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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended January 31, 2006,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period From to
Commission File Number 1-16497
MOVADO GROUP, INC.
(Exact name of registrant as specified in its charter)
<Table>
New York 13-2595932
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
650 From Road, 07652
Paramus, New Jersey (Zip Code)
(Address of Principal Executive Offices)
</Table>
Registrant's Telephone Number, Including Area Code:(201) 267-8000
Securities Registered Pursuant to Section 12(b) of the Act:
<Table>
Name of Each Exchange
Title of Each Class on which Registered
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Common stock, par value $0.01 per share New York Stock Exchange
</Table>
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 31, 2005 was approximately $394,027,633 (based on the
closing sale price of the registrant's Common Stock on that date as reported on
the New York Stock Exchange). For purposes of this computation, each share of
Class A Common Stock is assumed to have the same market value as one share of
Common Stock into which it is convertible and only shares of stock held by
directors and executive officers were excluded.
The number of shares outstanding of the registrant's Common Stock and Class
A Common Stock as of March 31, 2006 were 23,218,749 and 6,766,909, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to registrant's 2006
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference in Part III hereof.
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PART I
FORWARD-LOOKING STATEMENTS
Statements in this annual report on Form 10-K, including, without limitation,
statements under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and oral statements made by or with
the approval of an authorized executive officer of the Company, which are not
historical in nature, are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management's assumptions. Words such as "expects", "anticipates", "targets",
"goals", "projects", "intends", "plans", "believes", "seeks", "estimates",
"may", "will", "should" and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company's future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs, plans
for future operations, expectations regarding capital expenditures and operating
expenses, effective tax rates, margins, interest costs, and income as well as
assumptions relating to the foregoing. Forward-looking statements are subject to
certain risks and uncertainties, some of which cannot be predicted or
quantified. Actual results and future events could differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC including, without
limitation, the following: general economic and business conditions which may
impact disposable income of consumers in the United States and the other
significant markets where the Company's products are sold, general uncertainty
related to possible terrorist attacks and the impact on consumer spending,
changes in consumer preferences and popularity of particular designs, new
product development and introduction, competitive products and pricing,
seasonality, availability of alternative sources of supply in the case of the
loss of any significant supplier, the loss of significant customers, the
Company's dependence on key employees and officers, the ability to successfully
integrate the operations of acquired businesses without disruption to other
business activities, the continuation of licensing arrangements with third
parties, the ability to secure and protect trademarks, patents and other
intellectual property rights, the ability to lease new stores on suitable terms
in desired markets and to complete construction on a timely basis, the continued
availability to the Company of financing and credit on favorable terms, business
disruptions, disease, general risks associated with doing business outside the
United States including, without limitation, import duties, tariffs, quotas,
political and economic stability, and success of hedging strategies with respect
to currency exchange rate fluctuations.
These risks and uncertainties, along with the risk factors discussed under Item
1A "Risk Factors" in this Annual Report on Form 10-K, should be considered in
evaluating any forward-looking statements contained in this report or
incorporated by reference herein. All forward-looking statements speak only as
of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to the Company or any person acting on
its behalf are qualified by the cautionary statements in this section. The
Company undertakes no obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report.
1
Item 1. Business
GENERAL
In this Form 10-K, all references to the "Company", "Movado Group" or "MGI"
include Movado Group, Inc. and its subsidiaries, unless the context requires
otherwise.
Movado Group, Inc. is a manufacturer, distributor and retailer of fine watches
and jewelry. Its portfolio of brands is comprised of Movado(R), Ebel(R),
Concord(R), ESQ(R) SWISS ("ESQ"), Coach(R) Watches, HUGO BOSS(R) Watches, Juicy
Couture(TM) Watches and Tommy Hilfiger(R) Watches and beginning January 2007,
Lacoste(R) Watches. The Company is a leader in the design, development,
marketing and distribution of watch brands sold in almost every major category
comprising the watch industry. The Company also designs, develops and markets
proprietary Movado-branded jewelry, tabletop and accessory products which it
retails in its luxury Movado Boutiques.
The Company was incorporated in New York in 1967 under the name North American
Watch Corporation, to acquire Piaget Watch Corporation and Corum Watch
Corporation, which had been, respectively, the exclusive importers and
distributors of Piaget and Corum watches in the United States since the 1950's.
The Company sold its Piaget and Corum distribution businesses in 1999 and 2000,
respectively, to focus on its own portfolio of brands. Since its incorporation,
the Company has developed its brand-building reputation and distinctive image
across an expanding number of brands and geographic markets. Strategic
acquisitions and their subsequent growth, along with license agreements have
played an important role in the expansion of the Company's brand portfolio.
In 1970, the Company acquired the Concord brand and the Swiss company that had
been manufacturing Concord watches since 1908. In 1983, the Company acquired the
U.S. distributor of Movado watches and substantially all of the assets related
to the Movado brand from the Swiss manufacturer of Movado watches. The Company
changed its name to Movado Group, Inc. in 1996. In March 2004, the Company
completed its acquisition of Ebel, one of the world's premier luxury watch
brands that was established in La Chaux-de-Fonds, Switzerland in 1911.
The Company is very selective in its licensing strategy and chooses to enter
long-term partnerships with only powerful brands that are leaders in their
respective businesses. Under an exclusive agreement with The Hearst Corporation,
the Company launched ESQ in 1993. In 1999, the Company launched Coach Watches
under an exclusive agreement with Coach, Inc., and in 2001 Tommy Hilfiger
Watches under an exclusive agreement with Tommy Hilfiger, Inc.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share. On October 21, 1997, the Company
completed a secondary stock offering in which 1,500,000 shares of common stock
were issued. On May 21, 2001, the Company moved from the NASDAQ National Market
to the New York Stock Exchange ("NYSE"). The Company's common stock is traded on
the NYSE under the trading symbol MOV.
RECENT DEVELOPMENTS
Effective March 21, 2005, the Company entered into an exclusive worldwide
license agreement with HUGO BOSS to design, produce and market a collection of
watches under the BOSS(TM) and HUGO(TM) brand names. In 2005, the Company
introduced a limited number of HUGO BOSS watch models, with a major launch of a
new collection planned for Spring 2006 at Baselworld, the annual watch and
jewelry trade show held in Basel,
2
Switzerland. The HUGO BOSS collection will be sold through select distribution
outlets in Europe, the Americas and Asia, as well as HUGO BOSS retail locations.
On August 31, 2005, the Company signed a joint venture agreement ("JV
Agreement") with Financiere TWC SA ("TWC"), a French company with established
distribution, marketing and sales operations in France and Germany. Under the JV
Agreement, the Company and TWC control 51% and 49%, respectively, of MGI-TWC
B.V., a Dutch holding company that owns MGI-TWC SAS, a French corporation, and
MGI-TWC GmbH, a German corporation (collectively, the "Subsidiaries"). The
Subsidiaries are responsible for the marketing, distribution and sale in France
and Germany of the Company's licensed HUGO BOSS and Tommy Hilfiger brands, as
well as future brands licensed to the Company, subject to the terms of the
applicable license agreement. The terms of the JV Agreement include financial
performance measures which, if not attained, give either party the right to
terminate the JV Agreement after the fifth (5th) and the tenth (10th) year
(January 31, 2011 and January 31, 2016); restrictions on the transfer of shares
in the Dutch holding company; and a buy out right whereby the Company can
purchase all of TWC's shares in the holding company as of July 1, 2016 and every
5th anniversary thereafter at a pre-determined price. As of January 31, 2006,
there were no transactions between the Company and TWC.
In November 2005, Movado Group, Inc. entered into an exclusive worldwide license
agreement with L.C. Licensing, Inc. to design, produce and market a collection
of watches under the Juicy Couture and Couture Couture brand names. Juicy
Couture Watches are scheduled to launch in Fall 2006 and will be sold through
select high-end retailers initially in the United States, followed by Europe and
Asia.
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste, S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE name and the distinctive Lacoste "alligator" logo beginning in the
first half of 2007.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and Asia. The
Company divides the watch market into six principal categories as set forth in
the following table.
Suggested Retail Primary Category of Movado Group, Inc.
Market Category Price Range Brands
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Exclusive $10,000 and over Ebel and Concord
Luxury $1,500 to $9,999 Ebel, Concord and Movado
Premium $500 to $1,499 Movado
Moderate $100 to $499 ESQ, Coach, HUGO BOSS and Juicy Couture
Fashion $55 to $99 Tommy Hilfiger
Mass Market Less than $55 --
3
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and are often set with precious gems. These watches are primarily
mechanical or quartz-analog watches. Mechanical watches keep time with intricate
mechanical movements consisting of an arrangement of wheels, jewels and winding
and regulating mechanisms. Quartz-analog watches have quartz movements in which
time is precisely calibrated to the regular frequency of the vibration of quartz
crystal. Exclusive watches are manufactured almost entirely in Switzerland. In
addition to the Company's Ebel and Concord watches, well-known brand names of
exclusive watches include Audemars Piguet, Patek Philippe, Piaget and Vacheron
Constantin.
Luxury Watches
Luxury watches are either quartz-analog watches or mechanical watches. These
watches typically are made with either 14 or 18 karat gold, stainless steel or a
combination of gold and stainless steel, and are occasionally set with precious
gems. Luxury watches are primarily manufactured in Switzerland. In addition to a
majority of the Company's Ebel and Concord watches and certain Movado watches,
well-known brand names of luxury watches include Baume & Mercier, Breitling,
Cartier, Omega, Rolex and TAG Heuer.
Premium Watches
The majority of premium watches are quartz-analog watches. These watches
typically are made with gold finish, stainless steel or a combination of gold
finish and stainless steel. Premium watches are manufactured primarily in
Switzerland, although some are manufactured in Asia. In addition to a majority
of the Company's Movado watches, well-known brand names of premium watches
include Gucci, Rado and Raymond Weil.
Moderate Watches
Most moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in Asia and Switzerland. These watches typically are made
with gold finish, stainless steel, brass or a combination of gold finish and
stainless steel. In addition to the Company's ESQ, Coach, HUGO BOSS and Juicy
Couture brands, well-known brand names of watches in the moderate category
include Anne Klein, Bulova, Citizen, Guess, Seiko and Wittnauer.
Fashion Watches
Watches comprising the fashion market are primarily quartz-analog watches but
also include some digital watches. Watches in the fashion category are generally
made with stainless steel, gold finish, brass and/or plastic and are
manufactured primarily in Asia. Fashion watches feature designs that reflect
current and emerging fashion trends. Many are sold under licensed designer and
brand names that are well-known principally in the apparel industry. In addition
to the Company's Tommy Hilfiger brand, other well-known brands of fashion
watches include Anne Klein II, DKNY, Fossil, Guess, Kenneth Cole and Swatch.
Mass Market Watches
Mass market watches typically consist of digital watches and analog watches made
from stainless steel, brass and/or plastic and are manufactured in Asia.
Well-known brands include Casio, Citizen, Pulsar, Seiko and Timex. The Company
does not compete in the mass market watch category.
4
PRODUCTS
The Company designs, develops, markets and distributes products under the
following watch brands:
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, Movado is an icon of modern
design. Today the brand includes a line of watches, inspired by the simplicity
of the Bauhaus movement, including the world famous Movado Museum watch and a
number of other watch collections with more traditional dial designs. The design
for the Movado Museum watch was the first watch design chosen by the Museum of
Modern Art for its permanent collection. It has since been honored by other
museums throughout the world. All Movado watches have Swiss movements and are
made with 14 or 18 karat gold, 18 karat gold finish, stainless steel or a
combination of 18 karat gold finish and stainless steel. The majority of Movado
watches have suggested retail prices between $550 and $2,995.
Ebel
The Ebel brand, one of the world's premier luxury watch brands, was established
in La Chaux-de-Fonds, Switzerland in 1911. All Ebel watches feature Swiss
movements and are made with solid 18 karat gold, stainless steel or a
combination of 18 karat gold and stainless steel. The majority of Ebel watches
have suggested retail prices between $1,400 and $17,800.
Concord
Concord was founded in 1908 in Bienne, Switzerland. All Concord watches have
Swiss movements and are made with solid 18 karat or 14 karat gold, stainless
steel or a combination of 18 karat gold and stainless steel. The majority of
Concord watches have suggested retail prices between $1,690 and $14,900.
Coach Watches
Coach Watches are an extension of the Coach leathergoods brand and reflect the
Coach brand image. A distinctive American brand, Coach delivers stylish,
aspirational, well-made products that represent excellent value. Coach watches
contain Swiss movements and are made with stainless steel, gold finish or a
combination of stainless steel and gold finish with leather straps, stainless
steel bracelets or gold finish bracelets. The majority of Coach watches have
suggested retail prices between $228 and $498.
ESQ
ESQ competes in the entry level Swiss watch category and is defined by bold
sport and fashion designs. All ESQ watches contain Swiss movements and are made
with stainless steel, gold finish or a combination of stainless steel and gold
finish, with leather straps, stainless steel bracelets or gold finish bracelets.
The majority of ESQ watches have suggested retail prices between $150 and $395.
Tommy Hilfiger Watches
Reflecting the fresh, fun all-American style for which Tommy Hilfiger is known,
Tommy Hilfiger Watches feature quartz, digital or analog-digital movements, with
stainless steel, titanium, aluminum, silver-tone, two-tone or gold-tone cases
and bracelets, and leather, fabric, plastic or rubber straps. The line includes
fashion and sport models with the majority of Tommy Hilfiger watches having
suggested retail prices between $65 and $125.
5
HUGO BOSS Watches
HUGO BOSS is a global market leader in the world of fashion. Following the
execution of an exclusive worldwide license agreement with HUGO BOSS to design,
produce and market a collection of watches, under the BOSS and HUGO brand names,
the Company distributed certain watches within the pre-existing HUGO BOSS watch
collections, with limited new product introductions. Major new product launches
have been planned for spring 2006 at Baselworld, the annual watch and jewelry
trade show held in Basel, Switzerland. The new HUGO BOSS watch collection will
include classy, sporty, elegant and fashion timepieces with suggested retail
prices between $195 and $695.
DESIGN
The Company's continued emphasis on innovation and distinctive design has been
an important contributor to the prominence, strength and reputation of Movado
Group's brands. The Company's products are created and developed by in-house
design teams in both Switzerland and the United States, in cooperation with
various outside sources, including licensors' design teams. Senior management is
actively involved in the design process.
MARKETING
The Company's marketing strategy is to communicate a consistent brand specific
message each time a consumer comes in contact with them. Advertising is an
integral component to the successful marketing of the Company's product
offerings and therefore, the Company devotes significant resources to
advertising. Since 1972, the Company has maintained its own in-house advertising
department, which today focuses primarily on the implementation and management
of global marketing and advertising strategies for each of its brands, ensuring
consistency of presentation. The Company utilizes the creative development of
advertising campaigns from outside agencies. Advertising is developed
individually for each of the Company's watch brands as well as Movado Boutique
jewelry, tabletop and accessories and is directed primarily to the end consumer
rather than to trade customers. In addition, advertising is developed by
targeting consumers with particular demographic characteristics appropriate to
the image and price range of the brand. Advertisements are placed predominantly
in magazines and other print media but are also created for radio and television
campaigns, catalogs, outdoor and other promotional materials. Marketing expenses
totaled 16.1%, 16.2% and 16.1% of net sales in fiscal 2006, 2005 and 2004,
respectively.
OPERATING SEGMENTS
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. For operating segment data and geographic segment data for the years
ended January 31, 2006, 2005 and 2004, see Note 15 to the Consolidated Financial
Statements regarding Segment Information.
The Company's wholesale segment includes the design, development, marketing and
distribution of high quality watches, in addition to revenue generated from
after-sales service activities and shipping. The Retail segment includes the
Company's Movado Boutiques and its outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's international operations
are principally conducted in Europe, the Middle East and Asia. The Company's
international assets are substantially located in Switzerland.
6
Wholesale
Domestic Wholesale
The Company sells all of its brands in the domestic wholesale market primarily
through major jewelry store chains such as Helzberg Diamonds Corp., Sterling,
Inc. and Zale Corporation; department stores, such as Macy's, Neiman Marcus and
Saks Fifth Avenue, as well as independent jewelers. Sales to trade customers in
the United States, Canada and the Caribbean are made directly by the Company's
domestic sales force of approximately 150 employees. Of these employees, sales
representatives are responsible for a defined geographic territory, specialize
in a particular brand and sell to and service the independent jewelers within
their territory. Their compensation is based on salary plus commission. The
sales force also consists of account executives and account representatives who,
respectively, sell to and service the chain and department store accounts. The
latter typically handle more than one of the Company's brands and are
compensated based on salary and incentives. In South America, the Company
primarily sells Tommy Hilfiger watches through independent distributors.
International Wholesale
The Company sells Movado, Ebel, Concord, Coach and HUGO BOSS watches
internationally through its own international sales force of approximately 100
employees operating from the Company's sales and distribution offices in China,
France, Germany, Hong Kong, Japan, Singapore, Switzerland, the United Kingdom
and the United Arab Emirates. In addition, the Company sells Movado, Ebel,
Concord, Coach, HUGO BOSS and Tommy Hilfiger watches through a network of
independent distributors operating in numerous countries around the world. A
majority of the Company's arrangements with its international distributors are
long-term, generally require certain minimum purchases and restrict the
distributor from selling competitive products.
Retail
The Company operates in two retail markets, the luxury boutique market and the
outlet market. Movado Boutiques reinforce the luxury image of the Movado brand
and are a primary strategic focus of the Company. The Company operates 27 Movado
Boutiques in North America that are located in upscale regional shopping centers
and metropolitan areas. Movado Boutiques are merchandised with select models of
Movado watches, as well as proprietary Movado-branded jewelry, tabletop and
accessories and other product line extensions. The modern store design creates a
distinctive environment that showcases these products and provides consumers
with the ability to fully experience the complete Movado design philosophy. The
Company's 28 outlet stores are multi-branded and serve solely as an effective
vehicle to sell discontinued models and factory seconds of all of the Company's
watches, jewelry, tabletop and accessory products. Three additional Movado
Boutiques and one outlet are scheduled to open in fiscal year 2007.
SEASONALITY
The Company's domestic sales are traditionally greater during the Christmas and
holiday season. Consequently, the Company's net sales historically have been
higher during the second half of the fiscal year. The second half of each year
accounted for 56.9%, 58.7% and 58.6% of the Company's net sales for the fiscal
years ended January 31, 2006, 2005 and 2004, respectively. The amount of net
sales and operating profit generated during the second half of each fiscal year
depends upon the general level of retail sales during the Christmas and holiday
season, as well as economic conditions and other factors beyond the Company's
control. The Company does not expect any significant change in the seasonality
of its domestic business in the foreseeable future. Major selling seasons in
certain international markets center on significant local holidays that occur in
late winter or early spring.
7
BACKLOG
At March 31, 2006, the Company had unfilled orders of $43.5 million compared to
$21.4 million and $20.2 million at March 31, 2005 and 2004, respectively.
Unfilled orders include both confirmed orders and orders the Company believes
will be confirmed based on the historic experience with the customers. It is
customary for many of the Company's customers not to confirm their future orders
with a formal purchase order until shortly before their desired delivery.
CUSTOMER SERVICE, WARRANTY AND REPAIR
The Company has developed an approach to managing the retail sales process of
its wholesale customers that involves monitoring their sales and inventories by
product category and style. The Company also assists in the conception,
development and implementation of customers' marketing vehicles. The Company
places considerable emphasis on cooperative advertising programs with its major
retail customers. The Company's retail sales process has resulted in close
relationships with its principal customers, often allowing for influence on the
mix, quantity and timing of their purchasing decisions. The Company believes
that customers' familiarity with its sales approach has facilitated, and should
continue to facilitate, the introduction of new products through its existing
distribution network.
The Company permits the return of damaged or defective products. In addition,
although the Company has no obligation to do so, it does accept limited amounts
of product returns from customers in certain instances.
The Company has service facilities around the world including five Company-owned
service facilities and approximately 180 authorized independent service centers
worldwide. In order to maintain consistency and quality at its service
facilities and authorized independent service centers, the Company conducts
training sessions for and distributes technical information and updates to
repair personnel. All watches sold by the Company come with limited warranties
covering the movement against defects in material and workmanship for periods
ranging from two to three years from the date of purchase, with the exception of
Tommy Hilfiger watches, for which the warranty period is ten years. In addition,
the warranty period is five years for the gold plating for Movado watch cases
and bracelets. Products that are returned under warranty to the Company are
generally serviced by the Company's employees at its service facilities.
The Company retains adequate levels of component parts to facilitate after-sales
service of its watches for an extended period of time after the discontinuance
of such watches.
In 2003, the Company introduced Customer Wins, a web-based system providing
immediate access for the Company's retail partners and consumers to the
information they may want or need about after sales service issues. Customer
Wins allows the Company's retailers and end consumers to track their repair
status online 24 hours a day. The system permits customers to authorize repairs,
track repair status through the entire repair life cycle, view repair
information, and obtain service order history. Customer Wins can be accessed
online at www.mgiservice.com.
SOURCING, PRODUCTION AND QUALITY
The Company does not own any product manufacturing facilities, with the
exception of a small manufacturing facility for proprietary movements for its
Ebel brand. The Company employs a flexible manufacturing model that relies
primarily on independent manufacturers to meet shifts in marketplace demand and
changes in consumer preferences. All product sources must achieve and maintain
the Company's high quality standards and specifications. With strong supply
chain organizations in Switzerland, China and Hong Kong, the
8
Company maintains control over the quality of its products, wherever they are
manufactured. Compliance is monitored with strictly implemented quality control
standards, including site quality inspections.
A majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers. The Company obtains
other watch components for all of its brands, including movements, cases, hands,
dials, bracelets and straps from a number of other suppliers. The Company does
not have long-term supply contract commitments with any of its component parts
suppliers. Additionally, the Company manufactures some proprietary movements for
its Ebel brand.
Movado, Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are manufactured
using Swiss movements and other components obtained from third party suppliers.
Coach, ESQ, Tommy Hilfiger and HUGO BOSS watches are manufactured by independent
contractors. Coach and ESQ watches are manufactured using Swiss movements and
other components purchased from third party suppliers. Tommy Hilfiger and HUGO
BOSS watches are manufactured using movements and other components purchased
from third party suppliers.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks MOVADO(R), EBEL(R) and CONCORD(R), as well as
trademarks for the Movado Museum dial design, and related trademarks for watches
and jewelry in the United States and in numerous other countries.
The Company licenses ESQUIRE(R), ESQ(R) and related trademarks on an exclusive
worldwide basis for use in connection with the manufacture, distribution,
advertising and sale of watches pursuant to an agreement with The Hearst
Corporation ("Hearst License Agreement"). The current term of the Hearst License
Agreement expires December 31, 2009, but contains options for renewal at the
Company's discretion through December 31, 2018.
The Company licenses the trademark COACH(R) and related trademarks on an
exclusive worldwide basis for use in connection with the manufacture,
distribution, advertising and sale of watches pursuant to an agreement with
Coach, Inc. ("Coach License Agreement"). The Coach License Agreement expires on
January 31, 2008.
Under an agreement with Tommy Hilfiger Licensing, Inc. ("THLI"), the Company has
the exclusive license to use the trademark TOMMY HILFIGER(R) and related
trademarks in connection with the manufacture of watches worldwide and in
connection with the marketing, advertising, sale and distribution of watches at
wholesale (and at retail through its outlet stores) in the Western Hemisphere,
Europe, Pan Pacific, Latin America and Korea. The term of the license agreement
with THLI expires March 31, 2012.
Under its 2004 agreement with HUGO BOSS Trademark Management GmbH & Co ("HUGO
BOSS"), the Company received a worldwide exclusive license to use the trademark
HUGO BOSS(R) and any other trademarks of HUGO BOSS containing the names "HUGO"
or "BOSS", in connection with the production, promotion and sale of watches. The
term of the license continues through December 31, 2013, with an optional
five-year renewal period.
On November 21, 2005, the Company entered into an agreement with L.C. Licensing,
Inc. ("L.C. Licensing"), for the exclusive worldwide license to use the
trademarks JUICY COUTURE(TM) and COUTURE COUTURE LOS ANGELES(TM), in connection
with the manufacture, advertising, merchandising, promotion, sale and
9
distribution of timepieces and components. The term of the license is through
December 31, 2011, with a four-year renewal period at the option of the Company,
provided that certain sales thresholds are met.
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE(R) name and the distinctive "alligator" logo beginning in the first
half of 2007. The agreement continues through December 31, 2014 and renews
automatically for successive five year periods unless either party notifies the
other of non-renewal at least six months before the end of the initial term or
any renewal period.
The Company also owns, and has pending applications for, a number of design
patents in the United States and internationally for various watch designs, as
well as designs of watch cases, bracelets and jewelry.
The Company actively seeks to protect and enforce its intellectual property
rights by working with industry associations, anti-counterfeiting organizations,
private investigators and law enforcement authorities, including U.S. Customs
and Border Protection and, when necessary, sues infringers of its trademarks and
patents. Consequently, the Company is involved from time to time in litigation
or other proceedings to determine the enforceability, scope and validity of
these rights. With respect to the trademarks MOVADO, EBEL, CONCORD and certain
other related trademarks, the Company has received exclusion orders that
prohibit the importation of counterfeit goods or goods bearing confusingly
similar trademarks into the United States. In accordance with customs
regulations, these exclusion orders, however, cannot cover the importation of
gray-market Movado, Ebel and Concord watches because the Company is the
manufacturer of such watches. All of the Company's exclusion orders are
renewable.
COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of the Swatch Group, Ltd., a large Swiss-based competitor, no
single company competes with the Company across all of its brands. Certain
companies, however, compete with Movado Group, Inc. with respect to one or more
of its watch brands. Certain of these companies have, and other companies that
may enter the Company's markets in the future may have greater financial,
distribution, marketing and advertising resources than the Company. The
Company's future success will depend, to a significant degree, upon its
continued ability to compete effectively with regard to, among other things, the
style, quality, price, advertising, marketing, distribution and availability of
supply of the Company's watches and other products.
EMPLOYEES
As of January 31, 2006, the Company had approximately 1,300 full-time employees
in its domestic and international operations. No employee of the Company is
represented by a labor union or is subject to a collective bargaining agreement.
The Company has never experienced a work stoppage due to labor difficulties and
believes that its employee relations are good.
AVAILABLE INFORMATION
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge on the Company's website, located
at www.movadogroup.com, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the Securities and Exchange
Commission. The public may read any materials filed by the Company with the SEC
at the SEC's public reference room at 100 F. Street, N.E., Washington, D.C.,
20549.
10
The public may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains
reports, proxy and information statements, and other information regarding the
Company at www.sec.gov.
The Company has adopted a Code of Business Conduct and Ethics that applies to
all directors, officers and employees, including the Company's Chief Executive
Officer, Chief Financial Officer and principal accounting and financial
officers, which is posted on the Company's website. The Company will post any
amendments to the Code of Business Conduct and Ethics and any waivers that are
required to be disclosed by SEC regulations on the Company's website. In
addition, the Company's audit committee charter, compensation committee charter,
nominating/corporate governance committee charter and corporate governance
guidelines have been posted on the Company's website.
Item 1A. Risk Factors
The following risk factors and the forward-looking statements contained in this
Form 10-K should be read carefully in connection with evaluating Movado Group,
Inc.'s business. These risks and uncertainties could cause actual results and
events to differ materially from those anticipated. Additional risks which the
Company does not presently consider material, or of which it is not currently
aware, may also have an adverse impact on the business. Please also see
"Forward-Looking Statements" on page 1.
The Company faces intense competition in the worldwide watch industry.
The watch industry is highly competitive, and the Company competes globally with
numerous manufacturers, importers and distributors, some of which are larger and
have greater financial, distribution, advertising and marketing resources. The
Company's products compete on the basis of price, features, perceived
desirability, reliability and perceived attractiveness. The Company also faces
increased competition from internet-based retailers. The Company's future
results of operations may be adversely affected by these and other competitors.
Maintaining favorable brand recognition is essential to the success of the
Company, and failure to do so could materially and adversely affect the
Company's results of operations.
Favorable brand recognition is an important factor to the future success of the
Company. The Company sells its products under a variety of owned and licensed
brands. Factors affecting brand recognition are often outside the Company's
control, and the Company's efforts to create or enhance favorable brand
recognition, such as advertising campaigns, product design and anticipation of
fashion trends, may not have their desired effects. Additionally, the Company
relies on its license partners to maintain favorable brand recognition of their
respective parent brands, and the Company often has no control over the brand
management efforts of its license partners. Finally, although the Company's
independent distributors are subject to contractual requirements to protect the
Company's brands, it may be difficult to monitor or enforce such requirements,
particularly in foreign jurisdictions. Any decline in perceived favorable
recognition of the Company's owned or licensed brands could materially and
adversely affect future results of operations and profitability.
If the Company is unable to respond to changes in consumer demands and fashion
trends in a timely manner, sales and profitability could be adversely affected.
Fashion trends and consumer demands and tastes often shift quickly. The Company
attempts to monitor these trends in order to adapt its product offerings to suit
customer demand. There is a risk that the Company will not properly perceive
changes in trends or tastes, which may result in the failure to adapt the
Company's products accordingly. In addition, new model designs are regularly
introduced into the market for all brands to keep ahead of evolving fashion
trends as well as to initiate new trends of their own. There is risk that the
public may
11
not favor these new models or that the models may not be ready for sale until
after the trend has passed. If the Company fails to respond to and keep up to
date with fashion trends and consumer demands and tastes, its brand image,
sales, profitability and results of operations could be materially and adversely
affected.
If the Company misjudges the demand for its products, high inventory levels
could adversely affect future operating results and profitability.
Consumer demand for the Company's products can affect inventory levels. If
consumer demand is lower than expected, inventory levels can rise causing a
strain on operating cash flow. If the inventory cannot be sold through the
Company's wholesale or retail outlets, additional reserves or write-offs to
future earnings could be necessary. Conversely, if consumer demand is higher
than expected, insufficient inventory levels could result in unfulfilled
customer orders, loss of revenue and an unfavorable impact on customer
relationships. Failure to properly judge consumer demand and properly manage
inventory could have a material, adverse effect on profitability and liquidity.
An increase in product returns could negatively impact the Company's operating
results and profitability.
The Company recognizes revenue as sales when merchandise is shipped and title
transfers to the customer. The Company permits the return of damaged or
defective products and accepts limited amounts of product returns in certain
instances. Accordingly, the Company provides allowances for the estimated
amounts of these returns at the time of revenue recognition based on historical
experience. While such returns have historically been within management's
expectations and the provisions established, future return rates may differ from
those experienced in the past. Any significant increase in product damages or
defects and the resulting credit returns could have a material adverse effect on
the Company's operating results for the period or periods in which such returns
materialize.
The Company's business relies on the use of independent parties to manufacture
its products. Any loss of an independent manufacturer, or the Company's
inability to deliver quality goods in a timely manner, could have an adverse
affect on customer relations, brand image, net sales and results of operations.
The Company employs a flexible manufacturing model that relies primarily on
independent manufacturers to meet shifts in marketplace demand. All product
sources must achieve and maintain the Company's high quality standards and
specifications. The inability of a manufacturer to ship orders in a timely
manner or to meet the Company's high quality standards and specifications could
cause the Company to miss committed delivery dates with customers, which could
result in cancellation of the customers' orders. In addition, delays in delivery
of satisfactory products could have a material, adverse effect on the Company's
profitability if the delays cause the Company to be unable to market certain
products during the seasonal periods during which its sales are typically
higher. See "Risk Factors - The Company's business is seasonal, with sales
traditionally greater during certain holiday seasons, so events and
circumstances that adversely affect holiday consumer spending will have a
disproportionately adverse effect on the Company's results of operations." A
majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers. Additionally, the
Company does not have long-term supply commitments with its manufacturers and
thus competes for production facilities with other organizations, some of which
are larger and have greater resources.
12
If the Company loses any of its license agreements, there may be significant
loss of revenues and a negative effect on business.
Many of the Company's brands are subject to license agreements. License
agreements give the Company the right to produce, market and distribute certain
products under the brand names of ESQ, Coach, Tommy Hilfiger, HUGO BOSS, Juicy
Couture and beginning in 2007, Lacoste. There are certain minimum royalty
payments as well as other requirements associated with these agreements. Failure
to meet any of these requirements could result in the loss of the license.
Additionally, after the term of the license agreement has concluded, the
licensor may decide not to renew with the Company. Any loss of one or more of
the Company's licenses could result in loss of future revenues which could
adversely affect its financial condition.
Changes in the sales mix of the Company's products could impact gross profit
margins.
The individual brands that are sold by the Company are sold at a wide range of
price points and yield a variety of gross profit margins. Thus, the mix of sales
by brand can have an impact on the gross profit margins of the Company. If the
Company's sales mix shifts unfavorably toward brands with lower gross profit
margins than the Company's historical consolidated gross profit margin or if the
mix of business changes significantly in the Movado Boutiques, it could have an
adverse affect on the results of operations.
The Company's business is seasonal, with sales traditionally greater during
certain holiday seasons, so events and circumstances that adversely affect
holiday consumer spending will have a disproportionately adverse effect on the
company's results of operations.
The Company's sales are seasonal by nature. The Company's U.S. domestic sales
are traditionally greater during the Christmas and holiday season.
Internationally, major selling seasons center on significant local holidays that
occur in late winter or early spring. The amount of net sales and operating
income generated during these seasons depends upon the general level of retail
sales during the Christmas and holiday season, as well as economic conditions
and other factors beyond the Company's control. If events or circumstances were
to occur that negatively impact consumer spending during such holiday seasons,
it could have a material, adverse effect on the Company's sales, profitability
and results of operations.
If the economy faces a recessionary period, purchases of the Company products
may be adversely affected.
Some of the Company's products fall into higher price categories that are
considered discretionary luxury items. Consumer purchases of discretionary
luxury items can change due to many economic and global factors. Declining
confidence in the U.S. or international economies, rising interest rates and
taxation issues could adversely affect the level of available discretionary
income for consumers to spend. In addition, events such as war, terrorism,
natural disasters or outbreaks or disease could further dampen consumer spending
on luxury items. If any of these events should occur, the Company could suffer
from losses of future sales.
If the Company is unable to successfully implement its growth strategies or
manage its growing business, its future operating results could suffer.
The Company is constantly expanding its business through acquisitions, license
agreements, joint ventures and new initiatives such as the growing Movado
Boutique business. There is risk involved with each of these. Acquisitions and
new license agreements require the Company to ensure that new brands will
successfully complement the other brands in its portfolio. The Company assumes
the risk that the new brand will not be viewed by the public as favorably as its
other brands. In addition, the integration of an acquired company or licensed
brand into the Company's existing business can strain the Company's current
infrastructure with the
13
additional work required and there can be no assurance that the integration of
acquisitions or licensed brands will be successful or that acquisitions or
licensed brands will generate sales increases. The Company needs to ensure it
has the proper manpower and systems in place to allow for successful
assimilation of new businesses. The risk involved in growing the Movado Boutique
business is that the Company will not be able to successfully implement its
business model. In addition, the costs associated with leasehold improvements to
current Boutiques and the costs associated with opening new Boutiques could have
a material adverse effect on the Company's financial condition and results of
operations. The inability to successfully implement its growth strategies could
adversely affect the Company's future financial condition and results of
operations.
The loss or infringement of trademarks of the Company could have an adverse
effect on future results of operations.
The Company believes that its trademarks are vital to the competitiveness and
success of the business and has taken the appropriate actions to establish and
protect them. There can be no assurance, however, that such actions will be
adequate to prevent imitation of the Company's products or infringement of its
trademarks or that others will not challenge the Company's rights in, or its
ownership of certain trademarks, or that such trademarks will be successfully
defended. In addition, the laws of some foreign countries, including some of
which the Company sells its products, may not protect the rights to these
trademarks to the same extent as do the laws of the United States, which could
make it more difficult to successfully defend such challenges in these areas.
The inability to obtain or maintain rights in the Company's trademarks could
have an adverse effect on brand image and future results of operations.
Pricing fluctuations of commodities could adversely affect the Company's ability
to produce product at favorable prices.
Some of the Company's higher-end watch offerings are made with materials such as
diamonds, precious metals and gold. The Company's proprietary jewelry is
manufactured with silver, gold and platinum, semi-precious and precious stones,
and diamonds. A significant change in the prices of these commodities could
adversely affect the Company's business by:
- reducing gross profit margins;
- forcing an increase in suggested retail prices; which could lead to
- decreasing consumer demand; which could lead to
- higher inventory levels.
All of the above could adversely affect the Company's future cash flow and
results of operations.
The Company's business is subject to foreign currency exchange rate risk.
The majority of the Company's inventory purchases are denominated in Swiss
francs. The Company operates under a hedging program which utilizes forward
exchange contracts and purchased foreign currency options to mitigate foreign
currency risk. If these hedge instruments are unsuccessful at minimizing the
risk or are deemed ineffective, any fluctuation of the Swiss franc exchange rate
could impact the future results of operations. Changes in currency exchange
rates may also affect relative prices at which the Company and its foreign
competitors sell products in the same market. A portion of the Company's net
sales are derived from international subsidiaries and are denominated in
Canadian dollars, Swiss francs, Euros, Hong Kong dollars, Singapore dollars,
Japanese yen and British pounds. Future revenues derived in these currencies
could be affected by currency fluctuations.
14
The Grinberg family owns a majority of the voting power of the Company's stock.
Each share of common stock of the Company is entitled to one vote per share
while each share of class A common stock of the Company is entitled to ten votes
per share. While the members of the Grinberg family do not own a majority of the
Company's outstanding common stock, by their significant holdings of class A
common stock they control a majority of the voting power represented by all
outstanding shares of both classes of stock. Consequently, the Grinberg family
is in a position to significantly influence any matters that are brought to a
vote of the shareholders including, but not limited to, the election of the
board of directors and approving any action requiring the approval of
shareholders, including any amendments to the Company's certificate of
incorporation, mergers or sales of all or substantially all of the Company's
assets. This concentration of ownership also may delay, defer or even prevent a
change in control of the Company and make some transactions more difficult or
impossible without the support of the Grinberg family. These transactions might
include proxy contests, tender offers, mergers or other purchases of common
stock that could give stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of the Company's common stock.
The stock price of the Company could fluctuate and possibly decline due to
changes in revenue, operating results and cash flow.
The revenue, results of operations and cash flow of the Company can be affected
by several factors, some of which are not controllable by the Company. These
factors may include, but are not limited to, the following:
- the ability to anticipate consumer demands and fashion trends;
- increased competition within the watch industry;
- a downturn in the local or global economy that could affect the
purchase of consumer discretionary goods;
- material fluctuations in foreign exchange rates or commodities;
- the ability to prevent the loss of or infringement upon the
Company's trademarks;
- the loss of any of the Company's license agreements;
- the financial stability of the Company's customers;
- the success of the Company's growth strategies; and
- disease, natural disasters, acts of terrorism or war or other
similar global events.
The factors above, as well as any other factors discussed in section 1A of this
Form 10-K, could cause a decline in revenues or increased expenses, both of
which could have an adverse effect on the results of operations. If the
Company's earnings failed to meet the expectations of the public in any given
period, the Company's stock price could fluctuate and possibly decline.
If the Company were to lose its relationship with any of its key customers or
distributors or any of such customers or distributors were to experience
financial difficulties, there may be a significant loss of revenue and operating
results.
The Company's customer base covers a wide range of distribution including
national jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc.
and Zale Corporation, department stores such as Macy's, Neiman Marcus and Saks
Fifth Avenue, independent regional jewelers, licensed partner retail stores and
a network of distributors in many countries throughout the world. The Company
does not have long term purchase contracts with its customers, nor does it have
a significant backlog of unfilled orders. Customer purchasing decisions
15
could vary with each selling season. A material change in the Company's
customers' purchasing decisions could have an adverse effect on its revenue and
operating results.
The Company extends credit to its customers based on an evaluation of each
customer's financial condition usually without requiring collateral. Should any
of the Company's larger customers experience financial difficulties, it could
result in the Company's curtailing doing business with them or an increase in
its exposure related to its accounts receivable. The inability to collect on
these receivables could have an adverse effect on the Company's financial
results.
If the Company were to lose key members of management or be unable to attract
and retain the talent required for the business, operating results could suffer.
The Company's ability to execute key operating initiatives as well as to deliver
product and marketing concepts appealing to target consumers depends largely on
the efforts and abilities of key executives and senior management's
competencies. The unexpected loss of one or more of these individuals could have
an adverse effect on the future business. The Company cannot guarantee that it
will be able to attract and retain the talent and skills needed in the future.
If the Company were unable to maintain existing space or to lease new space for
Boutiques in prime mall locations or be unable to complete construction on a
timely basis, it may result in adversely affecting the Company's ability to
achieve profitable results in the Boutique business.
The Company's strategy to create a Movado lifestyle image and build retail
presence with product assortments that complement successful wholesale watch
distribution is a key element in the Company's future business plans. Movado
Boutiques are strategically located in the top malls throughout the United
States. If the Company could not maintain and secure locations in the prime
malls it could jeopardize the operations of the stores and business plans for
the future. Additionally, if the Company could not complete construction in new
stores within the planned timeframes, cost overruns and lost revenue could
adversely affect the profitability of the Boutique segment.
If the Company could not secure financing and credit with favorable terms, the
Company could suffer high borrowing costs which could impact financial results.
The Company has been able to secure financing and credit facilities with very
favorable terms due to the Company's financial stability and good relationships
with its lending partners. If conditions were to change where the Company was
unable to comply with its key covenants in its lending agreements or where
relationships were to deteriorate it could increase the borrowing rates and have
an adverse effect on financial results.
The Company relies heavily on its activities outside of the United States. Many
factors affecting business activities outside the United States could result in
an adverse impact on the business.
The Company produces all of its watches and a portion of its proprietary jewelry
outside the United States and primarily in Europe and Asia. The Company also
generates approximately 21% of its revenue through international sources.
Factors that could affect the business activity vary by region and market and
generally include without limitation:
- changes in social, political and/or economic conditions that could
disrupt the trade activity in the countries where the Company's
manufacturers, suppliers and customers are located;
- the imposition of additional duties, taxes and other charges on
imports and exports;
16
- changes in foreign laws and regulations;
- the adoption or expansion of trade sanctions; and
- a significant change in currency valuation in specific countries or
markets.
The occurrence or consequences of any of these risks could affect the Company's
ability to operate in the affected regions. This could have an adverse effect on
the Company's financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases various facilities in North America, Europe, the Middle East
and Asia for its corporate, manufacturing, distribution and sales operations. As
of January 31, 2006, the Company's leased facilities were as follows:
Square Lease
Location Function Footage Expiration
- -------- -------- ------- ----------
Moonachie, New Jersey Watch assembly, distribution and repair 100,000 May 2010
Paramus, New Jersey Executive offices 90,050 June 2013
Bienne, Switzerland Corporate functions, watch sales, 56,400 April 2007
distribution, assembly and repair
Villers le Lac, France European service and watch distribution 12,800 January 2015
Kowloon, Hong Kong Watch sales, distribution and repair 12,300 June 2007
Markham, Canada Office, distribution and repair 11,200 June 2007
ChangAn Dongguan, China Quality control and engineering 9,600 June 2010
Hackensack, New Jersey Warehouse 6,600 July 2007
Munich, Germany Watch sales 3,300 August 2008
Grenchen, Switzerland Watch sales 2,800 March 2006
New York, New York Public relations office 2,700 April 2008
Coral Gables, Florida Caribbean office, watch sales 1,500 November 2006
Shanghai, China Market research 1,100 July 2006
Singapore Watch sales, distribution and repair 1,100 August 2006
Dubai, United Arab Emirates Watch sales 730 July 2007
Richmond-Upon-Thames, United Kingdom Watch sales 500 February 2006
Tokyo, Japan Watch sales 270 July 2007
All of the foregoing facilities are used exclusively in connection with the
wholesale segment of the Company's business except that a portion of the
Company's executive office space in Paramus, New Jersey is used in connection
with management of its retail business.
17
The Company owns three properties totaling 40,400 square feet located in La
Chaux-de-Fonds, Switzerland used for manufacturing, storage and public
relations. In addition, the Company acquired an architecturally significant
building in La Chaux-de-Fonds in 2004 as part of its acquisition of Ebel.
The Company also owns approximately 2,500 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions.
The Company also leases retail space for the operation of 27 Movado Boutiques in
the United States, each of which averages 2,200 square feet (with the exception
of the Company's Soho Boutique in New York City which is approximately 4,700
square feet and the Company's Boutique in The Mall at Short Hills in New Jersey,
which is approximately 3,200 square feet) expiring from June 2006 to September
2016. In addition, the Company leases retail space averaging 1,600 square feet
per store with leases expiring from June 2006 to January 2016 for the operation
of the Company's 28 outlet stores in the United States.
The Company believes that its existing facilities are suitable and adequate for
its current operations.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the normal
course of its business. The Company believes that none of these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's operating results, liquidity or its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company during the
fourth quarter of fiscal 2006.
18
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of March 31, 2006, there were 50 holders of record of Class A Common Stock
and, the Company estimates, 6,583 beneficial owners of the Common Stock
represented by 392 holders of record. The Common Stock is traded on the New York
Stock Exchange under the symbol "MOV" and on March 31, 2006, the closing price
of the Common Stock was $23.08. The quarterly high and low split-adjusted
closing prices for the fiscal years ended January 31, 2006 and 2005 were as
follows:
Fiscal Year Ended Fiscal Year Ended
January 31, 2006 January 31, 2005
----------------- -----------------
Quarter Ended Low High Low High
- ------------- ------ ------ ------ ------
April 30 $15.94 $19.58 $12.63 $15.31
July 31 $15.83 $19.38 $14.30 $17.24
October 31 $16.70 $20.00 $13.02 $17.81
January 31 $17.30 $19.29 $17.16 $18.95
In connection with the October 7, 1993 public offering, each share of the then
currently existing Class A Common Stock was converted into 10.46 shares of new
Class A Common Stock, par value of $.01 per share (the "Class A Common Stock").
Each share of Common Stock is entitled to one vote per share and each share of
Class A Common Stock is entitled to 10 votes per share on all matters submitted
to a vote of the shareholders. Each holder of Class A Common Stock is entitled
to convert, at any time, any and all such shares into the same number of shares
of Common Stock. Each share of Class A Common Stock is converted automatically
into Common Stock in the event that the beneficial or record ownership of such
shares of Class A Common Stock is transferred to any person, except to certain
family members or affiliated persons deemed "permitted transferees" pursuant to
the Company's Amended Restated Certificate of Incorporation. The Class A Common
Stock is not publicly traded and consequently, there is currently no established
public trading market for these shares.
During the fiscal year ended January 31, 2005, the Board of Directors approved
four $0.04 per share quarterly cash dividends, which reflects the effect of the
fiscal 2005 two-for-one stock split. On March 23, 2005, the Board approved an
increase in the quarterly cash dividend rate from $0.04 to $0.05 per share. On
March 28, 2006, the Board approved an increase in the quarterly cash dividend
rate from $0.05 to $0.06 per share. The declaration and payment of future
dividends, if any, will be at the sole discretion of the Board of Directors and
will depend upon the Company's profitability, financial condition, capital and
surplus requirements, future prospects, terms of indebtedness and other factors
deemed relevant by the Board of Directors. See Notes 5 and 6 to the Consolidated
Financial Statements regarding contractual restrictions on the Company's ability
to pay dividends.
19
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,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Statement of Income Data:
Net sales $470,941 $418,966 $330,214 $300,077 $299,725
Cost of sales 184,621 168,818 129,908 115,907 115,653
-------- -------- -------- -------- --------
Gross profit 286,320 250,148 200,306 184,170 184,072
Selling, general and administrative (1) (2) 238,283 215,072 165,525 152,394 157,799
-------- -------- -------- -------- --------
Operating profit 48,037 35,076 34,781 31,776 26,273
Other income, net (3) (4) 1,008 1,444 -- -- --
Interest expense, net 4,109 3,430 3,044 3,916 5,415
-------- -------- -------- -------- --------
Income before taxes and cumulative effect of a change
in accounting principle 44,936 33,090 31,737 27,860 20,858
Provision for income taxes (5) (6) 18,319 6,783 8,886 7,801 3,735
-------- -------- -------- -------- --------
Income before cumulative effect of a change in
accounting principle 26,617 26,307 22,851 20,059 17,123
Cumulative effect of a change in accounting principle -- -- -- -- (109)
-------- -------- -------- -------- --------
Net income $ 26,617 $ 26,307 $ 22,851 $ 20,059 $ 17,014
======== ======== ======== ======== ========
Net income per share-Basic (7) $ 1.05 $ 1.06 $ 0.95 $ 0.84 $ 0.73
Net income per share-Diluted (7) $ 1.02 $ 1.03 $ 0.92 $ 0.82 $ 0.71
Basic shares outstanding (7) 25,273 24,708 24,101 23,739 23,366
Diluted shares outstanding (7) 26,180 25,583 24,877 24,381 24,014
Cash dividends declared per share (7) $ 0.20 $ 0.16 $ 0.105 $ 0.06 $ 0.06
Balance Sheet Data (End of Period):
Working capital (8) $369,227 $303,225 $252,883 $219,420 $153,932
Total assets $549,892 $477,074 $390,967 $345,154 $290,676
Total long-term debt $109,955 $ 45,000 $ 35,000 $ 35,000 $ 40,000
Shareholders' equity $321,678 $316,557 $274,713 $236,212 $172,470
(1) Fiscal 2005 includes a non-cash impairment charge of $2.0 million recorded
in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144").
(2) Fiscal 2002 includes a one-time severance and early retirement charge of
$2.7 million.
(3) The fiscal 2006 other income is comprised of a pre-tax gain of $2.6 million
on the sale of a building offset by a pre-tax loss of $1.6 million
representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions
would occur by the end of the originally specified time period.
(4) The fiscal 2005 other income is comprised of a $1.4 million litigation
settlement.
(5) The fiscal 2006 effective tax rate of 40.8% reflects a tax charge of $7.5
million associated with repatriated foreign earnings under the American
Jobs Creation Act of 2004.
(6) The effective tax rate for fiscal 2005 was reduced to 20.5% principally as
the result of adjustments in the fourth quarter relating to refunds from a
retroactive Swiss tax ruling and a favorable U.S. tax accrual adjustment.
(7) For all periods presented, basic and diluted shares outstanding, and the
related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
(8) The Company defines working capital as current assets less current
liabilities.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
GENERAL
Wholesale Sales. The primary factors that influence annual sales are general
economic conditions in the Company's domestic and international markets, new
product introductions, the level and effectiveness of advertising and marketing
expenditures and product pricing decisions.
Approximately 21% of the Company's total sales are from international markets
and therefore reported sales made in those markets are affected by foreign
exchange rates. The Company's international sales are billed in local currencies
(predominantly Euros and Swiss francs) and translated to U.S. dollars at average
exchange rates for financial reporting purposes. With the acquisition of Ebel in
March of 2004 and the introduction of HUGO BOSS watches, the Company expects
that a higher percentage of its total sales will be derived from international
markets in the future.
The Company's business is seasonal. There are two major selling seasons in the
Company's markets: the spring season, which includes school graduations and
several holidays and, most importantly, the Christmas and holiday season. Major
selling seasons in certain international markets center on significant local
holidays that occur in late winter or early spring. The Company's net sales
historically have been higher during the second half of the fiscal year. The
second half of the fiscal year ended January 31, 2006 accounted for 56.9% of the
Company's net sales.
Retail Sales. The Company's retail operations consist of 27 Movado Boutiques and
28 outlet stores located throughout the United States. The Company does not have
any retail operations outside of the United States.
The significant factors that influence annual sales volumes in the Company's
retail operations are similar to those that influence domestic wholesale sales.
In addition, many of the Company's outlet stores are located near vacation
destinations and, therefore, the seasonality of these stores is driven by the
peak tourist seasons associated with these locations.
Gross Margins. The Company's overall gross margins are primarily affected by
four major factors: brand and product sales mix, product pricing strategy,
manufacturing costs and the U.S. dollar/Swiss franc exchange rate. Gross margins
for the Company may not be comparable to those of other companies, since some
companies include all the costs related to its distribution network in cost of
sales whereas the Company does not include the costs associated with its U.S.
warehousing and distribution facility nor the occupancy costs for the retail
segment in the cost of sales line item.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Watches in the luxury and premium price
point categories generally earn lower gross margin percentages than moderate
price models. Gross margins in the Company's outlet business are lower than
those of the wholesale business since the outlets primarily sell seconds and
discontinued models that generally command lower selling prices. Gross margins
in the Movado Boutiques are affected by the mix of product sold. The margins
from the sale of watches are greater than those from the sale of jewelry and
accessories. Gross margins from the sale of watches in the Movado Boutiques also
exceed those of the wholesale business since the Company earns margins from
manufacture to point of sale to the consumer.
All of the Company's brands compete with a number of other brands on the basis
of not only styling but also wholesale and retail price. The Company's ability
to improve margins through price increases is therefore, to some extent,
constrained by competitors' actions.
21
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and assembly in Switzerland. Through
productivity improvement efforts, the Company has controlled the level of
overhead costs and maintained flexibility in its cost structure by outsourcing a
significant portion of its component and assembly requirements and expects to
extend this strategy over the near term.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's cost of goods sold and, therefore, its gross margins. The Company
hedges its Swiss franc purchases using a combination of forward contracts,
purchased currency options and spot purchases. The Company's hedging program had
the effect of minimizing the exchange rate impact on product costs and gross
margins.
Selling, General and Administrative ("SG&A") Expenses. The Company's SG&A
expenses consist primarily of marketing, selling, distribution and general and
administrative expenses. Annual marketing expenditures are based principally on
overall strategic considerations relative to maintaining or increasing market
share in markets that management considers to be crucial to the Company's
continued success as well as on general economic conditions in the various
markets around the world in which the Company sells its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, expenses associated with Baselworld, the annual
watch and jewelry trade show and other industry trade shows and operating costs
incurred in connection with the Company's retail business. Sales commissions
vary with overall sales levels. Retail selling expenses consist primarily of
payroll related and store occupancy costs.
Distribution expenses consist primarily of salaries of distribution staff,
rental and other occupancy costs, security, depreciation and amortization of
furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other
employee compensation, employee benefit plan costs, office rent, management
information systems costs, professional fees, bad debts, depreciation and
amortization of furniture and leasehold improvements, patent and trademark
expenses and various other general corporate expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to the Company's
Consolidated Financial Statements. The preparation of these financial statements
and the application of certain critical accounting policies require management
to make judgments based on estimates and assumptions that affect the information
reported. On an on-going basis, management evaluates its estimates and
judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, warranty obligations, and
contingencies and litigation. Management bases its estimates and judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources on historical experience, contractual commitments and on various
other factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following are the critical accounting
policies requiring significant judgments and estimates used in the preparation
of its consolidated financial statements.
22
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances as a
reduction of revenue in the same period that the sales are recorded. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may be
uncollectible in the future. Estimates are used in determining the allowance for
doubtful accounts and are based on an analysis of the aging of accounts
receivable, assessments of collectibility based on historic trends, the
financial condition of the Company's customers and an evaluation of economic
conditions. While the actual bad debt losses have historically been within the
Company's expectations and the allowances established, there can be no guarantee
that the Company will continue to experience the same bad debt loss rates. As of
January 31, 2006, the Company knew of no situations with any of the Company's
major customers which would indicate the customer's inability to make their
required payments.
Inventories
The Company values its inventory at the lower of cost or market. The Company's
domestic inventory is valued using the first-in, first-out (FIFO) method. The
cost of finished goods and component inventories, held by overseas subsidiaries,
are determined using average cost. The Company's management regularly reviews
its sales to customers and customers' sell through at retail to evaluate the
adequacy of inventory reserves. Inventory with less than acceptable turn rates
is classified as discontinued and, together with the related component parts
which can be assembled into saleable finished goods, is sold through the
Company's outlet stores. When management determines that finished product is
unsaleable in the Company's outlet stores or that it is impractical to build the
remaining components into watches for sale in the outlets, a reserve is
established for the cost of those products and components. These estimates could
vary significantly, either favorably or unfavorably, from actual requirements
depending on future economic conditions, customer inventory levels or
competitive conditions which may differ from the Company's expectations.
Long-Lived Assets
The Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company performs an impairment review, at a minimum, on an annual basis.
However, the Company will review its long-lived assets for impairment once
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). When such a
determination has been made, management compares the carrying value of the
assets with their estimated future undiscounted cash flows. If it is determined
that an impairment loss has
23
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the fair value of
the long-lived assets.
During fiscal 2006, the Company performed the review which resulted in no
impairment charge. During the fourth quarter of fiscal 2005, the Company
determined that the carrying value of its long-lived assets in the Movado
Boutique located in the Soho section of New York City, might not be recoverable.
The impairment review was performed pursuant to SFAS No. 144 because of an
economic downturn affecting the Soho Boutique operations and revenue forecasts.
As a result, the Company recorded a non-cash pretax impairment charge of $2.0
million consisting of property, plant and equipment of $0.8 million and other
assets of $1.2 million. The entire impairment charge is included in the selling,
general and administrative expenses in the fiscal 2005 Consolidated Statements
of Income. The Company will continue to operate this boutique. There were no
impairment losses related to long-lived assets in fiscal 2004.
Warranties
All watches sold by the Company come with limited warranties covering the
movement against defects in material and workmanship for periods ranging from
two to three years from the date of purchase, with the exception of Tommy
Hilfiger watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating for Movado watch cases and
bracelets. The Company records an estimate for future warranty costs based on
historical repair costs. Warranty costs have historically been within the
Company's expectations and the provisions established. If such costs were to
substantially exceed estimates, this could have an adverse effect on the
Company's operating results.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more-likely-than-not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
24
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2006
compared to fiscal 2005 and fiscal 2005 compared to fiscal 2004 along with a
discussion of the changes in financial condition during fiscal 2006.
The following are net sales by business segment (in thousands):
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
Wholesale:
Domestic $286,825 $256,331 $224,866
International 98,558 88,697 44,475
Retail 85,558 73,938 60,873
-------- -------- --------
Net Sales $470,941 $418,966 $330,214
======== ======== ========
The following table presents the Company's results of operations expressed as a
percentage of net sales for the fiscal years indicated:
Fiscal Year Ended January 31,
------------------------------------------------
2006 2005 2004
-------------- -------------- --------------
% of net sales % of net sales % of net sales
-------------- -------------- --------------
Net sales 100.0% 100.0% 100.0%
Gross margin 60.8% 59.7% 60.6%
Selling, general and administrative expenses 50.6% 51.3% 50.1%
Operating profit 10.2% 8.4% 10.5%
Other income 0.2% 0.3% --
Interest expense, net 0.9% 0.8% 0.9%
Income taxes 3.9% 1.6% 2.7%
Net income 5.6% 6.3% 6.9%
Fiscal 2006 Compared to Fiscal 2005
Net Sales
Net sales in fiscal 2006 were $470.9 million, or 12.4% above fiscal 2005 sales
of $419.0 million. For the year, sales increases were recorded in all business
segments and all brands, except the Concord brand.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 11.9%, or $30.5 million, to $286.8
million. A sales increase of $12.1 million was recorded in the Movado brand.
This sales growth was achieved through the introduction of new styling and
variations within existing watch families, including the addition of diamonds to
offer fresh elements appealing to the Movado customer coupled with strong iconic
marketing and advertising support. The
25
ESQ brand recorded a sales increase of $8.1 million due to the successful
repositioning of the brand in the entry level Swiss watch category by the
introduction of new product with integrated marketing support and a new
advertising campaign which led to strong retailer demand. The Ebel brand
recorded a sales increase of $6.0 million. This strong performance reflects the
cumulative impact of the Company's efforts over the past two years to
re-establish the brand with product and marketing support to bring the brand
image back to its roots and values. Concord sales were below prior year by $1.8
million, primarily due to reduced retailer demand and sell through to the
ultimate consumer.
International Wholesale Net Sales
The international wholesale business increased by 11.1%, or $9.9 million, to
$98.6 million. Ebel and Tommy Hilfiger recorded increases of $9.1 million and
$4.8 million, respectively. The increases in Ebel were achieved in virtually all
international markets. This was primarily the result of stronger retailer demand
for the new product introductions and the Company's marketing and advertising
support. Tommy Hilfiger sales increased primarily in Europe due to market
expansions and increased consumer recognition and demand. Concord sales were
below prior year by $3.9 million due to sales decreases recorded in Asia and the
Middle East.
Retail Net Sales
Sales in the Company's retail segment increased by $11.6 million, or 15.7%, to
$85.6 million. Comparable store sales increases of 8.5% were achieved in the
Movado Boutiques. In addition, non-comparable store sales grew by $6.0 million
over the prior year. Comparable store sales in the Company outlet stores
increased by 7.3%. At January 31, 2006, the Company operated 27 Movado Boutiques
and 28 outlet stores as compared to 24 Movado Boutiques and 27 outlet stores at
January 31, 2005.
The Company considers comparative store sales to be sales of stores that were
open as of February 1st of the prior fiscal year through January 31st of the
current fiscal year. The sales from stores that have been relocated, renovated
or refurbished are included in the calculation of comparable store sales. The
method of calculating comparative store sales varies across the retail industry.
As a result, the calculation of comparative store sales may not be comparable to
similar measures reported by other companies.
Gross Margin
Gross margin for the year was $286.3 million, an increase of $36.2 million over
prior year gross margin of $250.1 million. The increase of $36.2 million was
primarily due to increased sales of $52.0 million as well as an overall increase
in the gross margin as a percent of sales from 59.7% to 60.8%. The higher gross
margin percentage was attributed to margin improvements in most of the Company's
brands, particularly Ebel. This improvement was due to Ebel being
fully-integrated into the Company's existing supply chain. In addition, the
Movado Boutiques margin rate improved due to both the product mix and generally
higher margins in jewelry.
Selling, General and Administrative Expenses
SG&A expenses of $238.3 million increased by $23.2 million, or 10.8%, from
$215.1 million in fiscal 2005. The primary reasons for the increase was $7.1
million of increased spending in support of the retail expansion, increased
marketing spending of $7.3 million to support the new and existing brands and a
$4.9 million increase in payroll and related infrastructure costs in support of
brand growth and expansion. Fiscal 2005 amounts include a non-cash impairment
charge of $2.0 million related to the Soho Boutique.
26
Wholesale Operating Profit
Operating profit in the wholesale segment increased by $9.2 million to $42.3
million. The increase is the net result of higher gross margin of $27.3 million,
partially offset by an increase in SG&A expenses of $18.1 million. The higher
gross margin of $27.3 million was primarily the result of an increase in net
sales of $40.4 million. The increase in the SG&A expenses of $18.1 million is
primarily due to increased marketing spending of $7.3 million to support the
brand growth initiatives and a $4.9 million increase in payroll and related
infrastructure costs in support of the brand growth and expansion.
Retail Operating Profit
Operating profit in the retail segment increased by $3.7 million to $5.7 million
at January 31, 2006. The increase in the operating profit was the net result of
higher gross profit of $8.8 million partially offset by higher SG&A expenses of
$5.1 million. The increased gross profit was primarily attributed to the
increase in net sales of $11.6 million as well as higher gross margins in the
Movado Boutiques due to both product mix and generally higher margins in
jewelry. The higher SG&A expenses were primarily due to the costs associated
with the retail expansion. This amount included higher payroll related expense
of $3.2 million, increased occupancy costs of $1.6 million and increased
depreciation expense of $0.8 million. Fiscal 2005 amounts include a non-cash
impairment charge of $2.0 million for the Soho Boutique.
Other Income
The Company recorded other income for the year ended January 31, 2006 of $1.0
million. The Company recorded a pre-tax gain of $2.6 million on the sale of a
building acquired on March 1, 2004 in connection with the acquisition of Ebel.
The building was classified as an asset held for sale in other current assets.
Additionally, the Company recorded a pre-tax loss of $1.6 million representing
the impact of the discontinuation of foreign currency cash flow hedges because
it was not probable that the forecasted transactions would occur by the end of
the originally specified time period.
The Company recognized other income for the year ended January 31, 2005 from a
litigation settlement in the amount of $1.4 million.
Interest Expense
Interest expense for fiscal 2006 was $4.1 million, reflecting a 19.8% increase
over fiscal 2005 interest of $3.4 million. The increase was primarily the result
of higher average borrowings, which were $78.7 million or 35.7% above the prior
year. The increased borrowings were incurred in Switzerland in order to
repatriate foreign earnings under the American Jobs Creation Act of 2004 as well
as to fund the Company's working capital needs. Additionally, higher borrowing
rates for the year contributed to the increase in expense.
For borrowings data for the years ended January 31, 2006 and 2005, see Notes 5
and 6 to the Consolidated Financial Statements regarding Bank Credit
Arrangements and Lines of Credit and Long-Term Debt. For further information on
the American Jobs Creation Act of 2004, see Note 9 to the Consolidated
Financial Statements.
Income Taxes
The Company's income tax provision amounted to $18.3 million and $6.8 million in
fiscal 2006 and 2005 respectively. This represents an effective tax rate of
40.8% in fiscal 2006 compared to 20.5% for fiscal 2005. The higher effective tax
rate for 2006 is primarily due to the fourth quarter 2006 tax charge of $7.5
million
27
associated with repatriated foreign earnings under the American Jobs Creation
Act of 2004. For additional information related to income taxes for the years
ended January 31, 2006 and 2005, see Note 9 to the Consolidated Financial
Statements. In the prior year, the lower effective tax rate was the result of a
retroactive favorable Swiss tax ruling and a favorable U.S. tax accrual
adjustment.
Fiscal 2005 Compared to Fiscal 2004
Net Sales
Net sales in fiscal 2005 were $419.0 million, or 26.9% above fiscal 2004 sales
of $330.2 million. For the year, sales increases were recorded in all brands and
business segments.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 14.0%, or $31.5 million, to $256.3
million, including Ebel sales of $15.7 million. A sales increase of $7.2 million
was recorded in the Movado brand. The increase is attributed to new product
introductions at more affordable price points as well as increased sell through
at certain retailers in key customer chain stores. The Coach brand increased by
$2.3 million as a result of the introduction of fashion products in tandem with
new product offerings by Coach, Inc. The Tommy Hilfiger watch business increased
by $4.4 million. This reflects the expansion into new doors in the North
American marketplace as well as the continued strength of the Tommy Hilfiger
watch business.
International Wholesale Net Sales
The international wholesale business was $88.7 million and was above prior year
by $44.2 million or 99.4%, including Ebel sales of $28.5 million. An increase of
$6.3 million was recorded in Tommy Hilfiger as a result of international market
expansion. Coach, Concord and Movado increased by $2.0 million, $5.0 million and
$2.3 million, respectively, due to growth primarily recorded in Asia.
Retail Net Sales
Sales in the Company's retail segment increased by $13.1 million, or 21.5%, to
$73.9 million. Comparable store sales increases of 11.2% were achieved in the
Movado Boutiques. In addition, non-comparable sales grew by $10.4 million over
the prior year. Comparable store sales in the Company outlet stores were flat
year over year. At January 31, 2005, the Company operated 24 Movado Boutiques
and 27 outlet stores as compared to 17 Movado Boutiques and 26 outlet stores at
January 31, 2004.
Gross Margin
Gross margin for the year was $250.1 million, an increase of $49.8 million over
prior year gross margin of $200.3 million. The increase of $49.8 million was due
to increased sales of $88.8 million. As a percent of sales, gross margin was
59.7% versus 60.7% in the prior year. The lower gross margin percentage was
primarily attributed to a sales mix change due to the addition of Ebel and the
increased sales of Tommy Hilfiger, where the gross margins are lower than the
Company's historical average.
Selling, General and Administrative Expenses
SG&A expenses of $215.1 million increased by $49.5 million, or 29.9%, from
$165.5 million in fiscal 2004. The primary reasons for the increases were the
addition of Ebel, which recorded $28.3 million of incremental expenses, $6.6
million of increased spending in support of the Movado Boutique expansion,
higher payroll and
28
related costs of $6.4 million, additional marketing programs of $1.3 million
and other corporate initiatives of $2.2 million, which included higher legal
costs, costs incurred in connection with Sarbanes-Oxley implementation and costs
associated with the acquisition of Ebel which could not be capitalized. In
addition, in accordance with SFAS No. 144, the Company recorded a non-cash
impairment charge of $2.0 million which is included in SG&A.
Wholesale Operating Profit
Operating profit in the wholesale segment increased by $1.9 million to $33.0
million. The effect of the addition of Ebel was an operating loss for the year
of $3.8 million. Excluding the loss of Ebel, operating profit in the wholesale
segment was $36.8 million or an increase over prior year of $5.7 million. The
increase excluding the effect of Ebel is the net result of higher gross margin
of $16.8 million, partially offset by the increase in SG&A expenses of $11.1
million.
The higher gross margin of $16.8 million was the result of an increase in net
sales of $30.3 million. The increase in the SG&A expenses of $11.1 million is
primarily due to $1.7 million in the wholesale segment as a result of the
translation impact of the weak U.S. dollar, an increase of $1.3 million in
marketing spending, which includes support for the Movado expansion in China and
support for the international market expansion of Tommy Hilfiger, higher payroll
and related costs of $6.4 million and $2.2 million in other corporate
initiatives including higher legal costs, costs incurred in connection with
Sarbanes-Oxley implementation and costs associated with the acquisition of Ebel
which could not be capitalized.
Retail Operating Profit
Operating profit in the retail segment decreased by $1.6 million. The decrease
is the net result of higher gross margin of $8.5 million partially offset by
increased SG&A expenses of $10.1 million.
The retail segment higher gross margin was due to a net sales increase of $13.1
million. This was primarily due to comparable store sales increases in the
Movado Boutiques of 11.2% and the opening of seven new Movado Boutiques and one
new outlet store. The comparable store sales in the outlet stores were flat year
over year.
The increase in SG&A expenses of $10.1 million was primarily attributed to the
costs associated with the opening of the seven new Movado Boutiques and one new
outlet store of $6.6 million and the effect of the impairment charge related to
the Soho Boutique of $2.0 million.
Other Income
The Company recognized income for the year ended January 31, 2005 from a
litigation settlement in the net amount of $1.4 million. This consisted of a
gross settlement of $1.9 million partially offset by direct costs related to the
litigation of $0.5 million. After accounting for fees and taxes associated with
the settlement, net income increased by $0.8 million, or $0.03 per diluted
share.
Interest Expense
Interest expense for fiscal 2005 was $3.4 million, reflecting a 12.7% increase
over fiscal 2004 interest of $3.0 million. The increase was primarily the result
of higher average borrowings, which were $58.0 million or 14.9% above the prior
year. The increased borrowings were initiated to take advantage of low long-term
rates and to improve the Company's capital structure.
29
Income Taxes
The Company's income tax provision amounted to $6.8 million and $8.9 million in
fiscal 2005 and 2004 respectively. This represents an effective tax rate of
20.5% in fiscal 2005 compared to 28.0% for fiscal 2004. The lower effective tax
rate for fiscal 2005 is primarily due to adjustments in the fourth quarter
relating to refunds from a retroactive Swiss tax ruling, a favorable U.S. tax
accrual adjustment and the recording of the tax benefit from an asset impairment
in the U.S.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2006, the Company had $123.6 million of cash and cash equivalents
as compared to $63.8 million in the comparable prior year period. The $59.8
million increase is primarily due to the borrowing of 83.0 million Swiss francs,
with a dollar equivalent of $65.0 million, to repatriate foreign earnings under
the American Jobs Creation Act of 2004 and partially offset by cash used for
capital expenditures of $16.4 million, primarily to support the build out of
five new retail stores, renovation and expansion of existing stores, the
expansion of office space in the corporate headquarters in Paramus, New Jersey
and further automation of the distribution center in Moonachie, New Jersey. In
addition, cash provided by operating activities was $28.4 million.
Cash generated by operating activities continues to be the Company's primary
source to fund its growth initiatives and to pay dividends. In fiscal 2006, 2005
and 2004, the Company generated cash from operations of $28.4 million, $30.2
million and $51.6 million, respectively.
Accounts receivable at January 31, 2006 were $109.9 million as compared to
$104.7 million in the comparable prior year period. The increase of $5.2 million
or 4.9% was below the sales growth of 12.4%. This improvement reflects the
results of higher cash collections during the year as well as higher sales in
the retail segment and for the Company's licensed brands where shorter payment
terms are the norm. The accounts receivable days outstanding were 70 days and 74
days for the fiscal years ended January 31, 2006 and 2005, respectively.
Inventories at January 31, 2006 were $198.6 million as compared to $185.6
million in the comparable prior year period. Inventory increased by $13.0
million primarily due to the increase in Concord inventory of $3.1 million as a
result of the decline in sales and increased Ebel inventory of $8.0 million due
to new product launches. Additionally, inventory held for retail increased by
$3.4 million primarily due to the retail expansion and an expanded jewelry
product offering in the Boutiques. These increases include a favorable impact of
$5.3 million due to the stronger U.S. dollar in translating the inventory.
Cash used in investing activities amounted to $13.2 million, $59.5 million and
$11.5 million in fiscal 2006, 2005 and 2004, respectively. Cash used in
investing activities during fiscal 2006 was for capital expenditures of $16.4
million primarily to support the build out of five new retail stores, renovation
and expansion of existing stores, the expansion of office space in the corporate
headquarters in Paramus, New Jersey and further automation of the distribution
center in Moonachie, New Jersey. The cash used in investing activities was
offset by $4.0 million received as proceeds from the sale of a building acquired
on March 1, 2004 in connection with the acquisition of Ebel. The cash used in
investing activities during fiscal 2005 was primarily to fund the acquisition of
Ebel and capital expenditures related to the build out of the new Movado
Boutiques opened during the period.
Cash provided by / (used) in financing activities amounted to $62.1 million,
$3.6 million and ($1.9) million in fiscal 2006, 2005 and 2004, respectively.
Cash provided by financing activities during fiscal 2006 was primarily due to
the increase in borrowings of 83.0 million Swiss francs, with a dollar
equivalent of $65.0
30
million, to repatriate foreign earnings under the American Jobs Creation Act of
2004. Cash provided by financing activities during fiscal 2005 was primarily the
result of a net increase in long-term debt of $10.0 million partially offset by
the payment of a $5.2 million mortgage assumed as part of the Ebel acquisition.
During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes
under a Note Purchase and Private Shelf Agreement dated November 30, 1998. These
notes bear interest of 6.90% per annum, mature on October 30, 2010 and are
subject to annual repayments of $5.0 million commencing October 31, 2006. These
notes contain financial covenants including an interest coverage ratio,
maintenance of consolidated net worth and certain non-financial covenants that
restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. At January 31, 2006, the Company was in compliance with all
financial and non-financial covenants and $25.0 million of these notes were
issued and outstanding.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes"), in
an aggregate principal amount of $20.0 million, which will mature on October 8,
2011 and are subject to annual repayments of $5.0 million commencing on October
8, 2008. Proceeds of the Senior Series A-2004 Notes have been used by the
Company for capital expenditures, repayment of certain of its debt obligations
and general corporate purposes. These notes contain financial covenants
including an interest coverage ratio, maintenance of consolidated net worth and
certain non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. As of January 31, 2006, the Company was in
compliance with all financial and non-financial covenants and $20.0 million of
these notes were issued and outstanding.
On June 30, 2005, the Company renewed its promissory note for a $5.0 million
unsecured working capital line with Bank of New York, originally dated June 27,
2000. The line expires on July 31, 2006. The Company had no outstanding
borrowings under the line as of January 31, 2006 and 2005.
On December 12, 2005, the Company executed a line of credit letter agreement
with Bank of America ("B of A") and an amended and restated promissory note in
the principal amount of up to $20.0 million payable to B of A. Pursuant to the
line of credit letter agreement, B of A will consider requests for short-term
loans and documentary letters of credit for the importation of merchandise
inventory, the aggregate amount of which at any time outstanding shall not
exceed $20.0 million. The Company's obligations under the agreement are
guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.
Pursuant to the amended and restated promissory note, the Company promised to
pay to B of A $20.0 million, or such lesser amount as may then be the unpaid
balance of all loans made by B of A to the Company thereunder, in immediately
available funds upon the maturity date of June 16, 2006. The Company has the
right to prepay all or part of any outstanding amounts under the promissory note
without penalty at any time prior to the maturity date. The amended and restated
promissory note bears interest at an annual rate equal to either (i) a floating
rate equal to the prime rate or (ii) such fixed rate as may be agreed upon by
the Company and B of A for an interest period which is also then agreed upon.
The amended and restated promissory note contains various representations and
warranties and events of default that are customary for instruments of that
type. As of January 31, 2006, there were no outstanding borrowings against this
line.
On December 13, 2005, the Company executed a promissory note in the principal
amount of up to $37.0 million payable to JPMorgan Chase Bank, N.A. ("Chase").
Pursuant to the promissory note, the Company promised to
31
pay to Chase $37.0 million, or such lesser amount as may then be the unpaid
balance of each loan made or letter of credit issued by Chase to the Company
thereunder, upon the maturity date of July 31, 2006; provided that during the
period between January 31, 2006 and the maturity date, the maximum principal
amount of all loans made by Chase to the Company, and outstanding under the
promissory note, shall not exceed $2.0 million. The Company has the right to
prepay all or part of any outstanding amounts under the promissory note without
penalty at any time prior to the maturity date. The promissory note bears
interest at an annual rate equal to either (i) a floating rate equal to the
prime rate, (ii) a fixed rate equal to an adjusted LIBOR plus 0.625% or (iii) a
fixed rate equal to a rate of interest offered by Chase from time to time on any
single commercial borrowing. The promissory note contains various events of
default that are customary for instruments of that type. In addition, it is an
event of default for any security interest or other encumbrance to be created or
imposed on the Company's property, other than as permitted in the lien covenant
of the Credit Agreement. Chase issued 11 irrevocable standby letters of credit
for retail and operating facility leases to various landlords, for the
administration of the Movado Boutique private-label credit card and Canadian
payroll to the Royal Bank of Canada totaling $1.2 million with expiration dates
through March 18, 2007. As of January 31, 2006, there were no outstanding
borrowings against this promissory note.
On December 15, 2005, the Company, and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "Swiss Credit Agreement") which provides for a
revolving credit facility of 90.0 million Swiss francs and matures on December
15, 2010. The obligations of the Company's two Swiss subsidiaries under this
credit agreement are guaranteed by the Company under a Parent Guarantee, dated
as of December 15, 2005, in favor of the lenders. The credit agreement contains
financial covenants including an interest coverage ratio, average debt coverage
ratio, limitations on capital expenditures and certain non-financial covenants
that restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. Until the date immediately preceding the first day of the calendar
month following the date of delivery of the first annual or quarterly financial
statements after December 15, 2005, the credit facility bears interest at a rate
equal to the LIBOR (as defined in the Swiss Credit Agreement) plus .50% per
annum, after which it will bear interest at a rate equal to the LIBOR plus a
margin ranging from .50% per annum to .875% per annum (depending upon a leverage
ratio). As of January 31, 2006, the Company was in compliance with all financial
and non-financial covenants and had 83.0 million Swiss francs, with a dollar
equivalent of $65.0 million, outstanding under this revolving credit facility.
On December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "US Credit Agreement") which provides for a
revolving credit facility of $50.0 million (including a sublimit for borrowings
in Swiss francs of up to $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain terms and conditions.
The US Credit Agreement will mature on December 15, 2010. The obligations of MGI
Luxury Group S.A. and Movado Watch Company SA are guaranteed by the Company
under a Parent Guarantee, dated as of December 15, 2005, in favor of the
lenders. The obligations of the Company are guaranteed by certain domestic
subsidiaries of the Company under subsidiary guarantees, in favor of the
lenders. The credit agreement contains financial covenants including an interest
coverage ratio, average debt coverage ratio, limitations on capital expenditures
and certain non-financial covenants that restrict the Company's activities
regarding investments and acquisitions, mergers, certain transactions with
affiliates, creation of liens, asset transfers, payment of dividends and
limitation of the amount of debt outstanding. Until the date immediately
preceding the first day of the calendar month following the date of delivery of
the first annual or quarterly financial statements after December 15, 2005, the
credit facility bears interest, at Borrower's option, at a rate equal to the
Adjusted LIBOR (as defined in the US Credit Agreement) plus .50% per annum, or
32
the Alternate Base Rate (as defined in the US Credit Agreement), after which it
will bear interest, at Borrower's option, at a rate equal to the Adjusted LIBOR
plus a margin ranging from .50% per annum to .875% per annum (depending upon a
leverage ratio), or the Alternate Base Rate. As of January 31, 2006, the Company
was in compliance with all financial and non-financial covenants and there were
no outstanding borrowings against this line.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million Swiss francs, with dollar equivalents of $6.3 million and
$6.7 million at January 31, 2006 and 2005. As of January 31, 2006, the Swiss
bank has guaranteed the Company's Swiss subsidiary's obligations to certain
Swiss third parties in the amount of $3.3 million in various foreign
currencies. As of January 31, 2006, there were no outstanding borrowings against
these lines.
For fiscal 2006, treasury shares increased by 180,092 as the result of cashless
exercises of stock options for 527,387 shares of stock.
Cash dividends were $5.1 million, $4.0 million and $2.5 million in fiscal years
2006, 2005 and 2004, respectively.
At January 31, 2006, the Company had working capital of $369.2 million as
compared to $303.2 million in the prior year. The Company defines working
capital as the difference between current assets and current liabilities. The
Company expects that annual capital expenditures in the near term will be higher
by approximately $1.5 million when compared to fiscal 2006 levels. The increase
in capital expenditures will be due to the remodeling of existing stores,
increased spending in support of the Movado Boutiques expansion and higher costs
related to improving the Company's information technology infrastructure.
Management believes that the cash on hand in addition to the expected cash flow
from operations and the Company's short-term borrowing capacity will be
sufficient to meet its working capital needs for at least the next 12 months.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments due by period (in thousands):
2-3 4-5
Total Less than 1 year years years More than 5 years
-------- ---------------- -------- -------- -----------------
Contractual Obligations:
Long-Term Debt Obligations (1) $109,955 $ 5,000 $15,000 $ 84,955 $ 5,000
Interest Payments on Long-Term Debt (1) 14,236 3,657 6,280 4,059 240
Operating Lease Obligations (2) 79,103 12,590 21,417 18,719 26,377
Purchase Obligations (3) 40,344 40,344 -- -- --
Other Long-Term Obligations (4) 68,250 9,814 20,400 20,939 17,097
-------- ------- ------- -------- -------
Total Contractual Obligations $311,888 $71,405 $63,097 $128,672 $48,714
======== ======= ======= ======== =======
(1) The Company has long-term debt obligations and related interest payments of
$54.5 million related to Series A-2004 Senior Notes and Series A Senior
Notes further discussed in "Liquidity and Capital Resources". Additionally,
the Company has long-term debt obligations and related interest payments of
$69.7 million related to the Swiss revolving credit facility entered into
in fiscal 2006.
(2) Includes store operating leases, which generally provide for payment of
direct operating costs in addition to rent. These obligation amounts
include future minimum lease payments and exclude direct operating costs.
(3) The Company had outstanding purchase obligations with suppliers at the end
of fiscal 2006 for raw materials, finished watches and packaging in the
normal course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid
for items required to be purchased under agreements that are enforceable,
legally binding and specify minimum quantity, price and term.
(4) Other long-term obligations consist of minimum obligations related to the
Company's license agreements. The Company manufactures, distributes,
advertises and sells watches pursuant to its exclusive license agreements
with unaffiliated licensors. Royalty amounts are generally based on a
stipulated percentage of revenues, although certain of these agreements
contain provisions
33
for the payment of minimum annual royalty amounts. The license agreements
have various terms with additional renewal options, provided that minimum
sales levels are achieved. Additionally, the license agreements require the
Company to pay certain advertising expenses based on a stipulated
percentage of revenues, although certain of these agreements contain
provisions for the payment of minimum annual advertising amounts.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges by requiring the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure will no longer be an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company will be adopting SFAS No. 123(R) in the first quarter of
fiscal 2007 using the modified prospective application transition method. For
outstanding unvested options granted as of January 31, 2006, the adoption is
expected to have an impact of approximately $1.0 million, net of tax, on the
Company's consolidated results of operations for fiscal year ending January 31,
2007.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
34
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN 47 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The
adoption of EITF 05-6 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
35
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Rate Risk
The Company's primary market risk exposure relates to foreign currency exchange
risk (see Note 7 to the Consolidated Financial Statements). The majority of the
Company's purchases are denominated in Swiss francs. The Company reduces its
exposure to the Swiss franc exchange rate risk through a hedging program. Under
the hedging program, the Company manages most of its foreign currency exposures
on a consolidated basis, which allows it to net certain exposures and take
advantage of natural offsets. The Company uses various derivative financial
instruments to further reduce the net exposures to currency fluctuations,
predominately forward and option contracts. These derivatives either (a) are
used to hedge the Company's Swiss franc liabilities and are recorded at fair
value with the changes in fair value reflected in earnings or (b) are documented
as SFAS No. 133 cash flow hedges with the gains and losses on this latter
hedging activity first reflected in other comprehensive income, and then later
classified into earnings. In both cases, the earnings impact is partially offset
by the effects of currency movements on the underlying hedged transactions. If
the Company did not engage in a hedging program, any change in the Swiss franc
to local currency would have an equal effect on the Company's cost of sales. In
addition, the Company hedges its Swiss franc payable exposure with forward
contracts. As of January 31, 2006, the Company's entire net forward contracts
hedging portfolio consisted of 140.0 million Swiss francs equivalent for various
expiry dates ranging through October 31, 2006 compared to a portfolio of 239.0
million Swiss franc equivalent for various expiry dates ranging through January
27, 2006 as of January 31, 2005. If the Company was to settle its Swiss franc
forward contracts at January 31, 2006, the net result would be a loss of $1.6
million, net of tax benefit of $1.0 million. The Company had 10.0 million Swiss
franc option contracts related to cash flow hedges for various expiry dates
ranging through October 27, 2006 as of January 31, 2006 compared to 30.0 million
Swiss franc option contracts for various expiry dates ranging through October
31, 2005 as of January 31, 2005. If the Company was to settle its Swiss franc
option contracts at January 31, 2006, the net result would be a gain of $0.2
million, net of tax of $0.1 million.
The Company's Board of Directors authorized the hedging of the Company's Swiss
franc denominated investment in its wholly-owned Swiss subsidiaries using
purchase options under certain limitations. These hedges are treated as net
investment hedges under SFAS No. 133. As of January 31, 2006, the Company did
not hold a purchased option hedge portfolio related to net investment hedging
compared to 50.0 million Swiss francs as of January 31, 2005.
Commodity Risk
Additionally, the Company has a hedging program related to gold used in the
manufacturing of the Company's watches. Under this hedging program, the Company
purchases various commodity derivative instruments, primarily future contracts.
These derivatives are documented as SFAS No. 133 cash flow hedges, and gains and
losses on these derivative instruments are first reflected in other
comprehensive income, and later reclassified into earnings, partially offset by
the effects of gold market price changes on the underlying actual gold
purchases. If the Company did not engage in a gold hedging program, any changes
in the gold price would have an equal effect on the Company's cost of sales. The
Company did not hold any futures contracts in its gold hedge portfolio related
to cash flow hedges as of January 31, 2006.
Debt and Interest Rate Risk
In addition, the Company has certain debt obligations with variable interest
rates, which are based on LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The differences between the market
based interest rates at
36
January 31, 2006, and the fixed rates were unfavorable. The Company believes
that a 1% change in interest rates would affect the Company's net income by
approximately $0.6 million.
37
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule Page
Number Number
-------- -----------
Management's Annual Report on Internal Control Over
Financial Reporting F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Income for the fiscal years ended
January 31, 2006, 2005 and 2004 F-4
Consolidated Balance Sheets at January 31, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2006, 2005 and 2004 F-6
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 31, 2006, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8 to F-33
Valuation and Qualifying Accounts and Reserves II S-1
38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as
amended (the "Exchange Act"). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of the end of the period covered by
this report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial
reporting during the quarter ended January 31, 2006, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
It should be noted that while the Company's Chief Executive Officer and Chief
Financial Officer believe that the Company's disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that the Company's disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
See Consolidated Financial Statements and Supplementary Data for Management's
Annual Report on Internal Control Over Financial Reporting and the Report of
Independent Registered Public Accounting Firm containing an attestation thereto.
Item 9B. Other Information
None.
39
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the captions
"Election of Directors" and "Management" and is incorporated herein by
reference.
Information on the beneficial ownership reporting for the Company's directors
and executive officers is contained in the Company's Proxy Statement for the
2006 annual meeting of shareholders under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
Information on the Company's Audit Committee and Audit Committee Financial
Expert is contained in the Company's Proxy Statement for the 2006 annual meeting
of shareholders under the caption "Information Regarding the Board of Directors
and Its Committees" and is incorporated herein by reference.
The Company has adopted and posted on its website at www.movadogroupinc.com a
Code of Business Conduct and Ethics that applies to all directors, officers and
employees, including the Company's Chief Executive Officer, Chief Financial
Officer and principal financial and accounting officers. The Company will post
any amendments to the Code of Business Conduct and Ethics, and any waivers that
are required to be disclosed by SEC regulations, on the Company's website.
Item 11. Executive Compensation
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the captions
"Executive Compensation" and "Compensation of Directors" and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is included in the Company's Proxy
Statement for the 2006 annual meeting of shareholders under the caption "Fees
Paid to PricewaterhouseCoopers LLP" and is incorporated herein by reference.
40
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report
1. Financial Statements:
See Financial Statements Index on page 38 included in Item 8 of Part
II of this annual report.
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying
Accounts and Reserves
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index on pages 44 through 50 of this annual report.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOVADO GROUP, INC.
(Registrant)
Dated: April 12, 2006 By: /s/ Gedalio Grinberg
------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Dated: April 12, 2006 /s/ Gedalio Grinberg
----------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Dated: April 12, 2006 /s/ Efraim Grinberg
----------------------------------------
Efraim Grinberg
President and Chief Executive Officer
Dated: April 12, 2006 /s/ Richard J. Cote
----------------------------------------
Richard J. Cote
Executive Vice President and
Chief Operating Officer
Dated: April 12, 2006 /s/ Eugene J. Karpovich
----------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
Dated: April 12, 2006 /s/ Ernest R. LaPorte
----------------------------------------
Ernest R. LaPorte
Vice President of Finance and
Principal Accounting Officer
Dated: April 12, 2006 /s/ Margaret Hayes Adame
----------------------------------------
Margaret Hayes Adame
Director
Dated: April 12, 2006 /s/ Donald Oresman
----------------------------------------
Donald Oresman
Director
42
Dated: April 12, 2006 /s/ Leonard L. Silverstein
----------------------------------------
Leonard L. Silverstein
Director
Dated: April 12, 2006 /s/ Alan H. Howard
----------------------------------------
Alan H. Howard
Director
Dated: April 12, 2006 /s/ Nathan Leventhal
----------------------------------------
Nathan Leventhal
Director
Dated: April 12, 2006 /s/ Richard D. Isserman
----------------------------------------
Richard D. Isserman
Director
43
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 Purchase and Private Shelf Agreement dated as of November 30,
1998 between the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended January 31,
1999.
4.3 Note Purchase and Private Shelf Agreement dated as of March 21, 2001
between the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 4.4 to the
Registrant's Annual Report on Form 10-K for the year ended January 31,
2001.
4.4 Amendment dated as of March 21, 2004 to Note Purchase and Private
Shelf Agreement dated as of March 21, 2001 between the Registrant and
The Prudential Insurance Company of America. Incorporated herein by
reference to Exhibit 4.5 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2004.
10.1 Amendment Number 1 to License Agreement dated December 9, 1996 between
the Registrant as Licensee and Coach, a division of Sara Lee
Corporation as Licensor, dated as of February 1, 1998. Incorporated
herein by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1998.
44
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.2 Agreement, dated January 1, 1992, between The Hearst Corporation and
the Registrant, as amended on January 17, 1992. Incorporated herein by
reference to Exhibit 10.8 filed with the Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.3 Letter Agreement between the Registrant and The Hearst Corporation
dated October 24, 1994 executed October 25, 1995 amending License
Agreement dated as of January 1, 1992, as amended. Incorporated herein
by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1995.
10.4 Registrant's 1996 Stock Incentive Plan amending and restating the 1993
Employee Stock Option Plan. Incorporated herein by reference to
Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1996. *
10.5 Lease dated August 10, 1994 between Rockefeller Center Properties, as
landlord and SwissAm, Inc., as tenant for space at 630 Fifth Avenue,
New York, New York. Incorporated herein by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1994.
10.6 Death and Disability Benefit Plan Agreement dated September 23, 1994
between the Registrant and Gedalio Grinberg. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1994. *
10.7 Registrant's amended and restated Deferred Compensation Plan for
Executives effective June 17, 2004. Incorporated herein by reference
to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2005. *
10.8 License Agreement dated December 9, 1996 between the Registrant and
Sara Lee Corporation. Incorporated herein by reference to Exhibit
10.32 to the Registrant's Annual Report on Form 10-K for the year
ended January 31, 1997.
45
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.
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.
46
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.15 Second Amendment of Lease dated July 26, 2001 between Mack-Cali
Realty, L.P., as landlord, and Movado Group, Inc., as tenant, further
amending lease dated as of December 21, 2000. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q filed for the quarter ended October 31, 2001.
10.16 Third Amendment of Lease dated November 6, 2001 between Mack-Cali
Realty, L.P., as lessor and Movado Group, Inc., as lessee, for
additional space at Mack-Cali II, One Mack Drive, Paramus, New Jersey.
Incorporated herein by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended October 31,
2001.
10.17 Amendment Number 2 to Registrant's 1996 Stock Incentive Plan dated
March 16, 2001. Incorporated herein by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the year ended January
31, 2002.*
10.18 Amendment Number 3 to Registrant's 1996 Stock Incentive Plan approved
June 19, 2001. Incorporated herein by reference to Exhibit 10.28 to
the Registrant's Annual Report on Form 10-K for the year ended January
31, 2002.*
10.19 Amendment Number 3 to License Agreement dated December 9, 1996, as
previously amended, between the Registrant, Movado Watch Company S.A.
and Coach, Inc. dated as of January 30, 2003. Incorporated herein by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2002.
10.20 Line of Credit Letter Agreement dated August 20, 2001 between the
Registrant and The Bank of New York. Incorporated herein by reference
to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for
the year ended January 31, 2002.
47
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.21 First Amendment to the License Agreement dated June 3, 1999 between
Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company
S.A. entered into January 16, 2002. Incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 31, 2002.
10.22 Second Amendment to the License Agreement dated June 3, 1999 between
Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company
S.A. entered into August 1, 2002. Incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 31, 2002.
10.23 Amendment dated August 5, 2004 to Line of Credit Agreement between the
Registrant and The Bank of New York dated August 20, 2001.
Incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31, 2004.
10.24 Endorsement Agreement dated as of April 4, 2003 between the Registrant
and The Grinberg Family Trust. Incorporated herein by reference to
Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2003.
10.25 Third Amendment to License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and the Registrant entered into as of May 7,
2004. Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
30, 2004.
10.26 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Eugene J. Karpovich. Incorporated herein by reference to Exhibit
10.2 the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2004. *
10.27 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Frank Kimick. Incorporated herein by reference to Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 2004. *
48
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.28 Employment Agreement dated August 27, 2004 between the Registrant and
Mr. Timothy F. Michno. Incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2004. *
10.29 Master Credit Agreement dated August 17, 2004 and August 20, 2004
between MGI Luxury Group S.A. and UBS AG. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 2004.
10.30 Fourth Amendment to License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and the Registrant entered into as of June
25, 2004. Incorporated herein by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended July
31, 2004.
10.31 Fifth Amendment of Lease dated October 20, 2003 between Mack-Cali
Realty, L.P. as landlord and the Registrant as tenant further amending
the lease dated as of December 21, 2000. Incorporated herein by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2004.
10.32 Registrant's 1996 Stock Incentive Plan, amended and restated as of
April 8, 2004. Incorporated herein by reference to Exhibit 10.37 to
the Registrant's Annual Report on Form 10-K for the year ended
January 31, 2005.*
10.33 License Agreement entered into December 15, 2004 between MGI Luxury
Group S.A. and HUGO BOSS Trade Mark Management GmbH & Co. Incorporated
herein by reference to Exhibit 10.38 to the Registrant's Annual Report
on Form 10-K for the year ended January 31, 2005.
10.34 $50 million Credit Agreement dated as of December 15, 2005 between the
Registrant, MGI Luxury Group S.A. and Movado Watch Company S.A., as
borrowers the Lenders signatory thereto and JPMorgan Chase Bank, N.A.
as Administrative Agent, Swingline Bank and Issuing Bank.
49
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
10.35 CHF 90 million Credit Agreement dated as of December 15, 2005 between
MGI Luxury Group S.A. and Movado Watch Company S.A., as borrowers, the
Registrant as Parent, each of the lenders signatory thereto and
JPMorgan Chase Bank as administrative agent.
10.36 Line of Credit Agreement between the Registrant and Bank of America,
N.A. and Amended and Restated Promissory Note payable to Bank of
America, N.A., dated as of December 12, 2005.
10.37 License Agreement dated as of November 18, 2005 by and between the
Registrant, Swissam Products Limited and L.C. Licensing, Inc. **
10.38 Line of Credit Letter Agreement dated as of June 19, 2005 between the
Registrant and Bank of America and Amended and Restated Promissory
Note as of June 19, 2005. Incorporated by reference herein by
reference to Exhibit 10.1 of Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 2005.
10.39 Promissory Note dated as of December 13, 2005 to JPMorgan Chase Bank,
N.A.
21.1 Subsidiaries of the Registrant.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Constitutes a compensatory plan or arrangement.
** Confidential portions of Exhibit 10.37 have been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Exchange Act of 1934.
50
Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such terms are defined in
Rule 13a-15(f) under the Exchange Act, for the Company. With the participation
of the Chief Executive Officer and the Chief Financial Officer, the Company's
management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the framework and criteria
established in Internal Control - Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, the Company's management has concluded that the Company's internal
control over financial reporting was effective as of January 31, 2006.
Management's assessment of the effectiveness of our internal control over
financial reporting as of January 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Movado Group, Inc.:
We have completed integrated audits of Movado Group, Inc.'s 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of January 31, 2006, and an audit of its 2004 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Movado
Group, Inc. and its subsidiaries at January 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended January 31, 2006 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "Management's Annual
Report on Internal Control Over Financial Reporting" listed in the accompanying
index, that the Company maintained effective internal control over financial
reporting as of January 31, 2006 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
F-2
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 12, 2006
F-3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
Net sales $470,941 $418,966 $330,214
Cost of sales 184,621 168,818 129,908
-------- -------- --------
Gross profit 286,320 250,148 200,306
Selling, general and administrative 238,283 215,072 165,525
-------- -------- --------
Operating profit 48,037 35,076 34,781
Other income, net (Note 18) 1,008 1,444 --
Interest expense, net 4,109 3,430 3,044
-------- -------- --------
Income before income taxes 44,936 33,090 31,737
Provision for income taxes (Note 9) 18,319 6,783 8,886
-------- -------- --------
Net income $ 26,617 $ 26,307 $ 22,851
======== ======== ========
Basic income per share:
Net income per share $ 1.05 $ 1.06 $ 0.95
Weighted basic average shares outstanding 25,273 24,708 24,101
Diluted income per share:
Net income per share $ 1.02 $ 1.03 $ 0.92
Weighted diluted average shares outstanding 26,180 25,583 24,877
See Notes to Consolidated Financial Statements
F-4
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31,
-------------------
2006 2005
-------- --------
ASSETS
Current assets:
Cash $123,625 $ 63,782
Trade receivables, net 109,852 104,685
Inventories, net 198,582 185,609
Other 28,989 32,630
-------- --------
Total current assets 461,048 386,706
Property, plant and equipment, net 52,168 52,510
Other assets 36,676 37,858
-------- --------
Total assets $549,892 $477,074
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 5,000 --
Accounts payable 35,529 38,488
Accrued payroll and benefits 10,239 10,747
Accrued liabilities 32,826 28,996
Current taxes payable 7,724 --
Deferred income taxes 503 5,250
-------- --------
Total current liabilities 91,821 83,481
Long-term debt 104,955 45,000
Deferred and noncurrent income taxes 11,947 14,827
Other liabilities 19,491 17,209
-------- --------
Total liabilities 228,214 160,517
-------- --------
Commitments and contingencies (Notes 11 and 12)
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued -- --
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 23,215,836 and 22,580,459 shares
issued, respectively 232 226
Class A Common Stock, $0.01 par value, 30,000,000
shares authorized; 6,766,909 and 6,801,812 shares
issued and outstanding, respectively 68 68
Capital in excess of par value 107,965 100,289
Retained earnings 236,515 214,953
Accumulated other comprehensive income 27,673 48,706
Treasury Stock, 4,613,645 and 4,433,553 shares at
cost, respectively (50,775) (47,685)
-------- --------
Total shareholders' equity 321,678 316,557
-------- --------
Total liabilities and shareholders' equity $549,892 $477,074
======== ========
See Notes to Consolidated Financial Statements
F-5
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended January 31,
------------------------------
2006 2005 2004
-------- -------- --------
Cash flows from operating activities:
Net income $ 26,617 $ 26,307 $ 22,851
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16,780 12,603 9,973
Utilization of NOL 2,881 2,725 --
Impairment of long-lived assets -- 2,025 --
Deferred and noncurrent income taxes (4,575) 8,132 10,101
Provision for losses on accounts receivable 2,399 2,072 2,290
Provision for losses on inventories 1,529 3,221 993
(Gain) loss on disposition of property, plant and equipment -- (253) 109
Gain on sale of asset held for sale (2,630) -- --
Loss on hedge derivatives 1,622 -- --
Tax benefit from stock options exercised 2,436 2,554 2,511
Changes in assets and liabilities:
Trade receivables (5,496) 1,422 4,583
Inventories (18,282) (29,587) (6,248)
Other current assets (240) 5,716 12,179
Accounts payable (1,662) 11,248 160
Accrued liabilities 351 (6,615) 987
Accrued payroll and benefits (508) 2,714 2,023
Current taxes payable 7,727 (12,199) (9,370)
Other noncurrent assets (2,808) (6,253) (4,997)
Other noncurrent liabilities 2,302 4,358 3,502
-------- -------- --------
Net cash provided by operating activities 28,443 30,190 51,647
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (16,367) (14,947) (10,830)
Proceeds from sale of asset held for sale 4,000 -- --
Acquisition of Ebel, net of cash acquired -- (43,525) --
Trademarks (798) (1,000) (653)
-------- -------- --------
Net cash used in investing activities (13,165) (59,472) (11,483)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 64,955 -- --
Repayment of Senior Notes -- (10,000) --
Payment of Ebel mortgage -- (5,187) --
Proceeds of Senior Notes -- 20,000 --
Stock options exercised and other changes 2,156 2,703 589
Dividends paid (5,055) (3,955) (2,537)
-------- -------- --------
Net cash provided by (used in) financing activities 62,056 3,561 (1,948)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (17,491) 7,420 5,502
Net increase (decrease) in cash and cash equivalents 59,843 (18,301) 43,718
Cash and cash equivalents at beginning of year 63,782 82,083 38,365
-------- -------- --------
Cash and cash equivalents at end of year $123,625 $ 63,782 $ 82,083
======== ======== ========
See Notes to Consolidated Financial Statements
F-6
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumulated
Class A Capital in Other
Preferred Common Common Excess of Retained Comprehensive Treasury
Stock Stock Stock Par Value Earnings Income (Loss) Stock
--------- ------ ------- ---------- -------- ------------- --------
Balance, January 31, 2003 $-- $101 $34 $ 72,145 $172,287 $ 19,386 ($27,741)
Net income 22,851
Dividends ($0.105 per share) (2,537)
Stock options exercised, net of tax of $2,511 8 16,861 (14,254)
Supplemental executive retirement plan 170
Restricted stock amortization less cancellations 315
Net unrealized gain on investments, net of tax
of $89 139
Net change in effective portion of
hedging contracts, net of
tax of $2,212 (3,434)
Foreign currency translation adjustment 18,382
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2004 $-- $109 $34 $ 89,491 $192,601 $ 34,473 ($41,995)
Net income 26,307
Stock split adjustment 109 34 (143)
Dividends ($0.16 per share) (3,955)
Stock options exercised, net of tax of $2,554 8 10,010 (5,690)
Supplemental executive retirement plan 107
Restricted stock amortization less cancellations 824
Net unrealized gain on investments, net of tax
of $18 39
Net change in effective portion of
hedging contracts, net of
tax of $134 366
Foreign currency translation adjustment 13,828
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2005 $-- $226 $68 $100,289 $214,953 $ 48,706 ($47,685)
Net income 26,617
Dividends ($0.20 per share) (5,055)
Stock options exercised, net of tax of $2,436 6 6,325 (3,090)
Supplemental executive retirement plan 124
Restricted stock amortization less cancellations 1,227
Net unrealized gain on investments, net of tax
of $19 1
Net change in effective portion of
hedging contracts, net of
tax of $2,055 (3,318)
Foreign currency translation adjustment (17,716)
--- ---- --- -------- -------- -------- --------
Balance, January 31, 2006 $-- $232 $68 $107,965 $236,515 $ 27,673 ($50,775)
=== ==== === ======== ======== ======== ========
Note: Balances prior to fiscal 2004 within the Consolidated Statements of
Changes in Shareholders' Equity have not been split-adjusted.
(Shares information in thousands) Common Stock Class A Common Stock Treasury Stock
------------ -------------------- --------------
Balance at January 31, 2003 20,116 6,802 (3,094)
Stock issued to employees exercising stock options 1,639 -- (1,033)
Conversion of Class A Common Stock -- -- 14
Restricted stock and other stock plans, less cancellations -- -- --
------ ----- ------
Balance January 31, 2004 21,755 6,802 (4,113)
------ ----- ------
Stock issued to employees exercising stock options 825 -- (337)
Conversion of Class A Common Stock -- -- --
Restricted stock and other stock plans, less cancellations -- -- 16
------ ----- ------
Balance January 31, 2005 22,580 6,802 (4,434)
------ ----- ------
Stock issued to employees exercising stock options 601 -- (180)
Conversion of Class A Common Stock 35 (35) --
Restricted stock and other stock plans, less cancellations -- -- --
------ ----- ------
Balance January 31, 2006 23,216 6,767 (4,614)
====== ===== ======
Note: Shares information provided has been adjusted to reflect the effect of the
fiscal 2005 two-for-one stock split.
See Notes to Consolidated Financial Statements
F-7
NOTES TO MOVADO GROUP, INC.'S CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Movado Group, Inc. (the "Company") is a designer, manufacturer and distributor
of quality watches with prominent brands in almost every price category
comprising the watch industry. In fiscal 2006, the Company marketed seven
distinctive brands of watches: Movado, Ebel, Concord, ESQ, Coach, HUGO BOSS and
Tommy Hilfiger, which compete in most segments of the watch market.
Movado, Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are manufactured
using Swiss movements and other components obtained from third party suppliers.
Coach, ESQ, Tommy Hilfiger and HUGO BOSS watches are manufactured by
independent contractors. Coach and ESQ watches are manufactured using Swiss
movements and other components purchased from third party suppliers. Tommy
Hilfiger and HUGO BOSS watches are manufactured using movements and other
components purchased from third party suppliers.
In addition to its sales to trade customers and independent distributors,
through a wholly-owned domestic subsidiary, the Company sells Movado watches, as
well as proprietary Movado jewelry, tabletop and accessories directly to
consumers in its Movado Boutiques. Additionally, the Company operates outlet
stores throughout the United States, through which it sells discontinued models
and factory seconds.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company uses estimates when accounting for sales discounts, rebates,
allowances and incentives, warranty, income taxes, depreciation, amortization,
contingencies and asset and liability valuations.
Reclassification
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2006 presentation.
Translation of Foreign Currency Financial Statements and Foreign Currency
Transactions
The financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at
F-8
average exchange rates for the year. Foreign currency transaction gains and
losses are charged or credited to earnings as incurred. Foreign currency
translation gains and losses are reflected in the equity section of the
Company's consolidated balance sheet in accumulated other comprehensive income
(loss). The balance of the foreign currency translation adjustment, included in
Accumulated Other Comprehensive Income, was $30.3 million and $48.1 million as
of January 31, 2006 and 2005, respectively.
Cash and Cash Equivalents
Cash equivalents are considered all highly liquid investments with original
maturities at date of purchase of three months or less.
Trade Receivables
Trade receivables as shown on the consolidated balance sheet is net of
allowances. The allowance for doubtful accounts is determined through an
analysis of the aging of accounts receivable, assessments of collectibility
based on historic trends, the financial condition of the Company's customers and
an evaluation of economic conditions. The Company writes off uncollectible trade
receivables once collection efforts have been exhausted and third parties
confirm the balance is not recoverable.
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Ebel, Concord, Coach, HUGO BOSS and Tommy
Hilfiger watches are also marketed outside the U.S. through a network of
independent distributors. Accounts receivable are stated net of allowances for
doubtful accounts of $7.0 million, $6.8 million and $6.7 million and net of
estimated sales returns and allowances of $18.7 million, $21.2 million and $17.3
million at January 31, 2006, 2005 and 2004, respectively.
The Company's concentrations of credit risk arise primarily from accounts
receivable related to trade customers during the peak selling seasons. The
Company has significant accounts receivable balances due from major national
chain and department stores. The Company's results of operations could be
materially adversely affected in the event any of these customers or a group of
these customers defaulted on all or a significant portion of their obligations
to the Company as a result of financial difficulties. As of January 31, 2006,
there were no known situations with any of the Company's major customers which
indicate the customer's inability to make the required payments.
Sales returns and allowances for the fiscal years ended January 31, 2006, 2005
and 2004 were as follows (in thousands):
2006 2005 2004
-------- -------- --------
Balance, beginning of year $ 21,249 $ 17,270 $ 16,974
Acquired Ebel reserves -- 7,181 --
Provision charged to operations 33,400 27,032 26,329
Credits issued (35,783) (30,334) (26,054)
Currency impact (163) 100 21
-------- -------- --------
Balance, end of year $ 18,703 $ 21,249 $ 17,270
======== ======== ========
F-9
Inventories
The Company values its inventory at the lower of cost or market. The Company's
domestic inventory is valued using the first-in, first-out (FIFO) method. The
cost of finished goods and component inventories, held by overseas subsidiaries,
are determined using average cost. The Company's management regularly reviews
its sales to customers and customers' sell through at retail to determine excess
or obsolete inventory reserves. Inventory with less than acceptable turn rates
is classified as discontinued and, together with the related component parts
which can be assembled into saleable finished goods, is sold through the
Company's outlet stores. When management determines that finished product is
unsaleable in the Company's outlet stores or when it is impractical to build the
remaining components into watches for sale in the outlets, a reserve is
established for the cost of those products and components. In addition, as part
of the acquisition of Ebel, a significant value of parts and components were
acquired that could not readily be identifiable to be produced as watches or for
future after sales service needs. These parts and components have been reserved
for based on future expected usage. These estimates could vary significantly,
either favorably or unfavorably, from actual requirements depending on future
economic conditions, customer inventory levels, expected usage or competitive
conditions which may differ from expectations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of buildings is amortized using the straight-line method based on
the useful life of 40 years. Depreciation of furniture and equipment is provided
using the straight-line method based on the estimated useful lives of assets,
which range from four to ten years. Computer software is amortized using the
straight-line method over periods which range from five to seven years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the term of the lease or the estimated useful life of the leasehold
improvement. Design fees and tooling costs are amortized using the straight-line
method based on the useful life of three years. Upon the disposition of
property, plant and equipment, the accumulated depreciation is deducted from the
original cost and any gain or loss is reflected in current earnings.
Long-Lived Assets
The Company establishes the estimated useful lives of its depreciable assets
based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company performs an impairment review, at a minimum, on an annual basis.
However, the Company will review its long-lived assets for impairment once
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable. When such a determination
has been made, management compares the carrying value of the assets with their
estimated future undiscounted cash flows. If it is determined that an impairment
loss has occurred, the loss is recognized during that period. The impairment
loss is calculated as the difference between asset carrying values and the fair
value of the long-lived assets.
During fiscal 2006, the Company performed the review which resulted in no
impairment charge. During the fourth quarter of fiscal 2005, the Company
determined that the carrying value of its long-lived assets in the Movado
Boutique located in the Soho section of New York City, may not be recoverable
and performed an
F-10
impairment review. The impairment review was performed pursuant to SFAS No. 144
because of an economic downturn affecting the Boutique operations and revenue
forecasts. As a result, the Company recorded a non-cash impairment charge of
$2.0 million consisting of property, plant and equipment of $0.8 million and
other assets of $1.2 million. The entire impairment charge is included in the
selling, general and administrative expenses in the fiscal 2005 Consolidated
Statement of Income. There were no impairment losses related to long-lived
assets in fiscal 2004.
Deferred Rent Obligations and Contributions from Landlords
The Company accounts for rent expense under non-cancelable operating leases with
scheduled rent increases on a straight-line basis over the lease term. The
excess of straight-line rent expense over scheduled payments is recorded as a
deferred liability. In addition, the Company receives build out contributions
from landlords primarily as an incentive for the Company to lease retail store
space from the landlords. This is also recorded as a deferred liability. Such
amounts are amortized as a reduction of rent expense over the life of the
related lease.
Capitalized Software Costs
The Company capitalizes certain computer software costs after technological
feasibility has been established. The costs are amortized utilizing the
straight-line method over the economic lives of the related products ranging
from five to seven years.
Intangibles
Intangible assets consist primarily of trade names and trademarks and are
recorded at cost. Trade names are not amortized. Trademarks are amortized over
ten years. The Company continually reviews intangible assets to evaluate whether
events or changes have occurred that would suggest an impairment of carrying
value. An impairment would be recognized when expected undiscounted future
operating cash flows are lower than the carrying value. At January 31, 2006 and
2005, intangible assets at cost were $10.3 million and $13.5 million,
respectively, and related accumulated amortization of intangibles was $5.7
million and $4.5 million, respectively. Amortization expense for fiscal 2006,
2005 and 2004 was $1.2 million, $1.0 million and $0.7 million, respectively.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce foreign currency
fluctuation risks. The Company accounts for its derivative financial instruments
in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS No. 133")
as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged.
F-11
The Company's risk management policy is to enter into forward exchange contracts
and purchase foreign currency options, under certain limitations, to reduce
exposure to adverse fluctuations in foreign exchange rates and, to a lesser
extent, in commodity prices related to its purchases of watches. When entered
into, the Company designates and documents these derivative instruments as a
cash flow hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
cash flow hedge and is highly effective, are recorded in other comprehensive
income until the underlying transaction affects earnings, and then are later
reclassified into earnings in the same account as the hedged transaction. The
Company formally assesses, both at the inception and at each financial quarter
thereafter, the effectiveness of the derivative instrument hedging the
underlying forecasted cash flow transaction. Any ineffectiveness related to the
derivative financial instruments' change in fair value will be recognized in the
period in which the ineffectiveness was calculated.
The Company uses forward exchange contracts to offset its exposure to certain
foreign currency liabilities. These forward contracts are not designated as SFAS
No. 133 hedges and, therefore, changes in the fair value of these derivatives
are recognized into earnings, thereby offsetting the current earnings effect of
the related foreign currency liabilities.
During fiscal 2003, the Company's risk management policy was modified to include
net investment hedging of the Company's Swiss franc-denominated investment in
its wholly-owned subsidiaries located in Switzerland using purchase foreign
currency options under certain limitations. When entered into for this purpose,
the Company designates and documents the derivative instrument as a net
investment hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
net investment hedge are recorded in other comprehensive income in the same
manner as the cumulative translation adjustment of the Company's Swiss
franc-denominated investment. The Company formally assesses, both at the
inception and at each financial quarter thereafter, the effectiveness of the
derivative instrument hedging the net investment.
All of the Company's derivative instruments have liquid markets to assess fair
value. The Company does not enter into any derivative instruments for trading
purposes.
During fiscal 2006, the Company recorded a pre-tax loss of $1.6 million in other
expense, representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions would
occur by the end of the originally specified time period.
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances in the
same period that the sales are recorded as a reduction of revenue. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
F-12
Cost of Sales
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and minor assembly in Switzerland.
Selling, General and Administrative Expenses
The Company's SG&A expenses consist primarily of marketing, selling,
distribution and general and administrative expenses. Annual marketing
expenditures are based principally on overall strategic considerations relative
to maintaining or increasing market share in markets that management considers
to be crucial to the Company's continued success as well as on general economic
conditions in the various markets around the world in which the Company sells
its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, expenses associated with Baselworld, the annual
watch and jewelry trade show and other industry trade shows and operating costs
incurred in connection with the Company's retail business. Sales commissions
vary with overall sales levels. Retail selling expenses consist primarily of
payroll related and store occupancy costs.
Distribution expenses consist primarily of salaries of distribution staff,
rental and other occupancy costs, security, depreciation and amortization of
furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other
employee compensation, employee benefit plan costs, office rent, management
information systems costs, professional fees, bad debts, depreciation and
amortization of furniture and leasehold improvements, patent and trademark
expenses and various other general corporate expenses.
Warranty Costs
The Company has warranty obligations in connection with the sale of its watches.
All watches sold by the Company come with limited warranties covering the
movement against defects in material and workmanship for periods ranging from
two to three years from the date of purchase, with the exception of Tommy
Hilfiger watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating for Movado watch cases and
bracelets. As a practice, warranty costs are expensed as incurred and recorded
in the quarterly consolidated statement of income. The warranty obligations are
evaluated quarterly and reviewed in detail on an annual basis to determine if
any material changes occurred. When changes in warranty costs are experienced,
the Company will adjust the warranty accrual as required. Warranty liability for
the fiscal years ended January 31, 2006, 2005 and 2004 was as follows (in
thousands):
F-13
2006 2005 2004
------- ------- -----
Balance, beginning of year $ 3,979 $ 900 $ 900
Acquired Ebel reserves -- 3,127 --
Provision charged to operations 2,185 1,450 789
Settlements made (3,979) (1,498) (789)
------- ------- -----
Balance, end of year $ 2,185 $ 3,979 $ 900
======= ======= =====
Preopening Costs
Costs associated with the opening of new boutique and outlet stores, including
pre-opening rent, are expensed in the period incurred.
Marketing
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Included in marketing expenses
are costs associated with cooperative advertising, media advertising, production
costs and costs of point-of-sale materials and displays. These costs are
recorded as SG&A expenses. The Company participates in cooperative advertising
programs on a voluntary basis and receives a "separately identifiable benefit in
exchange for the consideration". Since the amount of consideration paid to the
retailer does not exceed the fair value of the benefit received by the Company,
these costs are recorded as SG&A expenses as opposed to being recorded as a
reduction of revenue. Marketing expense for fiscal 2006, 2005 and 2004 amounted
to $75.9 million, $67.8 million and $53.1 million, respectively.
Included in the other current assets in the consolidated balance sheets as of
January 31, 2006 and 2005 are prepaid advertising costs of $3.8 million and $2.5
million, respectively. These prepaid costs represent advertising costs paid to
licensors in advance, pursuant to the Company's licensing agreements and
sponsorships.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and cost of goods sold,
respectively.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applies to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more-likely-than-not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves
F-14
estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
Earnings Per Share
The Company presents net income per share on a basic and diluted basis. Basic
earnings per share is computed using weighted-average shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of shares outstanding adjusted for dilutive common stock equivalents.
The weighted-average number of shares outstanding for basic earnings per share
were 25,273,000, 24,708,000 and 24,101,000 for fiscal 2006, 2005 and 2004,
respectively. For diluted earnings per share, these amounts were increased by
907,000, 875,000 and 776,000 in fiscal 2006, 2005 and 2004, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans. For all periods presented, basic and diluted shares outstanding,
and the related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
Stock-Based Compensation
Employee stock options are accounted for under the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense has not been recognized for stock
options granted at or above fair value. Had compensation expense been determined
and recorded based upon the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", net income (in thousands) and net
income per share would have been reduced to pro forma amounts for the fiscal
years ended January 31, 2006, 2005 and 2004 as follows:
2006 2005 2004
----------------------- ----------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net Income $26,617 $24,549 $26,307 $22,546 $22,851 $18,768
Net Income per share-Basic $ 1.05 $ 0.97 $ 1.06 $ 0.91 $ 0.95 $ 0.78
Net Income per share-Diluted $ 1.02 $ 0.94 $ 1.03 $ 0.88 $ 0.92 $ 0.75
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $8.11, $7.10 and $5.89 per
share in fiscal 2006, 2005 and 2004, respectively. The following
weighted-average assumptions were used for grants in 2006, 2005 and 2004:
dividend yield of 1.74% for fiscal 2006, 0.99% for fiscal 2005 and 0.87% for
fiscal 2004; expected volatility of 47% for fiscal 2006, 48% for fiscal 2005 and
52% for fiscal 2004; risk-free interest rates of 3.77% for fiscal 2006, 4.26%
for fiscal 2005 and 3.04% for fiscal 2004 and expected lives of three to seven
years for fiscal 2006, three to seven years for fiscal 2005 and four to seven
years for fiscal 2004.
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No.
F-15
151"). The amendments made by SFAS No. 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, and is not expected to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure will no longer be an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company will be adopting SFAS No. 123(R) in the first quarter of
fiscal 2007 using the modified prospective application transition method. For
outstanding unvested options granted as of January 31, 2006, the adoption is
expected to have an impact of approximately $1.0 million, net of tax, on the
Company's consolidated results of operations for fiscal year ending January 31,
2007.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The adoption of FIN 47 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the
F-16
date the leasehold improvements are purchased. EITF 05-6 is effective for
periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 2 - ACQUISITION
On December 22, 2003, the Company entered into an agreement to acquire Ebel S.A.
and the worldwide business related to the Ebel brand (collectively "Ebel") from
LVMH Moet Hennessy Louis Vuitton ("LVMH"). On March 1, 2004, the Company
completed the acquisition of Ebel with the exception of the payment for the
acquired Ebel business in Germany, which was completed July 30, 2004.
Under the terms of the agreement, the Company acquired all of the outstanding
common stock of Ebel S.A. and the related worldwide businesses in exchange for:
- - 51.6 million Swiss francs in cash; and
- - the assumption of a short-term mortgage payable of 6.6 million Swiss
francs.
Under the purchase method of accounting, the Company recorded an aggregate
purchase price of approximately $45.0 million, which consisted of approximately
$40.6 million in cash and $4.4 million in deal costs and other incurred
liabilities, which primarily consisted of legal, accounting, investment banking
and financial advisory services fees.
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations", ("SFAS No. 141"), the Company allocated the purchase
price to the tangible assets, intangible assets, and liabilities acquired based
on their estimated fair values. The fair value assigned to tangible and
intangible assets acquired was based on an independent appraisal. The fair value
of assets acquired and liabilities assumed exceeds the purchase price. That
excess has been allocated as a pro rata reduction of the amounts that otherwise
would have been assigned to all of the acquired assets except for certain
specific types of assets as set forth in SFAS No. 141. The pro forma adjustments
were based upon an independent assessment of appraised values. The assessment is
complete. In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and
purchased intangibles with indefinite lives are not amortized but will be
reviewed annually for impairment. Purchased intangibles with finite lives are
amortized on a straight-line basis over their respective estimated useful lives.
In accordance with Emerging Issues Task Force No. 95-3 ("EITF 95-3"),
"Recognition of Liabilities in Connection with a Purchase Business Combination",
the Company recognized costs associated with exiting an activity of an acquired
company and involuntary termination of employees of an acquired company as
liabilities assumed in a purchase business combination and included the
liabilities in the allocation of the acquisition cost. The liability recognized
in connection with the acquisition of Ebel was comprised of approximately $2.4
million for employee severance, $0.2 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. For the years ended January 31, 2006 and
2005, payments against employee severance, lease terminations, exit costs and
other liabilities amounted to $2.3 million, $0.2 million, $1.7 million and $0.4
million, respectively. There were no further adjustments related to the
abovementioned accruals during the fiscal year ended January 31, 2006.
F-17
As part of the acquisition, the Company recorded deferred tax assets resulting
from Ebel's net operating loss carryforwards amounting to approximately 165.0
million Swiss francs. The Company established a full valuation allowance on the
deferred tax assets. The total purchase price has been allocated as follows (in
thousands):
Cash $ 1,340
Accounts receivable 16,369
Property, plant and equipment 4,556
Inventories 35,834
Intangible assets 9,129
Other current assets 4,401
-------
Total assets acquired 71,629
Current liabilities 16,149
Short-term commitments and contingencies 5,269
Mortgage payable 5,185
-------
Total purchase price $45,026
=======
In allocating the purchase price, the Company considered, among other factors,
its intention for future use of the acquired assets, analyses of historical
financial performance and estimates of future performance of Ebel's products.
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined
results of operations of the Company and Ebel, on a pro forma basis, as though
the acquisition had been completed as of the beginning of the fiscal year ended
January 31, 2005. This pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that would have been achieved had the acquisition taken place at the
beginning of the fiscal year ended January 31, 2005. The unaudited pro forma
condensed combined statement of income for the fiscal year ended January 31,
2005 combines the historical results for the Company for the fiscal year ended
January 31, 2005 and the historical results for Ebel for the period preceding
the acquisition of February 1 through February 29, 2004. The following amounts
are in thousands, except per share amounts:
Fiscal Year Ended
January 31, 2005
-----------------
Revenues $420,335
Net income $ 24,302
Basic income per share $ 0.98
Diluted income per share $ 0.95
F-18
NOTE 3 - INVENTORIES, NET
Inventories, net at January 31, consisted of the following (in thousands):
2006 2005
-------- --------
Finished goods $129,921 $108,668
Component parts 64,563 72,260
Work-in-process 4,098 4,681
-------- --------
$198,582 $185,609
======== ========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 31, at cost, consisted of the following
(in thousands):
2006 2005
-------- --------
Land and buildings $ 3,843 $ 6,543
Furniture and equipment 52,376 44,036
Computer software 29,611 29,169
Leasehold improvements 37,411 32,288
Design fees and tooling costs 24,029 23,846
-------- --------
147,270 135,882
Less: accumulated depreciation (95,102) (83,372)
-------- --------
$ 52,168 $ 52,510
======== ========
Depreciation and amortization expense related to property, plant and equipment
for fiscal 2006, 2005 and 2004 was $15.4 million, $11.4 million and $9.0
million, respectively, which includes computer software amortization expense for
fiscal 2006, 2005 and 2004 of $4.4 million, $4.0 million and $2.9 million,
respectively.
NOTE 5 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
On June 30, 2005, the Company renewed its promissory note for a $5.0 million
unsecured working capital line with Bank of New York, originally dated June 27,
2000. The line expires on July 31, 2006. The Company had no outstanding
borrowings under the line as of January 31, 2006 and 2005.
On December 12, 2005, the Company executed a line of credit letter agreement
with Bank of America ("B of A") and an amended and restated promissory note in
the principal amount of up to $20.0 million payable to B of A. Pursuant to the
line of credit letter agreement, B of A will consider requests for short-term
loans and documentary letters of credit for the importation of merchandise
inventory, the aggregate amount of which at any time outstanding shall not
exceed $20.0 million. The Company's obligations under the agreement are
guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.
Pursuant to the amended and restated promissory note, the Company promised to
pay to B of A $20.0 million, or such lesser amount as may then be the unpaid
balance of all loans made by B of A to the Company thereunder, in immediately
available funds upon the maturity date of June 16, 2006. The Company has the
right to prepay all or part of any
F-19
outstanding amounts under the promissory note without penalty at any time prior
to the maturity date. The amended and restated promissory note bears interest at
an annual rate equal to either (i) a floating rate equal to the prime rate or
(ii) such fixed rate as may be agreed upon by the Company and B of A for an
interest period which is also then agreed upon. The amended and restated
promissory note contains various representations and warranties and events of
default that are customary for instruments of that type. As of January 31, 2006,
there were no outstanding borrowings against this line.
On December 13, 2005, the Company executed a promissory note in the principal
amount of up to $37.0 million payable to JPMorgan Chase Bank, N.A. ("Chase").
Pursuant to the promissory note, the Company promised to pay to Chase $37.0
million, or such lesser amount as may then be the unpaid balance of each loan
made or letter of credit issued by Chase to the Company thereunder, upon the
maturity date of July 31, 2006; provided that during the period between January
31, 2006 and the maturity date, the maximum principal amount of all loans made
by Chase to the Company, and outstanding under the promissory note, shall not
exceed $2.0 million. The Company has the right to prepay all or part of any
outstanding amounts under the promissory note without penalty at any time prior
to the maturity date. The promissory note bears interest at an annual rate equal
to either (i) a floating rate equal to the prime rate, (ii) a fixed rate equal
to an adjusted LIBOR plus 0.625% or (iii) a fixed rate equal to a rate of
interest offered by Chase from time to time on any single commercial borrowing.
The promissory note contains various events of default that are customary for
instruments of that type. In addition, it is an event of default for any
security interest or other encumbrance to be created or imposed on the Company's
property, other than as permitted in the lien covenant of the Credit Agreement.
Chase issued 11 irrevocable standby letters of credit for retail and operating
facility leases to various landlords, for the administration of the Movado
Boutique private-label credit card and Canadian payroll to the Royal Bank of
Canada totaling $1.2 million with expiration dates through March 18, 2007. As of
January 31, 2006, there were no outstanding borrowings against this line.
On December 15, 2005, Movado Group, Inc., and its Swiss subsidiaries, MGI Luxury
Group S.A. and Movado Watch Company SA, entered into a credit agreement with
JPMorgan Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The
Bank of New York and Citibank, N.A. (the "Swiss Credit Agreement") which
provides for a revolving credit facility of 90.0 million Swiss francs and
matures on December 15, 2010. The obligations of the Company's two Swiss
subsidiaries under this credit agreement are guaranteed by the Company under a
Parent Guarantee, dated as of December 15, 2005, in favor of the lenders. The
credit agreement contains financial covenants including an interest coverage
ratio, average debt coverage ratio, limitations on capital expenditures and
certain non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. Until the date immediately preceding the first day
of the calendar month following the date of delivery of the first annual or
quarterly financial statements after December 15, 2005, the credit facility
bears interest at a rate equal to the LIBOR (as defined in the Swiss Credit
Agreement) plus .50% per annum, after which it will bear interest at a rate
equal to the LIBOR plus a margin ranging from .50% per annum to .875% per annum
(depending upon a leverage ratio). As of January 31, 2006, the Company was in
compliance with all financial and non-financial covenants and had 83.0 million
Swiss francs, with a dollar equivalent of $65.0 million, outstanding under this
revolving credit facility.
On December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "US Credit Agreement") which provides for a
revolving credit facility of $50.0 million (including a sublimit for borrowings
in Swiss francs of up to $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain
F-20
terms and conditions. The US Credit Agreement will mature on December 15, 2010.
The obligations of MGI Luxury Group S.A. and Movado Watch Company SA are
guaranteed by the Company under a Parent Guarantee, dated as of December 15,
2005, in favor of the lenders. The obligations of the Company are guaranteed by
certain domestic subsidiaries of the Company under subsidiary guarantees, in
favor of the lenders. The credit agreement contains financial covenants
including an interest coverage ratio, average debt coverage ratio, limitations
on capital expenditures and certain non-financial covenants that restrict the
Company's activities regarding investments and acquisitions, mergers, certain
transactions with affiliates, creation of liens, asset transfers, payment of
dividends and limitation of the amount of debt outstanding. Until the date
immediately preceding the first day of the calendar month following the date of
delivery of the first annual or quarterly financial statements after December
15, 2005, the credit facility bears interest, at Borrower's option, at a rate
equal to the Adjusted LIBOR (as defined in the US Credit Agreement) plus .50%
per annum, or the Alternate Base Rate (as defined in the US Credit Agreement),
after which it will bear interest, at Borrower's option, at a rate equal to the
Adjusted LIBOR plus a margin ranging from .50% per annum to .875% per annum
(depending upon a leverage ratio), or the Alternate Base Rate. As of January 31,
2006, the Company was in compliance with all financial and non-financial
covenants and there were no outstanding borrowings against this line.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million Swiss francs, with dollar equivalents of $6.3 million and
$6.7 million at January 31, 2006 and 2005. As of January 31, 2006, the Swiss
bank has guaranteed the Company's Swiss subsidiary's obligations to certain
Swiss third parties in the amount of $3.3 million in various foreign currencies.
As of January 31, 2006, there were no outstanding borrowings against these
lines.
The Company pays a facility fee on the unused portion of the committed lines of
the Swiss Credit Agreement and the US Credit Agreement. The unused line of
credit of the committed lines was $55.5 million at January 31, 2006.
Aggregate maximum and average monthly outstanding borrowings against the
Company's lines of credit and related weighted-average interest rates during
fiscal 2006 and 2005 were as follows (dollars in thousands):
Fiscal Year Ended January 31,
-----------------------------
2006 2005
-------- -------
Maximum borrowings $100,745 $37,925
Average monthly borrowings $ 33,726 $21,711
Weighted-average interest rate 4.2% 2.3%
Weighted-average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
F-21
NOTE 6 - LONG-TERM DEBT
The components of long-term debt as of January 31, were as follows (in
thousands):
2006 2005
-------- -------
Swiss Revolving Credit Facility $ 64,955 $ --
Series A Senior Notes 25,000 25,000
Senior Series A-2004 Notes 20,000 20,000
-------- -------
109,955 45,000
Less: current portion (5,000) --
-------- -------
Long-term debt $104,955 $45,000
======== =======
For information related to the Swiss Revolving Credit Facility, see Note 5 on
Bank Credit Arrangements and Lines of Credit.
The Series A Senior Notes ("Series A Senior Notes") were issued on December 1,
1998 under a Note Purchase and Private Shelf Agreement and bear interest at
6.90% per annum. Interest is payable semiannually on April 30 and October 30.
These notes mature on October 30, 2010 and are subject to annual payments of
$5.0 million commencing on October 31, 2006. These notes contain financial
covenants including an interest coverage ratio, average debt ratio, maintenance
of tangible net worth, limitations on capital expenditures and certain
non-financial covenants that restrict the Company's activities regarding
investments and acquisitions, mergers, certain transactions with affiliates,
creation of liens, asset transfers, payment of dividends and limitation of the
amount of debt outstanding. At January 31, 2006, the Company was in compliance
with all financial and non-financial covenants and $25.0 million of these notes
were issued and outstanding.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes"), in
an aggregate principal amount of $20.0 million, which will mature on October 8,
2011 and are subject to annual repayments of $5.0 million commencing on October
8, 2008. Proceeds of the Senior Series A-2004 Notes will be used by the Company
for capital expenditures, repayment of certain of its debt obligations and
general corporate purposes. These notes contain financial covenants including an
interest coverage ratio, average debt ratio, maintenance of tangible net worth,
limitations on capital expenditures and certain non-financial covenants that
restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. As of January 31, 2006, the Company was in compliance with all
financial and non-financial covenants and $20.0 million of these notes were
issued and outstanding.
F-22
Aggregate maturities of long-term obligations at January 31, 2006 are as follows
(in thousands):
Fiscal Year Ended January 31,
2007 $ 5,000
2008 5,000
2009 10,000
2010 10,000
2011 74,955
Thereafter 5,000
--------
$109,955
========
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133 requiring that all derivative
financial instruments be recorded on the balance sheet at fair value.
As of January 31, 2006, the balance of deferred net losses on derivative
financial instruments documented as cash flow hedges included in accumulated
other comprehensive income ("AOCI") was $1.4 million in net losses, net of tax
benefit of $0.8 million, compared to $2.0 million in net gains at January 31,
2005, net of tax of $1.2 million and $1.6 million in net gains at January 31,
2004, net of tax of $1.0 million. The Company estimates that a substantial
portion of the deferred net losses at January 31, 2006 will be realized into
earnings over the next 12 months as a result of transactions that are expected
to occur over that period. The primary underlying transaction which will cause
the amount in AOCI to affect cost of goods sold consists of the Company's sell
through of inventory purchased in Swiss francs. The maximum length of time the
Company is hedging its exposure to the fluctuation in future cash flows for
forecasted transactions is 24 months. For the years ended January 31, 2006, 2005
and 2004, the Company reclassified net losses from AOCI to earnings of $1.8
million, net of tax benefit of $1.1 million, $1.4 million in net gains, net of
tax of $0.9 million, and $3.2 million in net gains, net of tax of $2.0 million,
respectively.
During fiscal 2006, the Company recorded a pre-tax loss of $1.6 million in other
expense, representing the impact of the discontinuation of foreign currency cash
flow hedges because it was not probable that the forecasted transactions would
occur by the end of the originally specified time period.
During fiscal 2006, 2005 and 2004, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio because of the
high degree of effectiveness between the hedging instrument and the underlying
exposure being hedged.
Changes in the contracts' fair value due to spot-forward differences are
excluded from the designated hedge relationship. The Company records these
transactions in the cost of sales of the Consolidated Statements of Income.
The balance of the net loss included in the cumulative foreign currency
translation adjustment associated with derivatives documented as net investment
hedges was $1.5 million, net of a tax benefit of $0.9 million as of both January
31, 2006 and 2005 and a net loss of $1.0 million, net of a tax benefit of $0.6
million as of January 31, 2004. Under SFAS No. 133, changes in fair value of
these instruments are recognized in currency
F-23
translation adjustment, a component of AOCI, to offset the change in the value
of the net investment being hedged.
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of January 31, 2006 (in millions):
Fair Value
of (Liability)
Asset Maturities
-------------- ----------
Forward exchange contracts ($2.5) 2006
Purchased foreign currency options 0.3 2006
-----
($2.2)
=====
The Company estimates the fair value of its foreign currency derivatives based
on quoted market prices or pricing models using current market rates. These
derivative financial instruments are currently reflected in other current assets
or current liabilities.
NOTE 8 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 4.79% Senior Notes and 6.90% Series A Senior
Notes approximate 97% and 103% of the carrying value of the notes, respectively,
as of January 31, 2006. The fair value was calculated based upon the present
value of future cash flows discounted at estimated borrowing rates for similar
debt instruments or upon estimated prices based on current yields for debt
issues of similar quality and terms.
NOTE 9 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2006, 2005
and 2004 consists of the following components (in thousands):
2006 2005 2004
------- ------- ------
Current:
U.S. Federal $13,205 $ 3,980 $4,346
U.S. State and Local 1,364 810 (126)
Non-U.S. 4,238 5,254 1,282
------- ------- ------
18,807 10,044 5,502
------- ------- ------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local (458) -- --
Non-U.S. -- -- 2,186
------- ------- ------
(458) -- 2,186
------- ------- ------
Deferred:
U.S. Federal (1,806) (2,533) (351)
U.S. State and Local (155) (242) 60
Non-U.S. 1,931 (486) 1,489
------- ------- ------
(30) (3,261) 1,198
------- ------- ------
Provision for income taxes $18,319 $ 6,783 $8,886
======= ======= ======
F-24
Income before taxes for U.S. operations was $15.9 million, $8.3 million and
$2.0 million for periods ended January 31, 2006, 2005 and 2004, respectively.
Income before taxes for non-U.S. operations was $29.0 million, $24.8 million
and $29.7 million for periods ended January 31, 2006, 2005 and 2004,
respectively.
Significant components of the Company's deferred income tax assets and
liabilities for the fiscal year ended January 31, 2006 and 2005 consist of the
following (in thousands):
2006 Deferred Taxes 2005 Deferred Taxes
---------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Operating loss carryforwards $ 30,770 $ -- $ 32,120 $ --
Inventory reserve 2,963 3,924 3,103 4,762
Receivable allowance 3,356 1,188 2,960 1,559
Deferred compensation 5,922 -- 4,627 --
Hedged derivatives 844 -- -- 323
Depreciation/amortization 305 34 2,247 267
Other 4,044 341 3,134 367
-------- ------ -------- ------
48,204 5,487 48,191 7,278
Valuation allowance (29,555) -- (33,393) --
-------- ------ -------- ------
Total $ 18,649 $5,487 $ 14,798 $7,278
======== ====== ======== ======
As of January 31, 2006, the Company had foreign net operating loss carryforwards
of approximately $130.1 million, which are available to offset taxable income in
future years. The majority of the carryforward tax losses ($117.2 million) were
incurred in Switzerland in the Ebel business prior to the Company's acquisition
of the Ebel business on March 1, 2004. Effective March 1, 2004, Ebel S.A. was
merged into another wholly-owned Swiss subsidiary, and a Swiss tax ruling was
obtained that allows the Ebel tax losses to offset taxable income in the
surviving entity. As part of purchase accounting, the Company recorded net
deferred tax assets for the Swiss tax losses and for the temporary differences
between the Swiss tax basis and the assigned values of the net Ebel assets. The
Company has established a partial valuation allowance on the deferred tax assets
as a result of an evaluation of expected utilization of such tax benefits within
the expiry of the tax losses through fiscal 2011. The recognition of the tax
benefit has been applied to reduce the carrying value of acquired intangible
assets to $0.3 million; subsequent recognition of deferred tax assets, if any,
will be applied to reduce the carrying value of the intangible assets to zero
prior to being recognized as a reduction of income tax expense. The Company
recognized cash tax savings of $2.9 million on the utilization of the Swiss tax
losses during the year. The remaining tax losses ($12.9 million) are related to
the Company's former operations in Germany, and its current operations in
Germany, Japan, and the United Kingdom. A full valuation allowance has been
established on the deferred tax assets resulting from these losses due to the
Company's current assessment that it is more-likely-than-not that the deferred
tax assets will not be utilized. The Japan tax losses have a 7 year life while
the German and United Kingdom tax losses have unlimited lives.
Management will continue to evaluate the appropriate level of allowance on all
deferred tax assets, considering such factors as prior earnings history,
expected future earnings, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset.
F-25
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,
-----------------------------
2006 2005 2004
------- ------- -------
Provision for income taxes at the U.S. statutory rate $15,728 $11,582 $11,108
Lower effective foreign income tax rate (5,958) (5,137) (5,487)
Change in valuation allowance 901 101 (13)
Tax provided on repatriated earnings of foreign subsidiaries 7,506 -- 3,133
State and local taxes, net of federal benefit 652 250 (43)
Other, net (510) (13) 188
------- ------- -------
Total $18,319 $ 6,783 $ 8,886
======= ======= =======
No provision has been made for federal income or withholding taxes which may be
payable on the remittance of the undistributed retained earnings of foreign
subsidiaries approximating $97.8 million at January 31, 2006, as those earnings
are considered permanently reinvested. As a result of various tax planning
strategies available to the Company, it is not practical to estimate the amount
of tax, if any, that may be payable on the eventual distribution of these
earnings.
The American Jobs Creation Act of 2004 (the "Act"), as enacted on October 22,
2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated during a one-year period. The deduction results in
an approximate 5.25% U.S. federal tax rate on any repatriated earnings. To
qualify for the deduction, the earnings must be reinvested in the United States
pursuant to a domestic reinvestment plan established by the Company's Chief
Executive Officer and approved by the Company's Board of Directors. Certain
other criteria in the Act, applicable Treasury Regulations and guidance
published (or that may be subsequently published) by the Internal Revenue
Service or Treasury Department must be satisfied as well. During the fourth
quarter of 2006, the Company approved a plan for reinvestment and repatriation
of up to $150.0 million. Under the executed plan, the Company repatriated
foreign earnings of $148.5 million. These earnings were previously considered to
be indefinitely reinvested outside the U.S. During the year, the effective tax
rate was increased to 40.8% principally as a result of the fourth quarter 2006
tax charge of $7.5 million associated with repatriated foreign earnings under
the American Jobs Creation Act of 2004. The effective tax rate excluding the
repatriation related tax charge was 24.06%. The fiscal 2005 effective tax rate
was 20.5%.
NOTE 10 - OTHER ASSETS
In fiscal 1996, the Company entered into an agreement with a trust which owned
an insurance policy issued on the lives of the Company's Chairman and his
spouse. Under this agreement, the trust assigned the insurance policy to the
Company as collateral to secure repayment by the trust of interest-free loans
made by the Company to the trust in amounts equal to the premiums on said
insurance policy (approximately $0.8 million per annum). The agreement required
the trust to repay the loans from the proceeds of the policy. At January 31,
2003, the Company had outstanding loans from the trust of $5.2 million. On April
4, 2003, the agreement was amended and restated to transfer the policy from the
trust to the Company in partial repayment of the loan
F-26
balance. The Company is the beneficiary of the policy insofar as upon the death
of the Company's Chairman and his spouse, the proceeds of the policy would first
be distributed to the Company to repay the premiums paid by the Company with the
remaining proceeds distributed to the trust. As of January 31, 2006, total
premiums paid were $7.6 million and the cash surrender value of the policy was
$7.7 million.
NOTE 11 - LEASES
The Company leases office, distribution, retail and manufacturing facilities,
and office equipment under operating leases, which expire at various dates
through January 2017. Certain leases include renewal options and the payment of
real estate taxes and other occupancy costs. Some leases also contain rent
escalation clauses (step rents) that require additional rent amounts in the
later years of the term. Rent expense for leases with step rents is recognized
on a straight-line basis over the minimum lease term. Likewise, capital funding
and other lease concessions that are occasionally provided to the Company, are
recorded as deferred rent and amortized on a straight-line basis over the
minimum lease term as adjustments to rent expense. Rent expense for equipment
and distribution, factory and office facilities under operating leases was
approximately $13.3 million, $12.6 million and $9.7 million in fiscal 2006, 2005
and 2004, respectively. Minimum annual rentals at January 31, 2006 under
noncancelable operating leases, which do not include real estate taxes and
operating costs, are as follows (in thousands):
Fiscal Year Ended January 31,
2007 $12,590
2008 11,083
2009 10,334
2010 9,906
2011 8,813
Thereafter 26,377
-------
$79,103
=======
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses, such as misappropriation of
assets. The Company believes it is adequately insured against such losses.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At January 31, 2006, the Company had outstanding letters of credit totaling $1.2
million with expiration dates through March 18, 2007 compared to $0.6 million
with expiration dates through May 15, 2006 as of January 31, 2005. One bank in
the domestic bank group has issued irrevocable standby letters of credit for
retail and operating facility leases to various landlords, for the
administration of the Movado Boutique private-label credit card and for Canadian
payroll to the Royal Bank of Canada.
As of January 31, 2006, a Swiss bank guaranteed one of the Company's Swiss
subsidiary's obligations to certain Swiss third parties in the amount of $3.3
million in various foreign currencies compared to $2.8 million as of January 31,
2005.
F-27
Pursuant to the Company's agreements with its licensors, the Company is required
to pay minimum royalties and advertising. As of January 31, 2006, the Company's
obligation related to its license agreements was $68.3 million.
The Company had outstanding purchase obligations of $40.3 million with suppliers
at the end of fiscal 2006 for raw materials, finished watches and packaging in
the normal course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid for
items required to be purchased under agreements that are enforceable, legally
binding and specify minimum quantity, price and term.
The Company is involved from time to time in legal claims involving trademarks
and intellectual property, licensing, employee relations and other matters
incidental to the Company's business. Although the outcome of such items cannot
be determined with certainty, the Company's general counsel and management
believe that the final outcome would not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. In addition, the Company maintains defined contribution
employee benefit plans for its employees located in Switzerland. Company
contributions and expenses of administering the plans amounted to $2.0 million,
$1.9 million and $1.1 million in fiscal 2006, 2005 and 2004, respectively.
Effective June 1, 1995, the Company adopted a defined contribution supplemental
executive retirement plan ("SERP"). The SERP provides eligible executives with
supplemental pension benefits in addition to amounts received under the
Company's other retirement plan. The Company makes a matching contribution which
vests equally over five years. During fiscal 2006, 2005 and 2004, the Company
recorded an expense related to the SERP of $0.7 million, $0.6 million and $0.5
million, respectively.
During fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not
in the SERP. Under the terms of this Stock Bonus Plan, the Company contributes a
discretionary amount to the trust established under the plan. Each plan
participant vests after five years in 100% of their respective prorata portion
of such contribution. For fiscal 2006, 2005 and 2004, the Company recorded an
expense of $0.3 million for each period related to this plan.
On September 23, 1994, the Company entered into a Death and Disability Benefit
Plan agreement with the Company's Chairman. Under the terms of the agreement, in
the event of the Chairman's death or disability, the Company is required to make
an annual benefit payment of approximately $0.3 million to his spouse for the
lesser of ten years or her remaining lifetime. Neither the agreement nor the
benefits payable thereunder are assignable and no benefits are payable to the
estates or heirs of the Chairman or his spouse. Results of operations for each
period include an actuarially determined charge related to this plan of $0.2
million for fiscal 2006, 2005 and 2004.
Effective concurrently with the consummation of the Company's public offering in
the fourth quarter of fiscal 1994, the Board of Directors and the shareholders
of the Company approved the adoption of the Movado Group, Inc. 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, as
F-28
amended and restated as of April 8, 2004, the Compensation Committee of the
Board of Directors, which is comprised of the Company's four outside directors,
has the authority to grant incentive stock options and nonqualified stock
options, to purchase, as well as stock appreciation rights and stock awards, up
to 9,000,000 shares of Common Stock. Options granted to participants under the
Plan generally become exercisable in equal installments over three years and
remain exercisable until the tenth anniversary of the date of grant. The option
price may not be less than the fair market value of the stock at the time the
options are granted.
Transactions in stock options under the Plan since fiscal 2003 are summarized as
follows:
Weighted-
Outstanding Average
Options Exercise Price
----------- --------------
January 31, 2003 4,539,520 $ 8.76
Options granted 978,144 $12.03
Options exercised (1,639,710) $ 8.74
Options cancelled (153,976) $ 5.86
---------- ------
January 31, 2004 3,723,978 $ 8.71
Options granted 784,203 $16.44
Options exercised (821,957) $ 9.04
Options cancelled (65,190) $ 9.33
---------- ------
January 31, 2005 3,621,034 $11.66
Options granted 166,500 $18.30
Options exercised (596,221) $ 6.54
Options cancelled (21,700) $12.88
---------- ------
January 31, 2006 3,169,613 $12.96
========== ======
Options exercisable at January 31, 2006, 2005 and 2004 were 2,507,382, 2,888,888
and 2,445,912, respectively.
The following table summarizes outstanding and exercisable stock options as of
January 31, 2006:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- --------------- ----------- ------------ --------- ----------- ---------
$ 3.12 - $ 6.22 170,290 4.1 $ 4.26 170,290 $ 4.26
$ 6.23 - $ 9.34 297,516 3.2 $ 7.06 273,816 $ 7.05
$ 9.35 - $12.45 811,963 4.1 $10.69 780,864 $10.73
$12.46 - $15.57 1,269,097 5.2 $14.46 958,997 $14.56
$15.58 - $18.68 614,747 7.0 $18.08 323,415 $18.37
$18.69 - $21.81 6,000 9.1 $18.85 -- --
--------- --- ------ --------- ------
3,169,613 5.1 $12.96 2,507,382 $12.34
--------- --- ------ --------- ------
F-29
Under the 1996 Stock Incentive Plan, the Company has the ability to grant
restricted stock to certain employees. In fiscal years 2006, 2005 and 2004, the
Company granted restricted stock shares of 96,160, 140,960 and 138,190,
respectively, with fair values at the date of grant of $1.7 million, $2.2
million and $1.4 million, respectively. Restricted stock grants vest three years
from the date of grant. Expense for these grants is recognized on a
straight-line basis over the vesting period. Included in the Company's
Consolidated Statements of Income for fiscal 2006, 2005 and 2004 is expense
related to restricted stock grants of $1.3 million, $0.9 million and $0.3
million, respectively.
NOTE 14 - TOTAL COMPREHENSIVE INCOME
The components of comprehensive income for the twelve months ended January 31,
2006, 2005 and 2004 are as follows (in thousands):
2006 2005 2004
-------- ------- -------
Net income $ 26,617 $26,307 $22,851
Net unrealized gain on investments,
net of tax 1 39 139
Net change in effective portion of
hedging contracts, net of tax (3,318) 366 (3,434)
Foreign currency translation adjustment (1) (17,716) 13,828 18,382
-------- ------- -------
Total comprehensive income $ 5,584 $40,540 $37,938
======== ======= =======
(1) The currency translation adjustments are not adjusted for income taxes as
they relate to permanent investments in international subsidiaries.
NOTE 15 - SEGMENT INFORMATION
The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The statement requires disclosure of segment data
based on how management makes decisions about allocating resources to segments
and measuring their performance.
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches, in addition to revenue
generated from after sales service activities and shipping. The Retail segment
includes the Movado Boutiques and outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's International operations
are principally conducted in Europe, the Middle East and Asia. The Company's
International assets are substantially located in Switzerland.
F-30
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Operating Profit (1)
------------------------------ ---------------------------
2006 2005 2004 2006 2005 2004
-------- -------- -------- ------- ------- -------
Wholesale $385,383 $345,028 $269,341 $42,289 $33,033 $31,098
Retail 85,558 73,938 60,873 5,748 2,043 3,683
-------- -------- -------- ------- ------- -------
Consolidated total $470,941 $418,966 $330,214 $48,037 $35,076 $34,781
======== ======== ======== ======= ======= =======
Total Assets Capital Expenditures
------------------- ----------------------------
2006 2005 2006 2005 2004
-------- -------- ------- ------- --------
Wholesale $484,767 $415,863 $ 9,659 $ 6,785 $ 2,958
Retail 65,125 61,211 6,708 8,162 7,872
-------- -------- ------- ------- -------
Consolidated total $549,892 $477,074 $16,367 $14,947 $10,830
======== ======== ======= ======= =======
Depreciation and Amortization
-----------------------------
2006 2005 2004
------- ------- ------
Wholesale $11,880 $ 8,909 $7,500
Retail 4,900 3,694 2,473
------- ------- ------
Consolidated total $16,780 $12,603 $9,973
======= ======= ======
Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales (2) Operating Profit (1)
------------------------------ ---------------------------
2006 2005 2004 2006 2005 2004
-------- -------- -------- ------- ------- -------
Domestic $372,383 $330,269 $285,739 $22,656 $12,617 $ 7,227
International 98,558 88,697 44,475 25,381 22,459 27,554
-------- -------- -------- ------- ------- -------
Consolidated total $470,941 $418,966 $330,214 $48,037 $35,076 $34,781
======== ======== ======== ======= ======= =======
Total Assets Long-Lived Assets
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
Domestic $391,310 $282,142 $37,101 $35,765
International 158,582 194,932 15,067 16,745
-------- -------- ------- -------
Consolidated total $549,892 $477,074 $52,168 $52,510
======== ======== ======= =======
(1) Fiscal 2005 Retail Operating Profit includes a non-cash impairment charge
of $2.0 million recorded in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144").
(2) The domestic and international net sales are net of intercompany sales of
$241.9 million, $272.1 million and $209.7 million for the twelve months
ended January 31, 2006, 2005 and 2004, respectively.
F-31
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2006 and 2005 (in thousands, except per share amounts):
Quarter Ended
----------------------------------------
1st 2nd 3rd 4th
------- -------- -------- --------
FISCAL 2006
Net sales $87,756 $115,326 $141,736 $126,123
Gross profit (1) $52,838 $ 69,986 $ 86,173 $ 77,323
Net income (2) $ 997 $ 8,551 $ 14,108 $ 2,961
NET INCOME PER SHARE:
Basic $ 0.04 $ 0.34 $ 0.56 $ 0.12
Diluted $ 0.04 $ 0.33 $ 0.54 $ 0.11
FISCAL 2005
Net sales $74,187 $ 97,788 $127,023 $119,968
Gross profit $43,385 $ 57,978 $ 77,141 $ 71,644
Net income (3) $ 736 $ 7,057 $ 11,334 $ 7,180
NET INCOME PER SHARE:
Basic $ 0.03 $ 0.29 $ 0.46 $ 0.29
Diluted $ 0.03 $ 0.28 $ 0.44 $ 0.28
(1) In the fourth quarter of fiscal year 2006, the Company recorded a one-time
out of period benefit adjustment of $0.8 million from a reversal of a
previously recorded liability. This adjustment was recorded in cost of
goods sold and the Company has concluded that the amount is not material to
the fourth quarter or any of the prior quarters impacted.
(2) Fourth quarter of fiscal year 2006 includes a $7.5 million charge
associated with repatriated foreign earnings under the American Jobs
Creation Act of 2004.
(3) Fourth quarter of fiscal year 2005 includes a non-cash impairment charge of
$2.0 million related to the Movado Boutique in Soho, New York City.
Additionally, income tax expense of $0.4 million recorded in the fourth
quarter of fiscal 2005 included $1.9 million of non-recurring favorable tax
benefits, including a retroactive favorable tax ruling and the tax benefit
associated with the previously mentioned impairment charge.
As each quarter is calculated as a discrete period, the sum of the four quarters
may not equal the calculated full year amount. This is in accordance with
prescribed reporting requirements.
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (in thousands):
Fiscal Year Ended
January 31,
------------------------
2006 2005 2004
------ ------ ------
Cash paid during the year for:
Interest $4,520 $2,950 $2,369
Income taxes $6,096 $7,434 $5,864
F-32
NOTE 18 - OTHER INCOME, NET
The components of other income, net for fiscal 2006 and 2005 are as follows (in
thousands):
Fiscal
Year Ended
January 31,
----------------
2006 2005
------- ------
Gain on sale of building (a) $ 2,630 $ --
Discontinued cash flow hedges (b) (1,622) --
Litigation settlement (c) -- 1,444
------- ------
Other income, net $ 1,008 $1,444
======= ======
(a) The Company recorded a pre-tax gain for the fiscal year ended January 31,
2006 of $2.6 million on the sale of a building acquired on March 1, 2004 in
connection with the acquisition of Ebel. The Company received cash proceeds
from the sale of $4.0 million. The building was classified as an asset held
for sale in other current assets.
(b) The Company recorded a pre-tax loss for the fiscal year ended January 31,
2006 of $1.6 million in other expense, representing the impact of the
discontinuation of foreign currency cash flow hedges because it was not
probable that the forecasted transactions would occur by the end of the
originally specified time period.
(c) The Company recognized income for the fiscal year ended January 31, 2005
from a litigation settlement in the amount of $1.4 million.
NOTE 19 - JUICY COUTURE LICENSE AGREEMENT
On November 21, 2005, the Company entered into a License Agreement with L.C.
Licensing, Inc. ("L.C. Licensing"), with an effective date of November 18, 2005.
The Company received an exclusive worldwide license to use the trademarks "Juicy
Couture" and "Couture Couture Los Angeles", in connection with the manufacture,
advertising, merchandising, promotion, sale and distribution of timepieces and
components. The term of the license is November 18, 2005 through December 31,
2011, with a four-year renewal period at the option of the Company, provided
that certain sales thresholds are met.
NOTE 20 - SUBSEQUENT EVENT
On March 27, 2006, the Company entered into an exclusive worldwide license
agreement with Lacoste, S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to
design, produce, market and distribute Lacoste watches that will be sold under
the LACOSTE name and the distinctive Lacoste "alligator" logo beginning in the
first half of 2007.
F-33
SCHEDULE II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance at Acquired Provision
beginning Ebel charged to Currency Net Balance at
Description of year balance operations revaluation write-offs end of year
- ---------------------------------- ---------- -------- ---------- ----------- ---------- -----------
Year ended January 31, 2006:
Allowance for doubtful accounts $6,830 -- $2,399 ($ 45) ($2,194) $6,990
Year ended January 31, 2005:
Allowance for doubtful accounts $6,659 $2,192 $2,072 $ 68 ($4,161) $6,830
Year ended January 31, 2004:
Allowance for doubtful accounts $5,235 -- $2,290 $ 106 ($ 972) $6,659
Balance at Acquired Provision
beginning Ebel charged to Currency Net Balance at
of year balance operations revaluation write-offs end of year
---------- -------- ---------- ----------- ---------- -----------
Year ended January 31, 2006:
Inventory reserve $54,447 -- $1,529 ($ 3,623) ($3,103) $49,250
Year ended January 31, 2005:
Inventory reserve $ 2,408 $50,800 $3,221 $ 3,464 ($5,446) $54,447
Year ended January 31, 2004:
Inventory reserve $ 4,323 -- $ 993 ($ 645) ($2,263) $ 2,408
Balance at Provision/
beginning (benefit) Currency Balance at
of year to operation revaluation Adjustments end of year
---------- ------------ ----------- ----------- -----------
Year ended January 31, 2006:
Deferred tax assets valuation (1) $33,393 $ 910 ($2,186) ($ 2,562) $29,555
Year ended January 31, 2005:
Deferred tax assets valuation (2) $ 795 $ 101 $ 488 $ 32,009 $33,393
Year ended January 31, 2004:
Deferred tax assets valuation $ 950 ($ 13) ($ 142) -- $ 795
(1) The detail of adjustments is as follows:
Release of valuation allowance, Ebel NOL's ($3,843)
Ebel Germany pre-acquisition NOL's 1,141
UK and Germany tax return accrual adjustments 140
-------
($2,562)
=======
(2) The detail of adjustments is as follows:
Ebel purchase accounting - NOL's $26,731
Ebel purchase accounting - other 3,261
Current year losses 1,201
Other 816
-------
$32,009
=======
S-1