% for fiscal 2002 and expected lives of four to seven years for fiscal 2004,
and seven years for each fiscal year of 2003 and 2002.
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.
Stockholders' Equity
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program
throughout fiscal 2004. There were no shares repurchased under the repurchase
program during fiscal 2004 and fiscal 2003. As of January 31, 2004, the Company
had authorization to repurchase shares up to an additional $4.5 million against
an aggregate authorization of $30.0 million.
Recently Issued Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company's
consolidated financial position, results of operations or cash flows as the
Company did not currently have any such instruments.
In January 2003, FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities" was issued. FIN 46 provides guidance on consolidating
variable interest entities and applies immediately to variable interests created
after January 31, 2003. In December 2003, the FASB revised and superceded FIN 46
with the issuance of FIN 46R in order to address certain implementation issues
which will be adopted in the first reporting period ending after March 15, 2004.
The interpretation requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity to finance its
activities without
F-11
support from other parties or the equity investors lack certain specified
characteristics. The adoption of FIN 46 did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104 supercedes SAB 101,
Revenue Recognition in Financial Statements to include the guidance from
Emerging Issues Task Force EITF 00-21 "Accounting for Revenue Arrangements with
Multiple Deliverables." The adoption of SAB 104 does not have an impact on the
Company's consolidated financial position, results of operations or cash flows.
Reclassification
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2004 presentation.
NOTE 2 - INVENTORIES
Inventories at January 31, consisted of the following (in thousands):
2004 2003
--------- ---------
Finished goods $ 78,490 $ 73,148
Component parts 43,335 40,649
Work-in-process 2,261 2,262
--------- ---------
124,086 116,059
Less: inventories reserve (2,408) (4,323)
--------- ---------
$ 121,678 $ 111,736
========= =========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 31, at cost, consisted of the following
(in thousands):
2004 2003
-------- --------
Furniture and equipment $ 37,234 $ 31,393
Computer software 26,333 24,338
Leasehold improvements 25,405 21,420
-------- --------
88,972 77,151
Less: accumulated depreciation (46,860) (37,212)
-------- --------
$ 42,112 $ 39,939
======== ========
Depreciation and amortization expense for fiscal 2004, 2003 and 2002 was $10.0
million, $7.6 million and $6.8 million, respectively, which includes computer
software amortization expense for fiscal 2004, 2003 and 2002 of $2.9 million,
$3.0 million and $2.6 million, respectively.
NOTE 4 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
The Company's revolving credit facility with its domestic bank group was amended
in June 2003 to provide for a three year $75.0 million unsecured revolving line
of credit. The line of credit expires on June 17, 2006. In
F-12
addition, certain members within the bank group provided for $15.0 million of
uncommitted working capital lines of credit at January 31, 2004 and 2003,
respectively. As of January 31, 2004, one bank in the domestic bank group issued
five irrevocable standby letters of credit for retail and operating facility
leases to various landlords and Canadian payroll to the Royal Bank of Canada
totaling $0.6 million with expiry dates through May 19, 2005. The Company pays a
facility fee on the unused portion of the credit facility. The agreement also
contains certain financial covenants including an interest coverage ratio, and
certain restrictions that limit the Company on the sale, transfer or
distribution of corporate assets, including dividends, and limit the amount of
debt outstanding. The Company was in compliance with these restrictions and
covenants at January 31, 2004 and 2003. The domestic unused line of credit was
$90.0 million and $115.0 million at January 31, 2004 and 2003, respectively.
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 8.8 million Swiss francs at both January 31, 2004 and 2003, with dollar
equivalents of approximately $7.0 million and $6.5 million, respectively, of
which a maximum of $5.0 million can be drawn. As of January 31, 2004, the Swiss
bank has made guarantees to certain Swiss third party obligations of
approximately 0.9 million Swiss francs. There are no restrictions on transfers
in the form of dividends, loans or advances to the Company by its foreign
subsidiaries.
There were no outstanding borrowings against the Company's aggregate demand
lines of credit at January 31, 2004 and January 31, 2003, respectively.
Aggregate maximum and average monthly outstanding borrowings against the
Company's lines of credit and related weighted average interest rates during
fiscal 2004 and 2003 were as follows (dollars in thousands):
Fiscal Year Ended January 31,
-----------------------------
2004 2003
------- -------
Maximum borrowings $31,000 $38,425
Average monthly borrowings $15,532 $27,958
Weighted average interest rate 2.1% 2.8%
Weighted average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
NOTE 5 - LONG-TERM DEBT
The components of long-term debt as of January 31 were as follows (in
thousands):
2004 2003
------- -------
Senior Notes $10,000 $10,000
Series A Senior Notes 25,000 25,000
------- -------
35,000 35,000
Less: current portion 10,000 --
------- -------
Long-term debt $25,000 $35,000
======= =======
Senior Notes due January 31, 2005 (the "Senior Notes") were issued in a private
placement completed in fiscal 1994 and bear interest at 6.56% per annum, payable
semiannually on July 31 and January 31, and are subject to
F-13
annual payments of $5.0 million commencing January 31, 1998. At January 31,
2004, $10.0 million in principal amount of these notes remained outstanding, of
which $5.0 million was paid on February 2, 2004, with the remaining $5.0 million
to be paid on January 31, 2005. The Company has the option to prepay amounts due
to holders of the Senior Notes at 100% of the principal plus a "make-whole"
premium and accrued interest.
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.
On 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. As
of January 31, 2004 and 2003, there were no amounts outstanding under the
agreement.
The agreements governing the Senior Notes and Series A Senior Notes contain
certain restrictions and covenants which generally require the maintenance of a
minimum net worth, limit the amount of additional secured debt the Company can
incur and limit the sale, transfer or distribution of corporate assets,
including dividends. The Company was in compliance with these restrictions and
covenants at January 31, 2004 and 2003.
NOTE 6 - DERIVATIVE INSTRUMENTS
The Company follows the provisions of SFAS No. 133 requiring that all derivative
instruments be recorded on the balance sheet at fair value.
As of January 31, 2004, the balance of deferred net gains on derivative
instruments documented as cash flow hedges included in accumulated other
comprehensive income ("AOCI") was $1.6 million, net of tax of $1.0 million,
compared to $4.5 million in net gains at January 31, 2003, net of tax of $2.9
million and $0.4 million in net loss at January 31, 2002, net of a tax benefit
of $0.1 million. The Company estimates that a substantial portion of the
deferred net gains at January 31, 2004 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 predominantly 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, 2004, 2003 and 2002,
the Company reclassified net gains from AOCI to earnings of approximately $3.2
million, net of tax of $2.0 million, $1.7 million, net of tax of $1.0 million,
and $0.6 million, net of tax of $0.4 million, respectively.
During fiscal 2004, 2003 and 2002, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio. However, the
Company incurred a $0.2 million loss, net of a tax benefit of $0.1 million, for
the amounts excluded in the assessment of the derivative hedge portfolio
effectiveness for each of fiscal years 2004 and 2003, and $2.2 million loss, net
of a tax benefit of $0.5 million in fiscal 2002. The Company records these
transactions in the cost of sales of the consolidated statements of income.
F-14
The balance of the net loss included in the cumulative foreign currency
translation adjustment associated with derivatives documented as net investment
hedges was $1.0 million, net of a tax benefit of $0.6 million as of January 31,
2004, compared to a net loss of $0.3 million, net of a tax benefit of $0.2
million, as of January 31, 2003. Under SFAS No. 133, changes in fair value of
these instruments are recognized in 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, 2004 (in millions):
January 31, 2004
Fair Value Maturities
Forward exchange contracts $5.5 2004
Purchased foreign currency options $1.1 2005-2006
---------
$6.6
=========
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 instruments are currently reflected in other assets or current
liabilities.
NOTE 7 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 6.56% Senior Notes and 6.90% Series A Senior
Notes approximate 103% and 107% of the carrying value of the notes,
respectively, as of January 31, 2004. 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.
F-15
NOTE 8 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2004, 2003
and 2002 consists of the following components (in thousands):
2004 2003 2002
------- ------- -------
Current:
U.S. Federal $ 4,346 $ 3,454 $ 480
U.S. State and Local (126) 134 (165)
Non-U.S. 1,282 445 1,221
------- ------- -------
5,502 4,033 1,536
------- ------- -------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local -- -- --
Non-U.S. 2,186 3,165 1,109
------- ------- -------
2,186 3,165 1,109
------- ------- -------
Deferred:
U.S. Federal (351) 775 1,057
U.S. State and Local 60 (65) 26
Non-U.S. 1,489 (107) 7
------- ------- -------
1,198 603 1,090
------- ------- -------
Provision for income taxes $ 8,886 $ 7,801 $ 3,735
======= ======= =======
Significant components of the Company's deferred income tax assets and
liabilities for the fiscal year ended January 31, 2004 and 2003 consist of the
following (in thousands):
2004 Deferred Taxes 2003 Deferred Taxes
------------------- -------------------
Assets Liabilities Assets Liabilities
-------- -------- -------- --------
Operating loss carryforwards $ 896 -- $ 1,159 $ --
Rent accrual 310 -- 257 --
Inventory reserve 1,633 4,843 2,364 5,025
Receivable allowance 2,840 900 1,941 1,079
Deferred compensation 3,941 -- 3,718 --
FAS 133 -- 471 -- 2,668
Depreciation/amortization -- 544 23 --
Other 1,603 1,218 1,537 308
-------- -------- -------- --------
11,223 7,976 10,999 9,080
Valuation allowance (795) -- (950) --
-------- -------- -------- --------
Total $ 10,428 $ 7,976 $ 10,049 $ 9,080
======== ======== ======== ========
As of January 31, 2004, the Company had foreign net operating loss
F-16
carryforwards of approximately $3.4 million, which are available to offset
taxable income in future years. As of January 31, 2004, the Company maintained a
valuation allowance with respect to the tax benefit of certain foreign net
operating loss carryforwards. Since the Company's foreign deferred tax assets
relate primarily to its former sales office in Germany, which is currently
operated by an independent distributor, the Company's assessment is that the
foreign deferred tax assets will not likely be utilized in the foreseeable
future. Management is continuing to evaluate the appropriate level of allowance
based on future operating results and changes in circumstances.
The provision for income taxes differs from the amount determined by applying
the U.S. federal statutory rate as follows (in thousands):
Fiscal Year Ended January 31,
-----------------------------
2004 2003 2002
-------- -------- --------
Provision for income taxes at the U.S. statutory rate $ 11,108 $ 9,751 $ 7,262
Lower effective foreign income tax rate (5,487) (4,110) (4,332)
Change in valuation allowance (13) (12) 110
Tax provided on repatriated earnings of foreign subsidiaries 3,133 1,856 1,377
State and local taxes, net of federal benefit (43) 44 (139)
Other, net 188 272 (543)
-------- -------- --------
Total $ 8,886 $ 7,801 $ 3,735
======== ======== ========
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 $203.0 million at January 31, 2004, as those earnings
are considered reinvested for an indefinite period. 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
such earnings.
NOTE 9 - 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 $0.7 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 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, 2004, the total premiums
paid amounted to $6.1 million and the cash surrender value of the policy was
$5.6 million.
NOTE 10 - LEASES, COMMITMENTS AND CONTINGENCIES
The Company leases office, distribution, retail and manufacturing facilities,
and office equipment under operating leases, which expire at various dates
through January 2015. Certain of the leases provide for renewal
F-17
options and escalation clauses for real estate taxes and other occupancy costs.
Rent expense for equipment and distribution, factory and office facilities under
operating leases was approximately $9.7 million, $8.9 million and $7.7 million
in fiscal 2004, 2003 and 2002, respectively. Minimum annual rentals at January
31, 2004 under noncancelable operating leases, which do not include escalations
that will be based on increases in real estate taxes and operating costs, are as
follows:
Fiscal Year Ending January 31,
(in thousands):
2005 $ 9,456
2006 9,294
2007 8,589
2008 7,318
2009 6,986
Thereafter 25,865
-------
$67,508
=======
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses. The Company believes it is
adequately insured against such losses.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. Company contributions and expenses of administering the
Employee Savings Plan amounted to $0.6 million, $0.7 million and $0.6 million in
fiscal 2004, 2003 and 2002, 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 2004, 2003 and 2002, the Company
recorded an expense related to the SERP of approximately $0.5 million for each
year.
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 2004, 2003 and 2002, the Company recorded an
expense of $0.3 million, $0.2 million and $0.1 million, respectively, 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 $300,000 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 include an
actuarially determined charge related to this plan of approximately $0.2
million, $0.1 million and $0.1 million in fiscal years 2004, 2003 and 2002,
respectively.
F-18
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, the Compensation
Committee of the Board of Directors, which is comprised of the Company's five
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 3,500,000 shares of Common Stock. Options granted to
participants under the Plan generally become exercisable in equal installments
over three or five 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 2001 are summarized as
follows:
Outstanding Weighted Average
Options Exercise Price
------- --------------
January 31, 2001 1,614,301 $15.09
Options granted 911,700 $17.26
Options exercised (231,301) $ 8.29
Options forfeited (118,028) $19.70
---------- ------
January 31, 2002 2,176,672 $16.47
Options granted 324,450 $20.10
Options exercised (177,748) $ 9.08
Options forfeited (53,614) $18.77
---------- ------
January 31, 2003 2,269,760 $17.52
Options granted 489,072 $24.06
Options exercised (819,855) $17.47
Options forfeited (76,988) $11.72
---------- ------
January 31, 2004 1,861,989 $19.41
========== ======
Options exercisable at January 31, 2004, 2003 and 2002 were 1,222,956, 1,095,797
and 796,015, respectively.
The following table summarizes outstanding and exercisable stock options as of
January 31, 2004:
F-19
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------------
$6.24 - $9.35 136,127 6.3 $8.50 66,607 $8.50
$9.36 - $12.46 161,688 2.0 $9.94 161,688 $9.94
$12.47 - $15.57 321,874 5.8 $13.99 191,669 $13.73
$15.58 - $18.69 83,033 7.0 $17.21 17,201 $16.68
$18.70 - $21.80 468,064 7.0 $20.44 209,228 $20.62
$21.81 - $24.92 143,844 5.2 $23.98 115,344 $23.97
$24.93 - $28.03 203,762 6.5 $25.59 117,622 $26.02
$28.04 - $31.15 343,597 6.7 $30.42 343,597 $30.42
- -----------------------------------------------------------------------------------------------------------------------
1,861,989 6.2 $19.41 1,222,956 $20.99
- -----------------------------------------------------------------------------------------------------------------------
NOTE 12 - TOTAL COMPREHENSIVE INCOME
The components of comprehensive income for the twelve months ended January 31,
2004, 2003 and 2002 are as follows (in thousands):
2004 2003 2002
-------- -------- --------
Net income $22,851 $20,059 $17,014
Accounting change, net of tax -- -- 367
Net unrealized gain (loss) on investments, net of
tax 139 (82) 199
Net change in Effective portion of
hedging contracts, net of tax (3,434) 4,584 (449)
Foreign currency translation adjustment 18,382 38,170 (5,234)
-------- -------- --------
Total comprehensive income $37,938 $62,731 $11,897
======== ======== ========
NOTE 13 - SEGMENT INFORMATION
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 Europe.
F-20
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Operating Income (Loss)
----------------------------------------------- --------------------------------------------
2004 2003 2002 2004 2003 2002
------------ ------------- ------------- ------------ ------------ ------------
Wholesale (1) $269,341 $246,195 $252,553 $34,930 $29,544 $25,445
Retail 60,873 53,882 47,172 (149) 2,232 828
------------ ------------- ------------- ------------ ------------ ------------
Consolidated total $330,214 $300,077 $299,725 $34,781 $31,776 $26,273
============ ============= ============= ============ ============ ============
Total Assets Capital Expenditures
----------------------------------------------- --------------------------------------------
2004 2003 2002 2004 2003 2002
------------- ------------- ------------- ------------ ------------ ------------
Wholesale $344,765 $310,937 $259,499 $2,958 $4,383 $8,631
Retail 46,202 34,217 31,177 7,872 2,142 5,271
------------- ------------- ------------- ------------ ------------ ------------
Consolidated total $390,967 $345,154 $290,676 $10,830 $6,525 $13,902
============= ============= ============= ============ ============ ============
Depreciation and Amortization
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Wholesale $7,500 $6,517 $6,043
Retail 2,473 1,852 1,507
------------- ------------- -------------
Consolidated total $9,973 $8,369 $7,550
============= ============= =============
Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Long-Lived Assets
---------------------------------- ----------------------------------
2004 2003 2002 2004 2003 2002
-------- -------- -------- -------- -------- --------
Domestic $285,739 $261,701 $251,857 $30,216 $26,530 $26,770
International 44,475 38,376 47,868 11,896 13,409 11,956
-------- -------- -------- -------- -------- --------
Consolidated total $330,214 $300,077 $299,725 $42,112 $39,939 $38,726
======== ======== ======== ======== ======== ========
Operating Income (Loss)
-------------------------------
2004 2003 2002
------- ------- -------
Domestic $6,622 $8,458 $3,704
International 28,159 23,318 22,569
------- ------- -------
Consolidated total $34,781 $31,776 $26,273
======= ======= =======
(1) The domestic and international net sales are net of intercompany sales of
$209.7 million, $182.5 million and $150.5 million for the twelve months
ended January 31, 2004, January 31, 2003 and January 31, 2002,
respectively.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2004 and 2003(in thousands, except per share amounts):
F-21
Quarter Ended
--------------------------------------------------
1st 2nd 3rd 4th
------- ------- -------- -------
Fiscal 2004
Net sales $60,170 $76,545 $100,767 $92,732
Gross profit $36,440 $47,239 $ 61,339 $55,288
Net income $ 856 $ 5,751 $ 10,074 $ 6,170
Per share:
Net income:
Basic $ 0.07 $ 0.48 $ 0.83 $ 0.51
Diluted $ 0.07 $ 0.46 $ 0.80 $ 0.49
Fiscal 2003
Net sales $57,271 $72,244 $ 91,023 $79,539
Gross profit $35,179 $44,373 $ 55,775 $48,843
Net income $ 332 $ 5,372 $ 8,808 $ 5,547
Per share:
Net income
Basic $ 0.03 $ 0.45 $ 0.74 $ 0.47
Diluted $ 0.03 $ 0.44 $ 0.73 $ 0.46
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 15 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (in thousands):
Fiscal Year Ended January 31,
2004 2003 2002
------ ------ ------
Cash paid during the year for:
Interest $2,369 $3,559 $4,963
Income taxes $5,864 $6,583 $9,118
NOTE 16 - SUBSEQUENT EVENTS
On March 1, 2004, Movado Group, Inc. (the "Company") completed the previously
announced acquisition of the Ebel business (the "Ebel Business") from LVMH Moet
Hennessy Louis Vuitton ("LVMH") pursuant to a Share Purchase and Transfer of
Assets and Liabilities Agreement, dated December 22, 2003, between Concord Watch
Company SA, a wholly-owned subsidiary of the Company (the "Purchaser"), and
Sofidiv SAS, a wholly-owned subsidiary of LVMH (the "Seller"), as amended by
Amendment dated March 1, 2004 (the "Purchase
F-22
Agreement"), except for the acquisition of the Ebel Business in Germany, which
the Company expects to complete on or about May 1, 2004. The transaction was
effected through (i) the acquisition by the Purchaser from the Seller of all of
the outstanding shares of capital stock of Ebel SA, a wholly-owned subsidiary of
the Seller engaged in the Ebel Business, and (ii) the transfer of certain
additional assets and liabilities related to the Ebel Business from certain
affiliates of the Seller to certain affiliates of the Purchaser.
The total purchase price, which was based in part on the net book value of the
transferred assets, was 47.9 million Swiss francs in cash (approximately $37.8
million based on exchange rates as of March 1, 2004), subject to post-closing
adjustments. The Company funded the acquisition with cash on hand. The Company
currently intends to use the acquired assets in the continued operation of the
Ebel business.
On March 10, 2004, the Board approved an increase in the quarterly cash dividend
rate from $0.06 to $0.08 per share and approved a 2 for 1 stock split to be
effected by means of a stock dividend distributable on June 25, 2004 to
shareholders of record as of June 11, 2004, subject to shareholder approval of
an increase in the number of authorized shares of Common Stock and Class A
Common Stock at the annual shareholders meeting.
F-23
Schedule II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Provision
beginning charged to Currency Net Balance at
Description of year operations revaluation write-offs end of year
----------- ------- ------------ ----------- ----------- -----------
Year ended January 31, 2004:
Allowance for doubtful accounts $5,235 $2,290 $106 ($972) $6,659
Year ended January 31, 2003:
Allowance for doubtful accounts $4,070 $1,987 $93 ($915) $5,235
Year ended January 31, 2002:
Allowance for doubtful accounts $4,442 $1,384 ($16) ($1,740) $4,070
Balance at Provision
beginning charged to Currency Net Balance at
of year operations revaluation write-offs end of year
------- ------------ ----------- ----------- -----------
Year ended January 31, 2004:
Inventory reserve $4,323 $993 ($645) ($2,263) $2,408
Year ended January 31, 2003:
Inventory reserve $8,151 $1,829 $848 ($6,505) $4,323
Year ended January 31, 2002:
Inventory reserve $9,607 $885 ($479) ($1,862) $8,151
Balance at Provision/
beginning (benefit) Currency Balance at
of year to operation revaluation Adjustments end of year
------- ------------ ----------- ----------- -----------
Year ended January 31, 2004:
Deferred tax assets valuation $950 ($13) ($142) $-- $795
Allowance
Year ended January 31, 2003:
Deferred tax assets valuation $1,480 ($12) $86 ($604) $950
Allowance
Year ended January 31, 2002:
Deferred tax assets valuation $1,383 $110 ($13) $-- $1,480
Allowance
S-1