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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, 1999,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22378
MOVADO GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 13-2595932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 Chubb Avenue 07071
Lyndhurst, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 460-4800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Name of each exchange on which registered:
NONE
Securities registered pursuant to Section 12(b) of the Act;
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing sales price of the Common Stock as of April 23, 1999,
the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $234,295,255. 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 April 23, 1999 were 9,438,938 and 3,527,000 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to Registrant's 1998
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference in Part III hereof.
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PART I
Item 1. Business
CORPORATE ORGANIZATION
The registrant, Movado Group, Inc., is a designer, manufacturer and distributor
of quality watches with prominent brands sold in almost every price category
comprising the watch industry. It was incorporated in New York in 1967 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 registrant and its
subsidiaries are referred to herein as "Movado Group, Inc.," or the "Company"
unless the context otherwise requires.
In 1970, the Company acquired the Swiss manufacturer of Concord watches, which
had been manufacturing Concord watches since 1908, and in 1983, the Company
acquired the U.S. distributor of and substantially all the assets related to the
Movado watch brand from the Swiss manufacturer of Movado watches.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share (the "Common Stock"). In connection
with the public offering, each share of old Class A Common Stock was
reclassified into 10.46 shares of Class A Common Stock, par value $.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
shares 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 share 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 Common Stock is quoted on the NASDAQ
National Market under the trading symbol "MOVA".
On October 21, 1997, the Company completed a secondary stock offering in which
1,500,000 shares of Common Stock were issued.
On February 22, 1999, the Company completed the sale of its Piaget business to
VLG North America, Inc. ("VLG"). The Company sold all of its right, title and
interest in substantially all the assets, properties and rights relating to the
business of selling and distributing Piaget watches and jewelry in the United
States, Canada, Central America and the Caribbean.
With executive offices in Lyndhurst, New Jersey, the Company operates
wholly-owned subsidiaries in Canada, Hong Kong, Japan, Singapore, Switzerland
and the United States.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and the Far
East. While exact worldwide wholesale sales volumes are difficult to quantify,
the Company estimates from data obtained from the Federation of the Swiss Watch
Industry that worldwide wholesale sales of finished watches were over $13
billion in 1996. Watches are produced predominantly in Switzerland, Hong Kong
and Japan. According to the
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Federation of the Swiss Watch Industry, Switzerland, Hong Kong and Japan
accounted for approximately 68%, 17% and 5%, respectively, of worldwide finished
watch exports based on value in 1996. Among all the major watch exporting
countries, Swiss watches have the highest average unit value.
The Company divides the watch market into five principal categories as set forth
in the following table:
PRIMARY CATEGORY OF
SUGGESTED RETAIL MOVADO GROUP, INC.
MARKET CATEGORY PRICE RANGE BRANDS
- --------------- ----------- ------
Exclusive $10,000 and over Corum
Luxury $1,000 to $9,999 Concord and Vizio
Premium Branded $500 to $999 Movado and Coach
Moderate Branded $100 to $499 ESQ and Coach
Mass Market less than $100 --
The Company competes in the Exclusive category as the exclusive distributor of
Corum watches in the United States, Canada and the Caribbean. The Company's
Concord watches compete primarily in the Luxury category of the market, although
certain Concord watches compete in the Exclusive and Premium Branded categories.
The Company's Vizio watches compete in the Luxury category of the market. The
Company's Movado watches compete primarily in the Premium Branded category of
the market, although certain Movado watches compete in the Exclusive, Luxury and
Moderate Branded categories. The Company's Coach brand competes in both the
Premium Branded and Moderate Branded categories. The ESQ line competes in the
Moderate Branded category of the market. The Company does not participate in the
Mass Market category.
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and may be set with precious gems, including diamonds, emeralds,
rubies and sapphires. These watches are primarily mechanical or quartz-analog
watches. Mechanical watches keep time with intricate mechanical movements
consisting of an arrangement of wheels, jewels and winding and regulating
mechanisms. Quartz-analog watches have quartz movements in which time is
precisely calibrated to the regular frequency of the vibration of quartz
crystal. Exclusive watches are manufactured almost entirely in Switzerland. In
addition to the Company's Corum watches and certain Movado 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 Concord, Vizio and certain Movado watches, well-known
brand names of Luxury watches include Baume & Mercier, Breitling, Cartier, Ebel,
Omega, Rolex and TAG Heuer.
Premium Branded Watches
The majority of Premium Branded 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 Branded watches are
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manufactured primarily in Switzerland, although some are manufactured in the Far
East. In addition to a majority of the Company's Movado watches, Coach watches
and certain Concord watches, well-known brand names of Premium Branded watches
include Gucci, Rado and Raymond Weil.
Moderate Branded Watches
Most Moderate Branded watches are quartz-analog watches. Moderate Branded
watches are manufactured primarily in the Far East and Switzerland. These
watches typically are made with gold finish, stainless steel, brass or a
combination of gold finish and stainless steel. In addition to the Company's ESQ
and Coach brands, well-known brand names of watches in the Moderate Branded
category include Anne Klein, Bulova, Gucci, Guess, Seiko and Wittnauer.
Mass Market Watches
Mass Market watches typically consist of digital and quartz-analog watches that
are made with stainless steel, brass or plastic. Digital watches, unlike
quartz-analog watches, have no moving parts. Instead, time is kept by electronic
microchips and is displayed as discrete Arabic digits illuminated on the watch
face by light emitting diodes (LEDs) or liquid crystal displays (LCDs). Mass
Market watches are manufactured primarily in the Far East. Movado Group, Inc.
does not manufacture or distribute Mass Market watches. Well-known brands of
Mass Market watches include Casio, Citizen, Fossil, Pulsar, Seiko, Swatch and
Timex.
PRODUCTS
The Company currently markets five distinctive brands of watches: Movado,
Concord, ESQ, Coach and Corum, which compete in the Exclusive, Luxury, Premium
Branded and Moderate Branded categories. The Company designs and manufactures
Movado and Concord watches primarily in Switzerland, as well as in the United
States, for sale throughout the world. ESQ watches are manufactured to the
Company's specifications by independent contractors located in the Far East and
are presently sold primarily in the United States, Canada and the Caribbean.
Coach watches are assembled in Switzerland by independent suppliers. In
addition, Movado Group, Inc. is the exclusive distributor of Swiss-manufactured
Corum watches in the United States, Canada and the Caribbean. Corum watches are
manufactured in Switzerland by Corum Swiss. Until the end of fiscal 1999, the
Company distributed Piaget watches. On February 22, 1999 the Company sold its
Piaget distribution rights, together with substantially all the assets
comprising its Piaget business to VLG.
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, the Movado brand today
includes a line of watches based on the design of the world famous Movado Museum
watch and a number of other watch collections with more traditional dial
designs. The design for the Movado Museum watch was the first watch design
chosen by the Museum of Modern Art for its permanent collection. It has since
been honored by 10 other museums throughout the world. All Movado watches have
Swiss movements, and are made with 14 or 18 karat gold, 18 karat gold finish,
stainless steel or a combination of 18 karat gold finish and stainless steel.
The majority of Movado watches have suggested retail prices between
approximately $195 and $4,000.
Concord
Concord was founded in 1908 in Bienne, Switzerland. All Concord watches have
Swiss movements, either quartz or mechanical. Concord watches are made with 18
karat gold, stainless steel or a combination of 18 karat gold and stainless
steel, except for Concord Royal Gold watches, most of which are made with 14
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karat gold. The majority of Concord watches have suggested retail prices between
approximately $1,000 and $15,000.
Coach
During fiscal 1999, the Company introduced Coach watches under an exclusive
license with Coach, a division of Sara Lee Corp. All Coach watches contain Swiss
movements and are made with stainless steel, gold finish or a combination of
stainless steel and gold finish, with leather straps, stainless steel bracelets
or gold finish bracelets. The suggested retail pricing ranges from $195 to $795.
ESQ
ESQ was launched in the second half of fiscal 1993. All ESQ watches contain
Swiss movements and are made with stainless steel, at least 18 karat gold finish
or a combination of stainless steel and at least 18 karat gold finish, with
leather straps, stainless steel bracelets or at least 18 karat gold finish
bracelets. The ESQ brand consists of sport and fashion watches with suggested
retail prices from approximately $125 to $495 with features and styles
comparable to more expensive watches.
Corum
Corum watches are manufactured by Corum Ries, Bannwart et Cie ("Corum Swiss").
Corum Swiss is a family owned company founded in 1955 in La Chaux-de-Fonds,
Switzerland. Corum's watch designs are typically unique and distinctive. Corum's
most recognized watches are the Gold Coin and Admiral's Cup. The majority of
Corum watches have suggested retail prices between approximately $3,000 and
$30,000.
Other Products and Services
During fiscal 1999, sales of other products and services totaled approximately
$32.1 million, or approximately 11.5% of net sales. These sales include revenues
from the Company's service and watch repair operations, which historically have
represented a source of consistent revenues with profit margins comparable to
those generated from sales of the Company's watches. Other products and services
include sales derived from the Company's 24 retail stores.
WARRANTY AND REPAIR
The Company has service facilities around the world in 10 Company-owned service
facilities and approximately 135 authorized independent service centers. The
Company conducts training sessions for and distributes technical information and
updates to repair personnel in order to maintain consistency and quality at its
service facilities and authorized independent service centers. The Company's
products are covered by limited warranties against defects in materials and
workmanship for periods ranging from one to three years from the date of
purchase for movements and up to five years for Movado watch casings and
bracelets. Products that are returned under warranty to the Company are
generally serviced by the Company's employees at its service facilities.
ADVERTISING
Advertising is important to the successful marketing of the Company's watches.
Movado Group, Inc. has maintained its own in-house advertising department since
1972 and devotes significant resources to advertising. Advertising expenditures
totaled approximately 19.4%, 20.9% and 18.0% of net sales in fiscal 1999, 1998
and 1997, respectively. Advertising is developed individually for each of the
Company's watch brands and is directed primarily to the ultimate consumer rather
than to trade customers. The Company
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develops advertising for each of its brands by targeting consumers with
particular demographic characteristics appropriate to the image and price range
of the brand. Advertisements are placed predominately in magazines and other
print media, but are also created for television campaigns, catalogues and
promotional materials.
SALES AND DISTRIBUTION
Overview
The Company sells Movado and Concord watches throughout the world. ESQ watches
are presently sold in North America and the Caribbean. The Company presently
sells Coach watches in the United States, the Caribbean, Japan, Hong Kong and
the Pacific rim. The Company is the exclusive distributor for Corum watches in
the United States, Canada and the Caribbean. All five brands are sold to trade
customers by the Company's sales personnel, who typically specialize in one
particular brand. The Company also sells Movado and Concord watches outside the
United States, Canada, Central America and the Caribbean and Coach watches
outside the United States through independent international distributors. In
fiscal 1999 and 1998, one trade customer accounted for 10% and 12% of the
Company's net sales, respectively. In addition to its sales to trade customers
and independent distributors, a portion of the Company's net sales are made
directly to consumers in the United States through the Company's 23 retail
stores.
The Company conducts its business primarily in two operating segments:
"Wholesale" and "Other". Other includes the Company's retail and service center
operations. The Company divides its business into two major geographic segments:
"Domestic" which includes the results of the Company's Untied States and
Canadian operations and "International" which includes the results of all other
Company operations. The Company's international operations are principally
conducted in Europe.
Domestic
Movado Group, Inc. operates in the United States through its North American
Watch Company division and in Canada through a Canadian subsidiary. The Company
sells its products in the domestic market primarily through department stores,
such as Macy's, Neiman-Marcus and Saks Fifth Avenue, jewelry store chains, such
as Zales, Helzberg and Sterling, and independent jewelers. Movado, Concord,
Coach and ESQ watches are sold through each of these retail channels and Corum
watches are sold primarily to independent jewelers. Sales to trade customers in
the United States and Canada are made directly by the Company's sales force of
approximately 125 employees. A majority of the sales force is compensated solely
on the basis of commissions, which are determined as a percentage of sales.
International
The Company sells Movado, Concord and Coach watches internationally through its
own sales force of approximately 20 employees operating from the Company's sales
and distribution offices in Hong Kong, Singapore, and Switzerland, and also
through a network of approximately 80 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 Distribution
In addition to its sales to trade customers and independent distributors, the
Company sells Movado watches as well as Movado jewelry, table top accessories
and other line extensions in the Company operated Movado Boutiques located in
Rockefeller Center, The Westchester Mall and Roosevelt Field Mall in New York,
The
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Mall at Short Hills in New Jersey and scheduled for opening in the summer of
1999, at the Venetian in Las Vegas, Nevada. The Company also operates 19 outlet
stores located in Cabazon, St. Helena and Solvang, California; Destin, Orlando,
Ellenton and St. Augustine, Florida; Dawsonville, Georgia; Tuscola, Illinois;
Michigan City, Indiana; Kittery, Maine; Lee, Massachusetts; Lancaster and
Tannersville, Pennsylvania; Hilton Head and Myrtle Beach, South Carolina; San
Marcos, Texas; Manchester, Vermont; and Williamsburg, Virginia. These outlet
stores sell discontinued and sample merchandise and factory seconds, providing
the Company with an organized and efficient method of reducing its inventory
without competing directly with trade customers.
BACKLOG
At March 31, 1999, the Company had unfilled customer orders of approximately
$28.7 million, compared to approximately $31.8 million at March 31, 1998 (based
on currency exchange rates in effect on March 31, 1999). The Company believes
that substantially all such orders are firm and will be filled during the
Company's current fiscal year. The Company's backlog is affected by a variety of
factors, including seasonality and the scheduling of the manufacture and
shipment of products. Accordingly, a period-to-period comparison of backlog is
not necessarily meaningful and may not be indicative of eventual shipments.
SOURCES AND AVAILABILITY OF SUPPLIES
Movado and Concord watches are generally assembled at the Company's
manufacturing facility in Bienne, Switzerland with some off-site assembly
performed principally by independent Swiss watch makers. Movado and Concord
watches are assembled using Swiss movements and other components obtained from
third-party suppliers. The Movado Gold and Concord Royal Gold collections are
assembled by the Company at its facilities in Lyndhurst, New Jersey using Swiss
movements as well as bracelets and cases obtained from third-party suppliers.
Coach watches are assembled in Switzerland by independent assemblers using Swiss
movements and other components obtained from third-party suppliers in
Switzerland and elsewhere. ESQ watches are manufactured by independent
contractors in the Far East using Swiss movements and other components purchased
from third-party suppliers principally located in the Far East.
A majority of the watch movements used in the manufacture of Movado, Concord and
ESQ watches are purchased from two suppliers. The Company obtains other watch
components for all of its manufactured brands, including movements, cases,
crystals, dials, bracelets and straps, from a number of other suppliers.
Precious stones used in the Company's watches are purchased from various
suppliers and are set in the United States, Canada and Switzerland. Movado
Group, Inc. does not have long-term supply contracts with any of its component
parts suppliers.
The Company purchases Corum watches from Corum Swiss under a long-term
distribution agreement expiring December 31, 2009. Under the terms of the
Company's distribution agreement with Corum Swiss ("Corum Distribution
Agreement"), Corum Swiss undertakes to sell watches to the Company at the lowest
prices at which the watches are then being offered for sale to others, and to
use reasonable efforts to comply with all delivery dates specified by the
Company.
COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of Swatch Group Inc. (formerly known as SMH), 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
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enter the Company's markets in the future may have, substantially greater
financial, distribution, marketing and advertising resources than the Company.
The Company's future success will depend, to a significant degree, upon its
ability to compete effectively with regard to, among other things, the style,
quality, price, advertising, marketing and distribution of its watch brands.
TRADEMARKS AND LICENSING AGREEMENTS
Movado Group, Inc. owns the trademarks MOVADO(R), CONCORD(R), VIZIO(R) and
related trademarks for watches in the United States and in numerous other
countries. The Company licenses ESQUIRE(R), ESQ(R) and related trademarks on an
exclusive basis for use in connection with the manufacture, distribution,
advertising and sale of watches pursuant to an agreement with the Hearst
Corporation ("Hearst License Agreement"). The current term of the Hearst License
Agreement expires December 31, 2000, and the agreement is renewable at the
Company's option through December 31, 2018. The Company licenses the trademark
COACH(R) and related trademarks on an exclusive basis for use in connection with
the manufacture, distribution, advertising and sale of watches pursuant to an
agreement with Coach, a division of Sara Lee Corporation ("Coach License
Agreement"). Subject to meeting certain performance goals, the Coach License
Agreement expires 10 years after the Company's initial sales of Coach watches to
retail outlets not operated by Coach.
The Company owned the trademark PIAGET(R) for watches and jewelry and a number
of related trademarks for watches in the United States. In connection with the
sale of the Piaget business to VLG, the Company assigned the trademarks to S.A.
Ancienne Fabrique Georges Piaget et Cie.
The Company has the exclusive right to use the trademark CORUM(R) and a number
of related trademarks for watches in the United States in connection with its
advertising and sale of Corum watches pursuant to the Corum Distribution
Agreement.
The Company actively seeks to protect and enforce its trademarks by working with
industry associations, anti-counterfeiting organizations, private investigators
and law enforcement authorities, monitoring the enforcement of certain exclusion
orders received from Customs and, when necessary, suing infringers of its
trademarks. Consequently, the Company is involved from time to time in
litigation or other proceedings to determine the enforceability, scope and
validity of these rights. With respect to the trademarks MOVADO(R) and
CONCORD(R) and certain other related trademarks, the Company has received
exclusion orders that prohibit the importation of counterfeit goods or goods
bearing confusingly similar trademarks into the United States. In accordance
with Customs regulations, these exclusion orders, however, cannot cover the
importation of gray-market Movado or Concord watches because the Company is the
manufacturer of such watches. All of the Company's exclusion orders are
renewable.
EMPLOYEES
As of January 31, 1999, the Company has approximately 850 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.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS, SEASONALITY, FOREIGN AND
DOMESTIC OPERATIONS
The Company divides its business into two major geographic segments: "Domestic",
which includes the results of the Company's United States and Canadian
operations, and "International", which includes the results of all other Company
operations. The Company's international operations are principally conducted in
Europe. The Company's international assets are substantially located in Europe.
Other international operations constituted less than 10% of consolidated total
assets for all periods presented.
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The Company's sales in the United States and Canada are traditionally greater
during the Christmas and holiday season and are significantly more seasonal than
its international sales. Consequently, the Company's net sales historically have
been higher during the second half of its fiscal year. The second half of each
year accounted for approximately 60.2%, 61.2% and 62.0% of the Company's net
sales for the fiscal years ending January 31, 1999, 1998 and 1997, respectively.
The amount of net sales and operating income generated during the second half of
each fiscal year depends upon the general level of retail sales during the
Christmas and holiday season, as well as economic conditions and other factors
beyond the Company's control. The Company does not expect any significant change
in the seasonality of its domestic business in the foreseeable future.
International sales tend to be less seasonal, particularly those derived from
the Middle and Far Eastern markets.
The Company conducts its business primarily in two operating segments:
"Wholesale" and "Other". The Company's wholesale segment includes the designing,
manufacturing and distribution of quality watches. Other includes the Company's
retail and service center operations. See Note 11 to the consolidated financial
statements for financial information regarding segment data.
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Item 2. Properties
The Company leases various facilities in the United States, Canada, Switzerland
and the Far East for its corporate, manufacturing, distribution and sales
operations. The Company's leased facilities are as follows:
SQUARE LEASE
LOCATION FUNCTION FOOTAGE EXPIRATION
- -------- -------- ------- ----------
Lyndhurst, New Jersey Executive offices, watch 93,000 May 2002
assembly and distribution
Bienne, Switzerland Corporate functions, watch 52,000 January 2007
sales, distribution,
assembly and repair
Markham, Canada Office and distribution 11,200 June 2007
Hackensack, New Jersey Warehouse 6,600 July 1999
New York, New York Watch repair and Public 4,900 April 2008
Relations Office
Hong Kong Watch sales, distribution 4,100 June 2001
and repair
Los Angeles, California Watch repair 3,000 December 2002
Miami, Florida Watch repair 2,600 October 2001
Grenchen, Switzerland Watch sales 2,600 March 2000
Toronto, Canada Office 1,600 June 2000
Japan Watch sales 1,500 January 2000
Singapore Watch sales, distribution 1,100 August 2001
and repair
The Company leases retail space averaging 1,300 square feet per store with
leases expiring from November 2000 to January 2006 for the operation of the
Company's 19 outlet stores. The Company also leases retail space for the
operation each of its four Boutiques averaging 1,700 square feet per store with
leases expiring from January 2005 to August 2008. The Company also leases retail
space for the operation of the newest Boutique in The Venetian in Las Vegas,
Nevada to open in the Summer of 1999. The new location has approximately 2,300
square feet and the lease will expire April 2006.
The Company is currently exploring available alternatives in connection with the
presently scheduled expiration in May 2002 of its Lyndhurst, New Jersey lease.
The Company also owns approximately 2,400 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions. The Company believes that its existing facilities are adequate for
its current operations and to handle reasonably foreseeable sales growth.
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 in the fourth
quarter of fiscal 1999.
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PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters
As of March 18, 1999, there were 55 holders of record of the Class A Common
Stock and, the Company estimates, approximately 1,200 beneficial owners of the
Common Stock represented by 541 holders of record. The Common Stock is traded on
the Nasdaq National Market under the symbol "MOVA". The quarterly high and low
closing prices for the fiscal years ended January 31, 1999 and 1998 were as
follows:
1999 1998
QUARTER ENDED LOW HIGH LOW HIGH
------ ------ ------ ------
April 30 $21.00 $30.44 $11.72 $13.59
July 31 $24.00 $30.25 $13.32 $19.48
October 31 $15.13 $24.75 $19.38 $23.50
January 31 $17.63 $26.63 $17.75 $24.00
The Class A Common Stock is not publicly traded and is subject to certain
restrictions on transfer as provided under the Company's Amended Restated
Certificate of Incorporation and consequently, there is currently no established
public trading market for these shares.
During each fiscal year ended January 31, 1999 and 1998, the Board of Directors
approved four $0.02 per share quarterly cash dividends to shareholders of record
of the Common Stock and Class A Common Stock. 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 Note 4 to the
Consolidated Financial Statements regarding contractual restrictions on the
Company's ability to pay dividends.
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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 (in
thousands except per share amounts).
Fiscal Year Ended January 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA:
Net sales $ 277,836 $ 237,005 $ 215,107 $ 185,867 $ 160,853
--------- --------- --------- --------- ---------
Cost of sales 111,766 97,456 95,031 83,502 75,871
Selling, general and administrative 133,395 113,593 99,657 84,315 69,243
--------- --------- --------- --------- ---------
Total expenses 245,161 211,049 194,688 167,817 145,114
--------- --------- --------- --------- ---------
Operating income 32,675 25,956 20,419 18,050 15,739
Net interest expense 5,437 5,383 4,874 4,450 4,307
--------- --------- --------- --------- ---------
Income before income taxes 27,238 20,573 15,545 13,600 11,432
Provision for (benefit from) income taxes 6,265 4,731 3,853 3,876 (2,512)
--------- --------- --------- --------- ---------
Net income $ 20,973 $ 15,842 $ 11,692 $ 9,724 $ 13,944
========= ========= ========= ========= =========
Net income per share-Basic $ 1.63 $ 1.35 $ 1.04 $ 0.86 $ 1.24
Net income per share-Diluted $ 1.58 $ 1.29 $ 1.02 $ 0.86 $ 1.24
Basic shares outstanding 12,842 11,736 11,273 11,263 11,250
Diluted shares outstanding 13,256 12,236 11,489 11,327 11,251
Cash dividends declared per share $ 0.080 $ 0.080 $ 0.064 $ 0.053 $ 0.043
BALANCE SHEET DATA (END OF PERIOD):
Working capital $ 194,852 $ 157,103 $ 126,690 $ 132,679 $ 121,357
Total assets 296,375 249,069 208,443 200,380 186,949
Long-term debt 55,000 35,000 40,000 40,000 40,000
Shareholders' equity 166,426 145,533 103,870 104,841 92,930
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Statements included under Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in this annual report on Form
10-K, as well as statements in future filings by the Company with the Securities
and Exchange Commission ("SEC"), in the Company's press releases and oral
statements made by or with the approval of an authorized executive officer of
the Company, which are not historical in nature, are intended to be, and are
hereby identified as, "FORWARD LOOKING STATEMENTS" for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934. The
Company cautions readers that FORWARD LOOKING STATEMENTS, include without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, plans for future operations,
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, competitive products and pricing, ability to enforce
intellectual property rights, seasonality, availability of alternative sources
of supply in the case of loss of any significant supplier, the Company's
dependence on key officers, ability to enforce intellectual property rights,
continued availability to the Company of financing and credit on favorable terms
and success of hedging strategies with respect to currency exchange rate
fluctuations.
GENERAL
Net Sales. Among the more significant factors that influence annual sales are
general economic conditions in the Company's domestic and international markets,
new product introductions, the level of advertising expenditures, the
effectiveness of marketing and distribution programs and product pricing
decisions.
Reported sales are also affected by foreign exchange rates, primarily the U.S.
dollar/Swiss franc rate, because significant portions of the Company's
international sales are billed in Swiss francs and translated to U.S. dollars at
average exchange rates for financial reporting purposes.
The Company's business is very seasonal. There are two major selling seasons in
the Company's North American 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
around significant local holidays that occur in late Winter or early Spring,
however, because these markets are a less significant portion of the Company's
business, their impact is far less than that of the selling seasons in North
America.
The Company is continuing its efforts to expand sales in key international
markets. These efforts have included: the recruitment of a number of key
personnel with management level sales and marketing responsibilities, the
addition and replacement of selected independent distributors, an increase in
the number of sales representatives, retargeted and increased advertising and
coordinated marketing programs designed to build brand awareness and consumer
demand for the Company's watches at point-of-sale.
Gross Margins. The Company's overall gross margins are primarily affected by
four major factors: sales mix, product pricing strategy, component and labor
costs and the U.S. dollar/Swiss franc exchange rate. The Company's gross margins
on its manufactured brands are higher than those on its distributed brands and;
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14
therefore, any shift in overall sales mix toward the Company's manufactured
brands will generally have a favorable impact on margins. In addition, margins
on sales of a particular brand vary from model to model and, therefore, changes
in the model sales mix within a brand will impact margins.
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 competitor actions. The overall level of liquidation sales of
discontinued models in a particular fiscal year can also impact the Company's
gross margins.
Manufacturing costs of the Company's Movado and Concord brands consist primarily
of component costs, Company and subcontractor assembly costs and unit overhead
costs.
The Company seeks to control and reduce component and subcontractor labor costs
through a combination of negotiations with existing suppliers and alternative
sourcing. Overall wage and salary costs at the Company's manufacturing
operations in Switzerland are a function of production levels and local
inflation. These costs have remained fairly stable over the three previous
fiscal years.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's production costs and, therefore, its gross margins. The Company,
therefore, hedges its Swiss franc purchases using a combination of forward
contracts, purchased currency options and spot purchases. The Company's hedging
program has, in the recent past, been reasonably successful in stabilizing
product costs despite exchange rate fluctuations.
Operating Expenses. The Company's operating expenses consist primarily of
advertising, selling, distribution and general and administrative expenses.
Annual advertising expenditures are based principally on overall strategic
considerations relative to maintaining or increasing market share in markets
that management considers to be crucial to the Company's continued success as
well as on general economic conditions in the various marketplaces around the
world in which the Company sells its products.
Selling expenses consist primarily of sales commissions, sales force travel
costs and operating costs incurred in connection with the Company's retail
business. Sales commissions vary proportionally with overall sales levels.
Retail operating expenses consist primarily of salaries and store rent.
Distribution expenses consist primarily of salaries of distribution staff, the
cost of part-time help to meet seasonal needs, and shipping costs and supplies.
General and administrative expenses consist primarily of salaries, employee
benefit plan costs, office rent, management information systems costs and
various other corporate expenses such as insurance, legal, internal audit and
credit and collection costs.
Operating expenses over the last three fiscal years reflect the effect of the
implementation of the Company's growth strategy. The more significant expenses
associated with this strategy included: advertising and marketing expenses
designed to increase market share for the Corum, Concord and Movado brands;
advertising and marketing costs for the continuing expansion of the Company's
ESQ line; additions to the Company's sales force; salaries and rents associated
with additional outlet stores; and the addition of staff to support
distribution, inventory management and customer service requirements coincident
with growth of the Company's business.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
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15
Net Sales. Comparative net sales by product class were as follows:
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
Concord, Movado, Coach and ESQ:
Domestic $180,909 $153,835 $138,810
International 50,940 40,028 30,185
Piaget and Corum 13,934 17,045 22,386
Other 32,053 26,097 23,726
-------- -------- --------
$277,836 $237,005 $215,107
======== ======== ========
Net sales increased 17.2% for the year ended January 31, 1999. The increase in
net sales for fiscal 1999 was predominately due to growth in the Company's
established manufactured brands (Concord, Movado and ESQ) and expansion of the
Company's retail network, which consists of 19 outlet stores and four Movado
Boutiques and the Piaget Boutique partially offset by reductions in the
Company's distributed brands, due in part to the announced sale of the Piaget
brand in December 1998 (see Note 14 to the consolidated financial statements).
In addition, the Company introduced the Coach watch brand, its fourth
manufactured brand, during the first quarter of fiscal 1999 which contributed
significantly to sales growth. Domestic sales increases were predominantly due
to the introduction of the Coach watch line and growth in Concord, Movado and
ESQ brand sales offset somewhat by reductions in sales of the Piaget and Corum
brands. Growth in the international business was predominantly due to growth of
Movado in the Far East, Middle East and the Caribbean.
Net sales increased 10.2% in fiscal 1998. The increase resulted primarily from
growth in sales in the U.S. and unit sales gains in the Company's international
business. Sales increases in the U.S were primarily in the Movado and Concord
brands. These increases were partially offset by sales declines in the Company's
ESQ, Piaget and Corum brands. ESQ sales declined in fiscal 1998 in comparison to
fiscal 1997 principally because of the significant expansion of the brand's
retail network, which occurred during fiscal 1997. Piaget sales declines were
due primarily to planned reductions in the distribution channels for the brand.
The increase in the Company's international business was due predominantly to
sales increases of the Concord and Movado brands in the Middle East, Far East
and Caribbean offset somewhat by the negative impact of a change in translation
rates.
Gross Margins. The gross margin for fiscal 1999 was 59.8% as compared to 58.9%
for fiscal 1998. The increase in margin was predominately due to a favorable
sales mix, particularly an increase in the proportion of sales of Concord,
Movado, Coach and ESQ to our other brands. The Company's gross margin also
benefited slightly from increases in the U.S. dollar against the Swiss franc.
The Company's gross margin increased from 55.8% to 58.9% in fiscal 1998,
principally as a result of sales mix, particularly an increase in the proportion
of Concord, Movado and ESQ sales to net sales. The Company's gross margin also
benefited by increases in the U.S. dollar against the Swiss franc.
Operating Expenses. Operating expenses for fiscal 1999 were $133.4 million or
48.0% of net sales as compared to $113.6 million or 47.9% of net sales in fiscal
1998. The increase in operating expenses was largely the result of planned
increases in both advertising and selling costs in the United States which were
necessary to launch the Coach brand and to develop and introduce new product
line extensions within the Movado brand through the Movado Boutiques. In
addition, increases in general and administrative costs were due to personnel
increases which were necessary for the support of our Movado Boutiques as well
as cost increases for information systems and employee benefit programs.
14
16
Operating expenses increased 14.0% in fiscal 1998 to 47.9% of net sales from
46.3% of net sales in fiscal 1997. The increase in fiscal 1998 operating
expenses occurred primarily in the advertising, selling and general and
administrative expense categories. Distribution costs declined as a percentage
of net sales.
The increase in advertising and marketing expenditures in fiscal 1998 which
occurred primarily in the U.S., was planned, and related to the Company's
ongoing efforts to build identity and image for its brands. Fiscal 1998
advertising and marketing costs were affected by higher levels of media spending
for Concord, Movado and, in particular, ESQ in the U.S and increased marketing
and promotional activities in the U.S. for all of the Company's brands. The
growth in consolidated advertising costs included increased media spending in
certain international markets, primarily the Far East and Middle East and
certain European markets. Fiscal 1998 general and administrative expenses
included increased employee benefit costs and rents due to the expansion of
office space necessitated by the Company's growth and head count increases.
Interest Expense. Net interest expense for fiscal 1999, 1998 and 1997 was $5.4
million, $5.4 million and $4.9 million, respectively, and consisted primarily of
interest on the Company's 6.56% Senior Notes, 6.90% Series A Senior Notes,
revolving lines of credit under the July 1997 Restated Credit Agreement, as
amended, and borrowings against working capital lines.
Income Taxes. The Company's income tax provision amounted to $6.3 million, $4.7
million, and $3.9 million for fiscal 1999, 1998 and 1997, respectively, or 23.0%
of pretax income for fiscal 1999 and 1998 and, 24.8% for fiscal 1997. A portion
of the Company's consolidated operations are located in non-U.S. jurisdictions,
and, therefore, the Company's effective rate differs from U.S. statutory rates.
The majority of the Company's non-U.S. operations are located in jurisdictions
with statutory rates below U.S. rates. The Company believes that the future
effective tax rate will range from 20% to 30%; however, there can be no
assurance of this as it is dependent on a number of factors, including the mix
of foreign to domestic earnings, local statutory tax rates and the Company's
ability to utilize net operating loss carryforwards in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been, and are expected to remain, primarily a
function of its seasonal working capital requirements, which have increased due
to significant growth in domestic sales over the two previous years. The
Company's business is not capital intensive and liquidity needs for capital
investments have not been significant in relation to the Company's overall
financing requirements.
The Company has met its liquidity needs primarily through funds from operations
and bank borrowings with domestic and Swiss banks. The Company's future
requirements for capital will relate not only to working capital requirements
for the expected continued growth of its existing brands, domestically and
internationally, but also to funding new product lines. In addition, the Company
made a $5 million sinking fund payment on February 1, 1999 and is required to
make another on January 31, 2000 in connection with its 6.56% Senior Notes which
were issued in the original principal amount of $40 million.
The Company's revolving credit and working capital lines with its domestic bank
group provide for a three year $90.0 million unsecured revolving line of credit,
pursuant to an Amended and Restated Credit Agreement, dated as of July 23, 1997,
among the Company, the Chase Manhattan Bank, as agent, Fleet Bank N.A., as
co-agent, and other banks signatory thereto, ("Restated Bank Credit Agreement"),
and $31.6 million of uncommitted working capital lines of credit. At January 31,
1999, the Company had $5.0 million in outstanding balances under the Restated
Bank Credit Agreement, which is included in Long-term debt.
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17
On November 30, 1998, the Company entered into a Note Purchase and Private Shelf
Agreement which allows for the issuance up to two years after the date of the
agreement of Senior promissory notes in the aggregate principal amount of up to
$50 million with maturities up to 12 years from their date of issuance. On
December 1, 1998, the Company brought down $25 million of 6.90% Series A Senior
Notes maturing on October 30, 2010 which are subject to annual prepayments of
$5.0 million commencing October 31, 2006.
In March 1998, the Company's Board of Directors authorized the repurchase of up
to 400,000 shares of the Company's Common Stock. As of January 31, 1999, the
Company had purchased 142,200 shares at an aggregate cost of $2.9 million. In
March 1999, the Board approved a revised stock repurchase program for the
repurchase of shares of the Company's Common Stock up to an aggregate repurchase
price of $10.0 million, in addition to the shares previously purchased.
The Company's debt-to-total capitalization ratio was 28.8% at January 31, 1999,
as compared to 23.6% at January 31, 1998. The increase in the debt to total
capitalization was due to the Company borrowing $25.0 million of 6.90% Series A
Senior Notes.
The Company's net working capital, consisting primarily of trade receivables and
inventories, amounted to $194.9 million and $157.1 million at January 31, 1999
and January 31, 1998, respectively. Accounts receivable at January 31, 1999 were
$109.1 million as compared to $92.4 million at January 31, 1998. The increase in
receivables was primarily the result of growth in the Company's business and the
addition of the Coach brand, which has been offset by Piaget receivables
classified as assets held for sale. Inventories at January 31, 1999 were $104.0
million as compared to $98.2 million at January 31, 1998. The increase in
inventories from January 31, 1999 to January 31, 1998 reflected the expansion of
the Company's product line, in particular the introduction of the Coach brand
and the opening of the Movado Boutiques which has been offset by Piaget
inventory classified as assets held for sale.
The Company's capital expenditures for the year ended January 31, 1999 were
approximately $11.7 million compared to $7.6 million for the year ended January
31, 1998. Expenditures in fiscal 1999 were primarily related to planned
expenditures in the Company's information systems, including retail information
systems, expansion of the Company's Movado boutiques and further expansion of
the Company's network of outlet stores. The Company's capital expenditures for
the year ended January 31, 1998 were approximately $7.6 million compared to $6.6
million for the year ended January 31, 1997. Expenditures in fiscal 1998 were
primarily related to improvements in the Company's management and sales
management information systems and costs incurred in connection with the
expansion of domestic distribution operations. The Company expects that capital
expenditures in the future will approximate the average of fiscal 1999 and 1998
levels.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) in June 1998. SFAS 133 requires all derivatives be
recorded on the balance sheet at fair value and establishes new accounting
practices for hedge instruments. SFAS 133 is required for the fiscal years
beginning after June 15, 1999. Management of the Company is currently analyzing
the effect SFAS 133 will have on the Company's statement of position and results
of operations.
MARKET RISKS
The Company's primary market risk exposure relates to foreign currency exchange
risk (see Note 5 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.
16
18
Under the hedging program, the Company purchases various financial instruments,
predominantly forward and option contracts. Gains and losses on financial
instruments resulting from this hedging activity are offset by the effects of
the currency movements on respective 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 entities' cost of sales. As of
January 31, 1999, the Company's hedging portfolio consisted of various Swiss
Franc forward contracts and Swiss franc option contracts. The forward contracts
have various maturity dates through June 17, 1999 with an average forward rate
of 1.4352 Swiss franc per dollar. The Company has $55.0 million of option
contracts with a maturity date of May 24, 2000. The option contracts have an
average strike price of 1.4239. As of January 31, 1999 the carrying value of the
options amounted to approximately $2.3 million, which represents the unamortized
premium of the option and a fair market value of approximately $2.8 million.
In addition, the Company has certain debt obligations with variable interest
rates, which are based on market interest. The Company does not hedge these
interest rate risks. The Company also has certain debt obligations with fixed
interest rates. The difference between the market based interest rates at the
balance sheet date and the fixed rates was minimal.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established permanent, fixed conversion rates between their existing currencies
and the European Union's common currency called the "euro".
The transition period for the introduction of the euro is scheduled to phase in
over a period ending January 1, 2002, with the existing currency being
completely removed from circulation on July 1, 2002. The Company has been
preparing for the use of the euro. The timing of the Company's phasing out all
uses of the existing currencies will comply with applicable legal requirements
and also will be scheduled to facilitate optimal coordination with the plans of
our vendors.
The Company does not currently have significant transactions denominated in euro
related currencies. This is not expected to change in the foreseeable future.
Therefore, the Company believes the introduction of the euro and the phasing out
of the other currencies will not have a material impact on the Company's
consolidated financial statements.
YEAR 2000
General
Many older computer software programs and other equipment with embedded chips or
processors (collectively "systems") refer to years in terms of their last two
digits only. Such systems may incorrectly interpret the year 2000 to mean the
year 1900. If not corrected, those systems could cause date related transaction
failures.
Project
The Company initiated a project in 1997 (the "Project") to improve and
standardize data and computer technology. The Project is designed to replace all
obsolete hardware and software with systems that are Year 2000 compliant and in
addition, to replace most business software systems. The project calls for the
replacement or upgrade of all PCs, servers, network components, desktop
software, core business software which support manufacturing, distribution,
sales, accounting, after sales service, retail point of sale, and electronic
data interchange (EDI). The new global technical network infrastructure
(hardware, software, and communication technology) has been implemented in all
U.S. locations, Switzerland and Canada. The remaining technical network
infrastructure for the Far East was implemented in February 1999. A new retail
point-of-sale and merchandise system that is Year 2000 compliant was implemented
in fiscal 1999 for all store
17
19
and headquarters locations. As part of the project, new client/server core
business applications software (BPCS 6.0 which is designed to be Year 2000
compliant) supporting manufacturing, distribution, sales, accounting and after
sales service was implemented in the U.S. in March 1999. The Company has been
working with System Software Associates, Inc. ("SSA") to complete such
implementation and testing as well as implementation and testing of the same
BPCS 6.0 applications software at the Company's Canadian, Far East and Swiss
facilities. Such implementation is expected to be completed in Switzerland
during the Summer of 1999 and in Canada and the Far East by the end of the
calendar year. Existing business applications software systems operating in
Canada and the Far East, however, have been made Year 2000 compliant in any
event by the implementation of upgrades, which were completed in February 1999.
Minor program and procedural changes were previously implemented to support
fiscal year 2000 processing for our existing Swiss business systems. The Company
has tested the BPCS 6.0 applications software by reviewing the database and
program definitions to confirm that the date formats are four digit year
specific. After completion of the quarter end processing related to the end of
the first quarter of fiscal 2000, the Company plans to conduct further testing
by simulating the date change to January 1, 2000. The Company has developed a
contingency plan with the goal of insuring that the Company's Swiss business
systems are Year 2000 compliant in the event implementation of the BPCS 6.0 core
business applications software is not completed before the end of calendar year
1999. This plan calls for the implementation of certain upgrades and the
remediation of applications software that is not Year 2000 compliant. As a
result of the Project and its contingency planning, the Company expects that it
will be Year 2000 compliant, on a global basis, by the end of calendar year
1999.
By the use of questionnaires, the Company is monitoring the Year 2000 system
status of customers and vendors involved with electronic interchange of data
with our systems. This monitoring will continue throughout 1999. Non-electronic
data exchange contingency approaches including reliance on communications by fax
will be used, if required, with those customers or vendors which fail to reach
Year 2000 system compliance by January 1, 2000.
Costs
Costs associated with systems replacement and modification to become Year 2000
compliant under the contingency plan (outside of the Project) are expected to be
approximately $400,000 and will be funded through the Company's working capital
lines and other credit facilities. The estimated total cost of the Project is
approximately $11.0 million. The total amount expended on the Project through
January 31, 1999 was approximately $7.1 million which has been capitalized as a
long-term asset. This estimate assumes that the Company will not incur
significant Year 2000 related costs due to the failure of customers, vendors and
other third parties to be Year 2000 compliant.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
result of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the Project as scheduled, and the Company's
contingency plan, if necessary, the possibility of significant interruptions of
normal operations should be reduced. No major information technology projects
have been deferred as a result of the Project.
18
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OTHER
On December 22, 1998, the Company entered into an agreement with VLG North
America, Inc. ("VLG") for the sale to VLG of substantially all of the assets,
properties and rights related to the Piaget business. The transaction was
completed on February 22, 1999 at a sale price of approximately $30.0 million.
The Company will report a pretax gain, representing the excess of the sale price
over the net book value of the assets sold at January 31, 1999, during the first
quarter of fiscal 2000. Accordingly, the Company recorded $22.2 million in
assets held for sale at January 31, 1999.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule Page
Number Number
------ ------
Report of Independent Accountants F-1
Consolidated Statements of Income and Comprehensive F-2
Income for the fiscal years ended January 31, 1999,
1998 and 1997
Consolidated Balance Sheets at January 31, 1999 and 1998 F-3
Consolidated Statements of Cash Flows for the fiscal years F-4
ended January 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity F-5
for the fiscal years ended January 31, 1999, 1998 and
1997
Notes to Consolidated Financial Statements F-6 to F-21
Valuation and Qualifying Accounts and Reserves II S-1
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
22
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 1999 annual meeting of shareholders and is incorporated herein
by reference.
Item 11. Executive Compensation
The information required by this item is included in the Company's Proxy
Statement for the 1999 annual meeting of shareholders and is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included in the Company's Proxy
Statement for the 1999 annual meeting of shareholders 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 1999 annual meeting of shareholders and is incorporated herein
by reference.
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23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements:
See Financial Statements Index on page 20 included in Item 8
of part II of this report.
(2) Financial Statements Schedules:
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 25 through 30 of this
report.
(b) Reports on Form 8-K
None
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24
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 30, 1999 By: /s/ Gedalio Grinberg
--------------------
Gedalio Grinberg
Chief Executive Officer and
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 30, 1999 /s/ Gedalio Grinberg
--------------------
Gedalio Grinberg
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: April 30, 1999 /s/ Efraim Grinberg
-------------------
Efraim Grinberg
President
Dated: April 30, 1999 /s/ Michael J. Bush
-------------------
Michael J. Bush
Executive Vice President and Chief
Operating Officer
Dated: April 30, 1999 /s/ Kenneth J. Adams
--------------------
Kenneth J. Adams
Senior Vice President and Chief
Financial Officer (Chief Financial
Officer and Principal Accounting
Officer)
Dated: April 30, 1999 /s/ Margaret Hayes Adame
------------------------
Margaret Hayes Adame
Director
Dated: April 30, 1999 /s/ Donald Oresman
------------------
Donald Oresman
Director
Dated: April 30, 1999 /s/ Leonard L. Silverstein
--------------------------
Leonard L. Silverstein
Director
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25
Dated: April 30, 1999 /s/ Alan H. Howard
------------------
Alan H. Howard
Director
24
26
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 Registrant'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 October 31,
1998.
4.1 Specimen Common Stock Certificate. Incorporated herein by reference to
Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year
ended January 31, 1998.
4.2 Note Agreement, dated as of November 9, 1993, by and between the
Registrant and The Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1993.
10.1 Lease dated August 5, 1998 between Grand Canal Shops Mall Construction,
LLC as landlord and Movado Retail Group, Inc., as tenant, for premises
at Grand Canal Shops, Clark County, Nevada. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 1998.
10.2 Amendment Number 1 to License Agreement dated December 9, 1996 between
Registrant as Licensee and Coach, a division of Sara Lee Corporation as
Licensor, dated as of February 1, 1998. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended October 31, 1998.
10.3 Amendment Number 6 to Franchise Agreement dated February 27, 1969
between Registrant as Distributor and Corum, Ries Bannwart and Co. as
manufacturer, as previously amended, dated as of October 22, 1997.
Incorporated herein by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1998.
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
25
27
10.4 Franchise Agreement between Corum Watch Corporation and Corum, Ries,
Bannwart & Co., dated February 27, 1969, as amended on April 16, 1979,
February 22, 1980, April 20, 1982, January 1988 and February 19, 1993.
Incorporated herein by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1 (Registration No.
33-666000).
10.5 Assignment Agreement, dated February 22, 1980, between Corum, Ries,
Bannwart & Co. and Corum Watch Corporation. Incorporated herein by
reference to Exhibit Number 10.7 filed with Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.6 Agreement, dated January 1, 1992, between The Hearst Corporation and
the Registrant, as amended on January 17, 1992. Incorporated herein by
reference to Exhibit Number 10.8 filed with Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.7 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.
10.8 Lease Agreement between the Registrant and Meadowlands Associates,
dated October 31, 1986, for office space in Lyndhurst, New Jersey,
together with the Non-Disturbance and Attornment Agreement, dated March
11, 1987. Incorporated herein by reference to Exhibit Number 10.10
filed with Company's Registration Statement on Form S-1 (Registration
No. 33-666000).
10.9 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.**
10.10 Line of Credit Letter Agreement dated July 18, 1997 between the
Registrant and Fleet Bank, N.A. Incorporated herein by reference to
Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year
ended January 31, 1998.
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
10.11 Line of Credit Letter Agreement dated February 25, 1998 between the
Registrant and Marine Midland Bank, N.A.
26
28
Incorporated herein by reference to Exhibit 10.14 to Registrant's
Annual Report on Form 10-K for the year ended January 31, 1998.
10.12 Letter Agreement dated May 19, 1993 between Concord Watch Company, S.A.
and Bern Cantonal Bank (English translation). Incorporated herein by
reference to Exhibit Number 10.15 filed with Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.13 Letter Agreement dated November 25, 1992 between Concord Watch Company,
S.A. and Swiss Bank Corporation (English translation). Incorporated
herein by reference to Exhibit Number 10.19 filed with Company's
Registration Statement on Form S-1 (Registration No. 33-666000).
10.14 Letter Agreement dated January 25, 1991 between Concord Watch Company,
S.A. and Union Bank of Switzerland (English translation). Incorporated
herein by reference to Exhibit Number 10.20 filed with Company's
Registration Statement on Form S-1 (Registration No. 33-666000).
10.15 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.
10.16 First Amendment of Lease dated May 31, 1994 between Meadowlands
Associates, as landlord and the Registrant, as tenant for additional
space at 125 Chubb Avenue, Lyndhurst, New Jersey. 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.
10.17 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.**
27
29
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
10.18 Registrant's amended and restated Deferred Compensation Plan for
Executives effective January 1, 1998 .** Incorporated herein by
reference to Exhibit 10.25 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1998.
10.19 Credit Agreement dated as of January 31, 1996 among the Registrant,
Chase Manhattan Bank (National Association) ("Chase"), NatWest Bank
N.A. ("NatWest"), Marine Midland Bank and Chase as Agent and NatWest as
Co-Agent. Incorporated herein by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the year ended January 31,
1996.
10.20 Letter Agreement dated August 25, 1995 between the Registrant and
Michael Bush together with Promissory Note dated October 25, 1995.
Incorporated herein by reference to Exhibit 10.29 to the Registrant's
Annual Report on Form 10-K for the year ended January 31, 1996.**
10.21 Policy Collateral Assignment and Split Dollar Agreement dated December
5, 1995 by and between the Registrant and The Grinberg Family Trust
together with Demand Note dated December 5, 1995. Incorporated herein
by reference to Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1996.**
10.22 Lease dated April 15, 1996 between the Registrant and Belle Mead
Corporation for premises at 1200 Wall Street West, Lyndhurst, New
Jersey. Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
30, 1996.
10.23 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.
10.24 Amendment number 1 to promissory note dated October 25, 1995 between
the Registrant and Michael Bush. Incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997.
28
30
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
10.25 Amended and Restated Credit Agreement dated as of July 23, 1997 among
the Registrant, the Chase Manhattan Bank as Agent, Swingline Bank and
Issuing Bank and Fleet Bank, N.A. as Co-Agent and the other Lenders
signatory thereto. Incorporated herein by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1997.
10.26 Amendment to Amended and Restated Credit Agreement dated as of August
5, 1997 among the Registrant, the Chase Manhattan Bank as Agent,
Swingline Bank and Issuing Bank and Fleet Bank, N.A. as Co-Agent and
the other Lenders signatory thereto. Incorporated herein by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1997.
10.27 Consent to Sublease dated as of June 18, 1997 among the Registrant,
Meadowlands Associates and Alexander and Alexander Consulting Group,
Inc. ("AACG"), and Sublease Agreement entered into as of May 7, 1997 by
and between the Registrant and AACG. Incorporated herein to Exhibit
10.3 to the Registrant's Quarterly Report in Form 10-Q for the quarter
ended July 31, 1997.
10.28 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.
10.29 Line of Credit Letter Agreement dated November 10, 1997 between the
Registrant and Fleet Bank, N.A. Incorporated herein by reference to
Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 1998.
10.30 Line of Credit Letter Agreement dated August 5, 1997 between the
Registrant and Fleet Bank, N.A. Incorporated herein by reference to
Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the
year ended January 31, 1998.
10.31 Note Purchase and Private Shelf Agreement dated as of November 30, 1998
between the Registrant and The Prudential Insurance Company of America.
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
29
31
10.32 February 1999 Amendment and Waiver dated as of February 19, 1999 as to
Amended and Restated Credit Agreement dated as of July 23, 1997 among
the Registrant, the Chase Manhattan Bank as Agent, Swingline Bank and
Issuing Bank and Fleet Bank, N.A. as Co-Agent and the other Lenders
signatory thereto.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
** Constitutes a compensatory plan or arrangement.
30
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Movado Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 22 present fairly, in all material
respects, the financial position of Movado Group, Inc. and its subsidiaries at
January 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
400 Campus Drive
Florham Park, New Jersey
March 25, 1999
F-1
33
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1999 1998 1997
---- ---- ----
NET INCOME:
Net sales $ 277,836 $ 237,005 $ 215,107
--------- --------- ---------
Costs and expenses:
Cost of sales 111,766 97,456 95,031
Selling, general and administrative 133,395 113,593 99,657
--------- --------- ---------
245,161 211,049 194,688
--------- --------- ---------
Operating income 32,675 25,956 20,419
Net interest expense 5,437 5,383 4,874
--------- --------- ---------
Income before income taxes 27,238 20,573 15,545
Provision for income taxes 6,265 4,731 3,853
--------- --------- ---------
Net income $ 20,973 $ 15,842 $ 11,692
========= ========= =========
Net income per share - Basic $ 1.63 $ 1.35 $ 1.04
========= ========= =========
Net income per share - Diluted $ 1.58 $ 1.29 $ 1.02
========= ========= =========
COMPREHENSIVE INCOME:
Net income $ 20,973 $ 15,842 $ 11,692
Other comprehensive income, net of tax:
Foreign currency translation adjustment 2,949 (3,281) (12,194)
--------- --------- ---------
Comprehensive income (loss) $ 23,922 $ 12,561 $( 502)
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
34
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 31,
---------------
1999 1998
---- ----
ASSETS
Current assets:
Cash $ 5,626 $ 10,874
Trade receivables, net 109,102 92,386
Inventories 104,027 98,183
Assets held for sale 22,187 --
Other 21,489 18,206
--------- ---------
Total current assets 262,431 219,649
Plant, property and equipment, net 22,998 18,909
Other assets 10,946 10,511
--------- ---------
$ 296,375 $ 249,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 2,200 $ --
Current portion of long-term debt 10,000 10,000
Accounts payable 25,181 25,286
Accrued liabilities 20,020 16,920
Deferred and current taxes payable 10,179 10,340
--------- ---------
Total current liabilities 67,580 62,546
--------- ---------
Long-term debt 55,000 35,000
Deferred and noncurrent foreign income taxes 5,728 3,460
Other liabilities 1,641 2,530
Shareholders' equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no shares issued -- --
Common Stock, $0.01 par value;
20,000,000 shares authorized; 9,419,781 and 9,317,007
shares issued, respectively 94 93
Class A Common Stock, $0.01 par value,
10,000,000 shares authorized; 3,530,922 and 3,556,793
shares issued and outstanding, respectively 35 36
Capital in excess of par value 65,332 64,475
Retained earnings 106,141 86,194
Accumulated other comprehensive income (2,188) (5,137)
Treasury stock, 159,019 shares and 17,251 shares at cost,
respectively (2,988) (128)
--------- ---------
Total shareholders' equity 166,426 145,533
--------- ---------
Commitments and contingencies (Note 9)
--------- ---------
$ 296,375 $ 249,069
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
35
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 20,973 $ 15,842 $ 11,692
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 5,380 4,121 3,946
Deferred and noncurrent foreign income taxes 1,764 483 221
Provision for losses on accounts receivable 1,304 1,005 1,917
Changes in current assets and liabilities:
Trade receivables (24,693) (18,699) (4,096)
Inventories (19,925) (12,988) (3,828)
Other current assets (1,265) (2,565) (14,163)
Accounts payable 290 263 5,174
Accrued liabilities 3,352 3,841 4,301
Deferred and current taxes payable 229 3,481 (377)
Increase in other noncurrent assets (314) (592) (1,285)
(Decrease) increase in other noncurrent liabilities (29) (307) 253
-------- -------- --------
Net cash (used in) provided by operating activities (12,934) (6,115) 3,755
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (11,707) (7,638) (6,626)
Goodwill, trademarks and other intangibles (1,835) (1,421) (294)
Sale of subsidiary 2,646 -- --
-------- -------- --------
Net cash used in investing activities (10,896) (9,059) (6,920)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net of underwriting
discounts and offering expenses -- 29,609 --
Repayment of Senior Notes (5,000) -- --
Proceeds from issuance of Series A Senior Notes 25,000 -- --
Net proceeds from (payment of) current bank borrowings 2,200 (7,570) 5,335
Principal payments under capital leases (387) (275) (389)
Stock options exercised 627 431 212
Dividends paid (1,026) (939) (720)
Purchase of treasury stock (2,860) -- --
-------- -------- --------
Net cash provided by financing activities 18,554 21,256 4,438
-------- -------- --------
Effect of exchange rate changes on cash 28 (93) (217)
-------- -------- --------
Net (decrease) increase in cash (5,248) 5,989 1,056
Cash at beginning of year 10,874 4,885 3,829
-------- -------- --------
Cash at end of year $ 5,626 $ 10,874 $ 4,885
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
36
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED
CAPITAL OTHER
CLASS A IN EXCESS COMPRE-
PREFERRED COMMON COMMON OF PAR RETAINED HENSIVE TREASURY
STOCK STOCK STOCK VALUE EARNINGS INCOME STOCK
----- ----- ----- ----- -------- ------ -----
Balance, January 31, 1996 $-- $64 $ 49 $34,199 $ 60,319 $ 10,338 $ (128)
Net income 11,692
Dividends ($0.064 per share) (720)
Stock options exercised, net of
tax benefit 251
Foreign currency translation
adjustments (12,194)
Conversion of Class A Common
Stock to Common Stock 1 (1)
--- --- ---- ------- -------- -------- -------
Balance, January 31, 1997 -- 65 48 34,450 71,291 (1,856) (128)
Net income 15,842
Dividends ($0.080 per share) (939)
Stock options exercised 431
Proceeds from issuance of
Common stock, net of
Underwriting discounts
and Offering expenses 15 29,594
Foreign currency translation
adjustments (3,281)
Conversion of Class A Common
Stock to Common Stock 13 (12)
--- --- ---- ------- -------- -------- -------
Balance, January 31, 1998 -- 93 36 64,475 86,194 (5,137) (128)
Net income 20,973
Dividends ($0.080 per share) (1,026)
Stock options exercised, net of
tax Benefit 857
Common stock repurchased (2,860)
Foreign currency translation
adjustments 2,949
Conversion of Class A Common
Stock to Common Stock 1 (1)
--- --- ---- ------- -------- -------- -------
Balance, January 31, 1999 $-- $94 $ 35 $65,332 $106,141 $ (2,188) $(2,988)
=== === ==== ======= ======== ======== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
37
MOVADO GROUP, INC.
NOTES TO 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 1999, the Company marketed six
distinctive brands of watches: Movado, Concord, ESQ, Coach, Piaget and Corum,
which compete in most segments of the watch market. On February 22, 1999, the
Company completed the sale of substantially all its assets relating to the
Piaget brand to VLG North America, Inc. ("VLG").
The Company designs and manufactures Concord and Movado watches primarily
through its subsidiaries in Switzerland and the United States. ESQ watches are
manufactured to the Company's specifications using Swiss movements by
independent contractors located in the Far East. Coach watches are assembled in
Switzerland by independent suppliers. The Company is also the exclusive
distributor of Swiss-manufactured Corum watches in the United States, Canada,
and the Caribbean. The Company distributes its watch brands through its United
States operations as well as through sales subsidiaries in Canada, Hong Kong,
Singapore and Switzerland and through a number of independent distributors
located in various countries throughout the world.
In addition to its sales to trade customers and independent distributors, the
Company sells Movado watches, Movado jewelry, table top accessories and other
product line extensions within the Movado brand directly to consumers in its
Company-operated Movado Boutiques. The Company also operates a number of Movado
outlet stores throughout the United States, through which the Company sells
discontinued and sample merchandise.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances have been eliminated.
Translation of foreign currency financial statements and foreign currency
transactions
The financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at average exchange
rates for the year. Foreign currency transaction gains and losses are charged or
credited to income as incurred. Foreign currency translation gains and losses
are reflected in the equity section of the Company's consolidated balance sheet
within accumulated other comprehensive income as foreign currency translation
adjustments.
F-6
38
Sales and trade receivables
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Concord and Coach watches are also marketed
through a network of independent distributors. Sales are recognized upon
shipment of products to trade customers. Accounts receivable are stated net of
allowances for doubtful accounts of $2,567,000 and $2,187,000 at January 31,
1999 and 1998, respectively. One individual trade customer accounted for 10% and
12% of the Company's consolidated net sales in fiscal 1999 and 1998,
respectively. No individual trade customer accounted for 10% or more of the
Company's consolidated net sales in fiscal 1997.
The Company's concentrations of credit risk arise primarily from accounts
receivable related to trade customers during the peak selling seasons. The
Company has significant accounts receivable balances due from major department
store chains. The Company's results of operations could be materially adversely
affected in the event any of these customers or a group of these customers
defaulted on all or a significant portion of their obligations to the Company as
a result of financial difficulties.
Inventories
Inventories are valued at the lower of cost or market. The cost of domestic
finished goods inventories is determined using the first-in, first-out (FIFO)
method. The costs of finished goods inventories held by overseas subsidiaries
and all component parts inventories are determined using average cost.
Plant, property and equipment
Plant, property and equipment at January 31, at cost, consists of the following
(in thousands):
1999 1998
---- ----
Furniture and equipment $ 34,586 $ 32,516
Leasehold improvements 11,096 9,558
-------- --------
45,682 42,074
Less: accumulated depreciation (22,684) (23,165)
-------- --------
$ 22,998 $ 18,909
======== ========
Depreciation of furniture and equipment is provided using the straight-line
method based on the estimated useful lives of assets which range from three to
ten years. Leasehold improvements are amortized using the straight-line method
over the lesser of the term of the related lease or the estimated useful life of
the leasehold improvement.
Goodwill and other intangibles
Other intangible assets consist primarily of trademarks and are recorded at
cost. Trademarks are amortized over ten years, except in the case of costs
associated with the Piaget and Corum trademarks, which are amortized over the
remaining terms of the Piaget and Corum distribution agreements. Goodwill is
amortized over 40 years. The Company reviews the carrying value of goodwill and
other intangible assets for impairment whenever events or changes have occurred
that would suggest an impairment of carrying value of an asset may not be
recoverable. An impairment would be recognized when expected undiscounted future
operating cash flows are lower than the carrying value. At January
F-7
39
31, 1999 and 1998, goodwill and other intangible assets at cost were $5,448,000
and $6,425,000, respectively, and related accumulated amortization of goodwill
and other intangibles were $2,322,000 and $2,696,000, respectively.
Advertising
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Advertising expenses for fiscal
1999, 1998 and 1997, amounted to $53.8 million, $49.6 million and $38.7 million,
respectively.
Income taxes
The Company and its domestic subsidiaries file a consolidated federal income tax
return. Foreign income taxes have been provided based on the applicable tax
rates in each of the foreign countries in which the Company operates. Certain
Swiss income taxes are payable over several years; the portion of these taxes
not payable within one year is classified as noncurrent. Noncurrent foreign
income taxes included in the consolidated balance sheets at January 31, 1999 and
1998 were $2,098,000 and $1,139,000, respectively.
Earnings per share
In accordance with the provisions of SFAS No. 128, Earnings Per Share, the
Company is presenting net income per share on a 'basic' and 'diluted' basis.
Basic earnings per share is computed using weighted average shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of shares outstanding adjusted for dilutive common stock
equivalents.
The weighted average number of shares outstanding for basic earnings per share
were 12,842,000, 11,736,000, and 11,273,000 for fiscal 1999, 1998 and 1997,
respectively. For diluted earning per share, these amounts were increased by
414,000, 500,000 and 216,000 in fiscal 1999, 1998 and 1997, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plan. There were no anti-dilutive common stock equivalents in the years
presented.
Stock-based compensation
Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes, pro forma net income and earnings per share are provided as
if the fair value method had been applied.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stockholders Equity
The Company's Class A Common Stock entitles the holder thereof to 10 votes per
share on all matters submitted to a vote of shareholders. Each share of Common
Stock is entitled to one vote per share.
F-8
40
In March 1998, the Company's Board of Directors authorized the repurchase of
400,000 shares of the Company's Common Stock. As of January 31, 1999, the
Company has repurchased 142,200 shares at an aggregate cost of $2.9 million. In
March 1999, the Board approved a revised stock repurchase program for the
repurchase of shares of the Company's Common Stock up to an aggregate repurchase
price of $10.0 million, in addition to the shares previously purchased.
New Accounting Standards
As of February 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Under SFAS
130, foreign currency translation adjustments, which had been reported
separately in shareholders' equity prior to adoption, are included in other
comprehensive income. No provision has been made for taxes on foreign
subsidiaries' undistributed earnings, because it is management's intention to
permanently reinvest the earnings of foreign subsidiaries within the business of
those companies. Amounts in prior year financial statements have been
reclassified to conform to SFAS 130.
Additionally, in fiscal 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This pronouncement
establishes standards for the reporting of financial information about a
Company's operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 was effective January 31, 1999 and has been adopted for all
periods presented.
These statements affect only financial statement presentation and disclosure.
Adoption of the new Standards did not have an impact on the Company's
consolidated financial position or results of operations.
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) in June 1998, which
establishes accounting and reporting standards for derivative instruments. SFAS
133 which is effective for the first quarter of fiscal 2001, requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting practices for hedge instruments. Management of the Company is
currently analyzing the effect, if any, SFAS 133 will have on the Company's
consolidated financial position and results of operations.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
JANUARY 31,
---------------
1999 1998
---- ----
Finished goods $ 64,438 $ 61,960
Work-in-process and component parts 39,589 36,223
-------- --------
$104,027 $ 98,183
======== ========
NOTE 3 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
In order to meet the increase in working capital requirements, the Company's
revolving credit and working capital lines with its domestic bank group were
amended in July 1997 to provide for a three-year $90.0 million unsecured
revolving line of credit, pursuant to the Restated Bank Credit Agreement, and to
provide for $28.3 million and $31.6 million of uncommitted working capital lines
of credit at January 31, 1999 and 1998, respectively. These new facilities
replaced a $20.0 million revolving line of credit and $35.0 million domestic
working capital lines of credit and certain of the Company's Swiss working
capital lines. At January 31, 1999 and January 31, 1998, the
F-9
41
Company had $5 million outstanding under the Restated Bank Credit Agreement. The
Restated Bank Credit Agreement provides for various rate options including the
federal funds rate plus a fixed rate, the prime rate or a fixed rate plus the
LIBOR rate. The Company pays a facility fee on the unused portion of the credit
facility. The agreement also contains certain financial covenants based on fixed
coverage ratios, leverage ratios and restrictions which limit the Company on the
sale, transfer or distribution of corporate assets, including dividends and
limit the amount of additional debt outstanding to $20 million. The Company was
in compliance with these restrictions and covenants at January 31, 1999. The
amount of $5.0 million outstanding at January 31, 1999 and 1998 is included in
Long-term debt. The domestic unused line of credit was $111.1 million and $116.6
million at January 31, 1999 and 1998, respectively.
The Company's Swiss subsidiaries maintain secured and unsecured lines of credit
with Swiss banks, a majority of which have an unspecified duration. Available
credit under these lines totaled 8,000,000 Swiss francs and 12,870,000 Swiss
francs, with dollar equivalents of approximately $5,633,000 and $8,708,000 at
January 31, 1999 and 1998, respectively. One subsidiary's credit line contains a
covenant requiring maintenance of retained earnings above a specified minimum
level. This subsidiary was in compliance with this covenant at January 31, 1999
and 1998. There are no other restrictions on transfers in the form of dividends,
loans or advances to the Company by its foreign subsidiaries.
Outstanding borrowings against the Company's aggregate demand lines of credit
were $2,200,000 at January 31, 1999. There were no borrowings under these credit
lines at January 31, 1998. Aggregate maximum and average monthly outstanding
borrowings against the Company's lines of credit and related weighted average
interest rates during fiscal 1999, 1998 and 1997 were as follows (in thousands):
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1999 1998 1997
---- ---- ----
Maximum borrowings $70,900 $72,560 $56,143
Average monthly borrowings $41,229 $41,564 $34,302
Weighted average interest rate 6.9% 6.4% 5.9%
Weighted average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
NOTE 4 - LONG-TERM DEBT
The components of long term debt as of January 31, were as follows (in
thousands):
1999 1998
---- ----
Senior Notes $35,000 $40,000
Series A Senior Notes 25,000 --
Revolving Credit Line 5,000 5,000
------- -------
F-10
42
$65,000 $45,000
Less current portion 10,000 10,000
------- -------
Long-term debt $55,000 $35,000
======= =======
Senior Notes due January 31, 2005 (the "Senior Notes") were issued in a private
placement completed in fiscal 1994 and bear interest at 6.56% per annum, payable
semiannually on July 31 and January 31, and are subject to annual payments of
$5.0 million commencing January 31, 1998 (or next business day). Accordingly,
such amounts have been classified as a current liability in fiscal 1999 and
1998. The Company has the option to prepay amounts due to holders of the Senior
Notes at 100% of the principal plus a "make-whole" premium and accrued interest.
The Series A Senior Notes ("Series A Senior Notes") were issued on December 1,
1998 under a Note Purchase and Private Shelf Agreement and bear interest at
6.90% per annum. Interest is payable semi-annually on April 30 and October 30
and mature on October 30, 2010 and are subject to annual payments of $5.0
million commencing October 31, 2006. The Note Purchase and Private Shelf
Agreement also provides for the issuance, up to two years after the date
thereof, of senior promissory notes in the aggregate principal amount of up to
an additional $25 million with maturities up to 12 years from their date of
issuance.
The agreements governing the Senior Notes and Series A Senior Notes contain
certain restrictions and covenants which generally require the maintenance of a
minimum net worth, limit the amount of additional secured debt the Company can
incur and limit the sale, transfer or distribution of corporate assets including
dividends. The Company was in compliance with these restrictions and covenants
at January 31, 1999.
Included in Long-term debt at January 31, 1999 and 1998 was $5.0 million related
to the Company's revolving credit agreement as described in Note 3.
NOTE 5 - FOREIGN CURRENCY MANAGEMENT
A substantial portion of the Company's watches and watch components are sourced
from affiliated and nonaffiliated suppliers in Switzerland. A significant
strengthening of the Swiss franc against currencies of other countries in which
the Company conducts sales activities increases the Company's product cost. This
may adversely impact gross margins to the extent the Company is unsuccessful in
hedging against changes in the currency exchange rates or higher product costs
cannot be recovered through price increases in local markets. Significant
fluctuations in the Swiss franc - U.S. dollar exchange rate can also have a
material impact on the U.S. dollar value of the net assets of the Company's
wholly-owned Swiss subsidiaries.
The Company hedges against foreign currency exposure using forward exchange
contracts, purchased foreign currency options and open market purchases to cover
identifiable inventory purchase commitments and occasionally equity invested in
its international subsidiaries. Due to production lead times, the Company hedges
identified inventory purchase commitments generally over a period of up to
eighteen months.
The Company has established strict counterparty credit guidelines and only
enters into foreign currency transactions with financial institutions of
investment grade or better. At January 31, 1999 and 1998, the
F-11
43
Company had foreign currency trading lines totaling $165,000,000 with various
banks. To minimize the concentration of credit risk, the Company enters into
hedging transactions with each of these banks. As a result, the Company
considers the risk of counterparty default to be minimal.
The following table presents the aggregate contract amounts and fair values,
based on dealer quoted prices, of the Company's financial instruments
outstanding at January 31, 1999 and 1998. Foreign currency forward contracts
included below mature within one year. Currency Option Contracts at January 31,
1999 and 1998 generally mature after one year. All financial instruments
included below were held for hedging purposes only. Contract amounts (in
thousands) consist primarily of U.S. dollar - Swiss franc contracts.
AS OF JANUARY 31,
---------------------------------------
1999 1998
----------------- ------------------
CONTRACT FAIR CONTRACT FAIR
AMOUNTS VALUES AMOUNTS VALUES
-------- ------ -------- ------
Foreign Currency Forward Contracts $11,399 $11,511 $ 9,036 $ 9,187
Currency Option Contracts $38,625 $ 2,829 $39,486 $ 576
The contract amounts of these foreign currency forward amounts and purchased
options do not necessarily represent amounts exchanged by the parties and,
therefore, are not a direct measure of the exposure of the Company through its
use of these financial instruments. The amounts exchanged are calculated on the
basis of the contract amounts and the other terms of the financial instruments,
which relate to exchange rates. As of January 31, 1999 and 1998, the receivable
from banks recorded in current assets associated with closed contract positions
was $1,547,000 and $1,000, respectively.
The estimated fair values of these foreign currency forward amounts and
purchased options used to hedge the Company's risks will fluctuate over time.
These fair value amounts should not be viewed in isolation, but rather in
relation to the fair values of the underlying hedged transactions and
investments and the Company's overall exposure to fluctuations in foreign
exchange rates.
Gains and losses from and premiums paid for forward or option transactions that
hedge inventory purchase commitments are included in the carrying cost of
inventory and are recognized in cost of sales upon sale of the inventory. Net
deferred charges from hedging amounted to $807,000 and $375,000 at January 31,
1999 and 1998, respectively, and were included in other current assets on the
accompanying balance sheet.
NOTE 6 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The estimated fair value of the Company's Senior Notes and Series A Senior Notes
at January 31, 1999 approximated the carrying value of the notes. The difference
between market-based interest rates at the balance sheet date and the 6.56% and
6.90% fixed rates of the notes was minimal. The fair value of the Company's
other monetary assets and liabilities approximate carrying value due to the
relatively short-term nature of these items.
NOTE 7 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 1999, 1998
and 1997 consists of the following components (in thousands):
F-12
44
1999 1998 1997
---- ---- ----
Current:
U.S. Federal $ 1,500 $ 725 $ 1,667
U.S. State and Local 444 192 477
Non-U.S 1,888 1,542 860
------- ------- -------
3,832 2,459 3,004
------- ------- -------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local -- -- --
Non-U.S 1,924 1,680 845
------- ------- -------
1,924 1,680 845
------- ------- -------
Deferred:
U.S. Federal (750) -- --
U.S. State and Local -- -- --
Non-U.S 1,259 592 4
------- ------- -------
509 592 4
------- ------- -------
Provision for income taxes $ 6,265 $ 4,731 $ 3,853
======= ======= =======
Deferred income taxes reflect the tax effect of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. Deferred income taxes have been
classified as current or noncurrent on the consolidated balance sheets based on
the underlying temporary differences and the expected due dates of taxes payable
upon reversal. Significant components of the Company's deferred income tax
assets and liabilities for the fiscal year, ended January 31, 1999 and 1998
consist of the following (in thousands):
1999 DEFERRED TAX 1998 DEFERRED TAX
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
Operating loss carryforwards $ 2,400 $ -- $ 2,092 $ --
Rent accrual 417 -- 542 --
Inventory reserve 1,038 6,218 813 5,516
Receivable allowance 816 1,370 643 565
Depreciation/amortization 1,191 -- 1,043 --
Other 948 22 637 271
------- ------- ------- -------
6,810 7,610 5,770 6,352
Valuation allowance (2,660) -- (2,370) --
------- ------- ------- -------
Total $ 4,150 $ 7,610 $ 3,400 $ 6,352
======= ======= ======= =======
As of January 31, 1999, the Company had foreign net operating loss carryforwards
of approximately $5.5 million, which are available to offset taxable income in
future years. As of January 31, 1999, the Company continued to maintain a 100%
valuation allowance with respect to the tax benefit of foreign net operating
loss carryforwards and other foreign tax assets. Since the Company's tax assets
relate primarily to its former sales office in Germany, which is currently
operated by an independent distributor, the Company's assessment is that the tax
assets will not likely be
F-13
45
utilized in the foreseeable future. Management is continuing to evaluate the
appropriate level of allowance based on future operating results and changes in
circumstances.
The provision for income taxes differs from the amount determined by applying
the U.S. federal statutory rate as follows (in thousands):
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1999 1998 1997
---- ---- ----
Provision for income taxes at the U.S. statutory rate $ 9,533 $ 7,200 $ 5,441
Realization of capital and operating loss carryforwards -- (88) --
Lower effective foreign income tax rate (3,685) (2,582) (2,369)
Tax provided on repatriated earnings of foreign subsidiaries 252 262 308
State and local taxes, net of federal benefit 134 127 315
Other 31 (188) 158
------- ------- -------
$ 6,265 $ 4,731 $ 3,853
======= ======= =======
No provision has been made for taxes on foreign subsidiaries' undistributed
earnings of approximately $120,000,000 at January 31, 1999, as those earnings
are considered to be reinvested for an indefinite period. As such, no additional
taxes have been provided for on these earnings.
F-14
46
NOTE 8 - OTHER ASSETS
In fiscal 1996, the Company entered into an agreement with a trust which owns an
insurance policy issued on the lives of the Company's Chairman and Chief
Executive Officer and his spouse. Under that agreement the trust has assigned
the insurance policy to the Company as collateral to secure repayment by the
trust of interest-free loans to be made by the Company in amounts sufficient for
the trust to pay the premiums on said insurance policy ($740,000 per annum).
Under the agreement, the trust will repay the loans from the proceeds of the
policy. The Company had loaned approximately $2,361,000 and $1,620,000 under
this agreement at January 31, 1999 and 1998, respectively.
NOTE 9 - LEASES, COMMITMENTS AND CONTINGENCIES
Rent expense for equipment and distribution, factory and office facilities held
under operating leases was approximately $5,470,000, $4,680,000 and $4,270,000
in fiscal 1999, 1998 and 1997, respectively. Minimum annual rentals at January
31, 1999 under noncancelable operating leases which do not include escalations
that will be based on increases in real estate taxes and operating costs are as
follows:
YEAR ENDING JANUARY 31,
(IN THOUSANDS):
2000 $5,680
2001 5,257
2002 4,443
2003 3,027
2004 2,380
2005 and thereafter 6,339
-------
$27,126
=======
The Company has entered into capital leases to finance the cost of enhancing its
management information systems in the United States and Switzerland. The gross
value of computer equipment recorded under capital leases was $3,848,000 as of
January 31, 1999 and 1998. Accumulated depreciation of computer equipment
recorded under capital leases was $3,436,000 and $2,884,000 as of January 31,
1999 and 1998, respectively.
Future minimum lease payments for equipment under capital leases at January 31,
1999 are as follows:
YEAR ENDING JANUARY 31,
(IN THOUSANDS):
2000 $ 71
----
Total minimum lease obligations 71
Less interest (2)
----
Present value of minimum lease obligations 69
Less current portion (69)
----
Net amount due after one year $ -
====
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses. The Company believes it is
adequately insured against such losses.
F-15
47
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. Company contributions and expenses of administering the
Employee Savings Plan amounted to $430,000, $143,000 and $127,000 in fiscal
1999, 1998 and 1997, 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 1999, 1998 and 1997, the Company
recorded expenses related to the SERP of approximately $338,000, $190,000 and
$138,000, respectively, which includes costs related to phantom shares.
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 pro-rata portion
of such contribution. For fiscal 1999, the Company recorded an expense of
$209,000 related to this plan.
On September 23, 1994, the Company entered into a Death and Disability Benefit
Plan agreement with the Company's Chairman and Chief Executive Officer. Under
the terms of the agreement, in the event of the Chairman's death or disability,
the Company is required to make an annual benefit payment of approximately
$300,000 to his spouse for the lesser of ten years or her remaining lifetime.
Neither the agreement nor the benefits payable thereunder are assignable and no
benefits are payable to the estates or heirs of the Chairman or his spouse.
Results of operations include an actuarially determined charge related to this
plan of approximately $101,000, $92,000 and $85,000 for fiscal 1999, 1998 and
1997, respectively.
Effective concurrently with the consummation of the Company's public offering in
the fourth quarter of fiscal 1994, the Board of Directors and the shareholders
of the Company approved the adoption of the Movado Group, Inc. 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, the Compensation Committee of
the Board of Directors, which is comprised of the Company's 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 1,500,000 shares of Common Stock. Options granted to participants
under the Plan become exercisable in equal installments on the first through
fifth anniversaries of the date of grant 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.
F-16
48
Transactions in stock options under the Plan since fiscal 1996 are summarized as
follows:
OUTSTANDING OPTION PRICE
OPTIONS PER SHARE
January 31, 1996 578,063 $ 7.43
Options granted 429,375 10.98
Options exercised (36,750) 7.47
Options forfeited (14,813) 7.47
---------
January 31, 1997 955,875 9.02
Options granted 227,964 13.49
Options exercised (51,250) 8.43
Options forfeited (6,189) 9.69
---------
January 31, 1998 1,126,400 9.91
Options granted 282,749 25.53
Options exercised (63,250) 9.02
Options forfeited (62,289) 13.39
---------
January 31, 1999 1,283,610 $13.23
=========
Options exercisable at January 31, 1999, 1998 and 1997 were 538,216, 373,684 and
260,850, respectively.
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $13.34, $6.53 and $3.47
per share in fiscal 1999, 1998 and 1997, respectively. The following
weighted-average assumptions were used for grants in fiscal 1999, 1998 and 1997:
dividend yield of 0.3% for fiscal 1999, 0.4% for fiscal 1998 and 2.0% for fiscal
1997; expected volatility of 45% for fiscal 1999, 38% for fiscal 1998 and 26%
for fiscal 1997, risk-free interest rates of 4.7% for fiscal 1999, and 5.6% for
fiscal 1998 and 1997, and expected lives of seven years for fiscal 1999, 1998
and 1997.
The Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for the Plan.
Had compensation cost for the Company's fiscal 1999, 1998 and 1997 grants for
stock-based compensation plans been determined based on the fair value at the
grant dates and recognized ratably over the vesting period, the Company's net
income and net income per share for fiscal 1999, 1998 and 1997 would approximate
the pro forma amounts below (in thousands except per share data):
1999 1998 1997
----------------- ----------------- -----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ----- -------- ----- -------- -----
Net Income $20,973 $19,856 $15,842 $15,306 $11,692 $11,392
Net Income per share-Basic $ 1.63 $ 1.55 $ 1.35 $ 1.30 $ 1.04 $ 1.01
Net Income per share-Diluted $ 1.58 $ 1.50 $ 1.29 $ 1.25 $ 1.02 $ 0.99
The pro forma impact takes into account options granted since February 1, 1995
and is likely to increase in future years as additional options are granted and
amortized ratably over the vesting period.
F-17
49
The following table summarizes outstanding and excisable stock options as of
January 31, 1999:
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------------------------------------------------------------------------
$5.00 - $9.99 724,026 6.2 $ 8.41 463,024 $ 8.02
$10.00 - $14.99 265,934 8.0 $13.14 69,792 $13.16
$15.00 - $19.99 42,250 9.4 $16.06 1,650 $16.33
$20.00 - $24.99 31,250 9.1 $23.37 1,250 $22.87
$25.00 - $29.75 220,150 9.1 $27.24 2,500 $26.50
- ---------------------------------------------------------------------------------
$5.00 - $29.75 1,283,610 7.2 $13.23 538,216 $ 8.83
=================================================================================
NOTE 11 - SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which requires reporting certain financial information
according to the "management approach." This approach requires reporting
information regarding operating segments on the basis used internally by
management to evaluate segment performance. SFAS 131 also requires disclosures
about products and services, geographic areas and major customers.
The Company divides its business into two major geographic segments: "Domestic",
which includes the results of the Company's United States and Canadian
operations, and "International", which includes the results of all other Company
operations. The Company's international operations are principally conducted in
Europe. The Company's international assets are substantially located in Europe.
Other international operations constituted less than 10% of consolidated total
assets for all periods presented.
The Company conducts its business primarily in two operating segments:
"Wholesale" and "Other". The Company's wholesale segment includes the designing,
manufacturing and distribution of quality watches. Other includes the Company's
retail and service center operations. The accounting policies of the segments
are the same as those described in "Significant Accounting Polices". The Company
evaluates segment performance based on operating profit.
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50
OPERATING SEGMENT DATA AS OF JANUARY 31 (IN THOUSANDS):
NET SALES OPERATING PROFIT
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
------------------------------ ------------------------------
Wholesale $245,783 $210,908 $191,381 $ 34,631 $24,277 $ 20,178
Other 32,053 26,097 23,726 (1,597) 1,963 623
Elimination(1) (359) (284) (382)
------------------------------ ------------------------------
Consolidated total $277,836 $237,005 $215,107 $ 32,675 $25,956 $ 20,419
============================== ==============================
SEGMENT ASSETS
------------------------------
1999 1998 1997
------------------------------
Wholesale $287,079 $237,382 $202,267
Other 3,670 813 1,291
Corporate(2) 5,626 10,874 4,885
------------------------------
Consolidated total $296,375 $249,069 $208,443
==============================
GEOGRAPHIC SEGMENT DATA (IN THOUSANDS):
NET SALES LONG-LIVED ASSETS
------------------------------ ---------------------------
1999 1998 1997 1999 1998 1997
------------------------------ ---------------------------
Domestic $245,865 $196,064 $177,039 $17,222 $13,324 $10,280
International 199,060 152,997 123,806 5,776 5,585 4,786
Elimination(3) (167,089) (112,056) (85,738)
------------------------------ ---------------------------
Consolidated total $277,836 $237,005 $215,107 $22,998 $18,909 $15,066
============================== ===========================
INCOME BEFORE INCOME TAXES
------------------------------
1999 1998 1997
------------------------------
Domestic $982 $1,796 $3,102
International 26,615 19,061 12,825
Elimination(1) (359) (284) (382)
------------------------------
Consolidated total $27,238 $20,573 $15,545
==============================
(1) Elimination of inter-segment management fees.
(2) Corporate assets include cash.
(3) Elimination of intercompany sales between domestic and international units.
F-19
51
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 1999 and 1998 (in thousands, except per share amounts):
QUARTER ENDED
APR 30 JUL 31 OCT 31 JAN 31
---------------------------------------------
1999
Net sales $ 41,650 $68,934 $97,455 $69,797
Gross profit $ 24,714 $39,565 $57,488 $44,303
Net income $ 148 $ 3,386 $12,007 $ 5,432
PER SHARE:
Net income:
Basic $ 0.01 $ 0.26 $ 0.94 $ 0.42
Diluted $ 0.01 $ 0.25 $ 0.91 $ 0.41
1998
Net sales $ 34,918 $56,994 $84,536 $60,557
Gross profit $ 19,901 $32,226 $49,098 $38,324
Net (loss) income $ (260) $ 2,355 $ 9,308 $ 4,439
PER SHARE:
Net (loss) income:
Basic $ (0.02) $ 0.21 $ 0.81 $ 0.35
Diluted $ (0.02) $ 0.20 $ 0.77 $ 0.34
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 13 - 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,
-----------------------------
1999 1998 1997
-----------------------------
Cash paid (received) during the year for:
Interest $5,274 $ 4,580 $5,141
Income taxes $4,585 $ (26) $4,321
Non cash investing and financial activities:
Equipment acquired under capital lease $-- $-- $ 217
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52
NOTE 14 - SUBSEQUENT EVENT
On December 22, 1998, the Company entered into an agreement with VLG North
America, Inc. ("VLG") for the sale to VLG of substantially all of the assets,
properties and rights related to the Piaget business. The transaction was
completed on February 22, 1999 at a sale price of approximately $30.0 million.
The Company will report a pretax gain, representing the excess of the sale
price over the net book value of the assets sold at January 31, 1999, during the
first quarter of fiscal 2000. Accordingly, the Company recorded $22.2 million in
assets held for sale at January 31, 1999.
F-21
53
SCHEDULE II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT PROVISION
BEGINNING CHARGED TO CURRENCY NET BALANCE AT
DESCRIPTION OF YEAR OPERATIONS REVALUATION WRITE-OFFS END OF YEAR
----------- ------- ---------- ----------- ---------- -----------
Year ended January 31, 1999:
Allowance for doubtful accounts $2,187 $1,304 $ 7 $ (931) $2,567
Year ended January 31, 1998:
Allowance for doubtful accounts $3,876 $1,005 $ (38) $(2,656) $2,187
Year ended January 31, 1997:
Allowance for doubtful accounts $3,323 $1,917 $(109) $(1,255) $3,876
BALANCE AT PROVISION
BEGINNING OF (BENEFIT) BALANCE AT
YEAR CHARGED ADJUSTMENTS END OF YEAR
---- ------- ----------- -----------
Year ended January 31, 1999:
Deferred tax assets valuation allowance $2,370 $ 290 $0 $2,660
Year ended January 31, 1998:
Deferred tax assets valuation allowance $2,580 $(210) $0 $2,370
Year ended January 31, 1997:
Deferred tax assets valuation allowance $2,439 $ 141 $0 $2,580
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S-1