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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, 2000,
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 4, 2000,
the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $101,089,751. 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 4, 2000 were 9,505,298 and 3,509,733 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to Registrant's 2000
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. The Company 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 the then currently existing Class A
Common Stock was converted into 10.46 shares of new Class A Common Stock, par
value of $.01 per share (the "Class A Common Stock"). Each share of Common Stock
is entitled to one vote per share and each share of Class A Common Stock is
entitled to 10 votes per share on all matters submitted to a vote of the
shareholders. Each holder of shares of Class A Common Stock is entitled to
convert, at anytime, any and all such shares into the same number of shares of
Common Stock. Each share of Class A Common Stock is converted automatically into
Common Stock in the event that the beneficial or record ownership of such shares
of Class A Common Stock is transferred to any person, except to certain family
members or affiliated persons deemed "permitted transferees" pursuant to the
Company's Amended Restated Certificate of Incorporation. The Common Stock is
traded 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 rights, title and
interest in substantially all the assets and properties relating to the business
of selling and distributing Piaget watches and jewelry in the United States,
Canada, Central America and the Caribbean.
On January 14, 2000, the Company completed the sale of its Corum business to
Corum Reis Bannwart & Co. SA ("Corum Switzerland"). The Company sold all of its
rights, title and interest in substantially all the assets and properties
relating to the business of selling and distributing Corum watches in the United
States, Canada and the Caribbean.
With executive offices in Woodcliff Lake and Lyndhurst, New Jersey, the Company
operates wholly owned subsidiaries in Canada, Hong Kong, Japan, Singapore,
Switzerland and the United States.
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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 watches are over $13 billion
annually. Watches are produced predominantly in Switzerland, Hong Kong/China and
Japan. According to the Federation of the Swiss Watch Industry, Switzerland,
Hong Kong/China and Japan accounted for approximately 58%, 33% and 2%
respectively, of worldwide watch exports based on units in 1999. 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 Concord
Luxury $1,000 to $9,999 Concord
Premium $500 to $999 Movado and Coach
Moderate $100 to $499 ESQ and Coach
Mass Market Less than $100 -
The Company's Concord watches compete primarily in the Luxury category of the
market, although certain Concord watches compete in the Exclusive and Premium
categories. The Company's Movado watches compete primarily in the Premium
category of the market, although certain Movado watches compete in the
Exclusive, Luxury and Moderate categories. The Company's Coach brand competes in
both the Premium and Moderate categories. The ESQ line competes in the Moderate
category of the market. The Company does not currently sell watches in the Mass
Market category, but plans to enter this category in Spring 2001 with a line of
watches to be marketed under a license agreement with Tommy Hilfiger Licensing,
Inc., which was executed in June 1999.
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and may be set with precious gems, including diamonds, emeralds,
rubies and sapphires. These watches are primarily mechanical or quartz-analog
watches. Mechanical watches keep time with intricate mechanical movements
consisting of an arrangement of wheels, jewels and winding and regulating
mechanisms. Quartz-analog watches have quartz movements in which time is
precisely calibrated to the regular frequency of the vibration of quartz
crystal. Exclusive watches are manufactured almost entirely in Switzerland. In
addition to the Company's Concord and Movado 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
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of the Company's Concord and certain Movado watches, well-known brand names of
Luxury watches include Baume & Mercier, Breitling, Cartier, Ebel, Omega, Rolex
and TAG Heuer.
Premium Watches
The majority of Premium watches are quartz-analog watches. These watches
typically are made with gold finish, stainless steel or a combination of gold
finish and stainless steel. Premium watches are manufactured primarily in
Switzerland, although some are manufactured in the Far East. In addition to a
majority of the Company's Movado, Coach and certain Concord watches, well-known
brand names of Premium watches include Gucci, Rado and Raymond Weil.
Moderate Watches
Most Moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in 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 category include Anne Klein,
Bulova, Gucci, Guess, Seiko, Citizen 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 (LED's) or liquid crystal displays (LCD's). Mass
Market watches are manufactured primarily in the Far East. Movado Group, Inc.
does not currently manufacture or distribute Mass-Market watches. Well-known
brands of Mass Market watches include Casio, Citizen, Fossil, Pulsar, Seiko,
Swatch and Timex. The Company plans to enter this category in Spring 2001 with
the launch of a line of watches to be produced and sold under license from Tommy
Hilfiger Licensing, Inc.
PRODUCTS
The Company currently markets four distinctive brands of watches: Movado,
Concord, ESQ and Coach, which compete in the Exclusive, Luxury, Premium and
Moderate 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. Until the end of
fiscal 1999, the Company distributed Piaget watches. On February 22, 1999, the
Company sold its Piaget business to VLG. Until the end of fiscal 2000, the
Company distributed Corum watches. On January 14, 2000, the Company sold its
Corum business to Corum Switzerland.
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
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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
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 Corporation. 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 prices range 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, gold finish or a combination
of stainless steel and gold finish, with leather straps, stainless steel
bracelets or gold finish bracelets. The ESQ brand consists of sport and fashion
watches with suggested retail prices ranging from $125 to $495, with features
and styles comparable to more expensive watches.
Other Revenue
During fiscal 2000, sales of other products and services totaled approximately
$39.1 million, or approximately 13% of consolidated net sales. Approximately $33
million of this other revenue is derived from the Company's retail operations
which consist of 22 outlet stores and 5 Movado Boutiques. The outlet stores sell
discontinued models and factory seconds of all of the Company's watch brands.
The Movado Boutiques sell selected models of Movado watches as well as
proprietary jewelry, home and personal accessory lines which were launched in
1998. The jewelry, home and personal accessory lines are sold exclusively in the
Movado Boutiques. Other revenue also includes the Company's after sales service
and watch repair operations.
WARRANTY AND REPAIR
The Company has service facilities around the world including 8 Company-owned
service facilities and approximately 120 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.
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Historically, the Company has retained significant inventories of component
parts to facilitate after sales service of its watches for an extended period of
time after the discontinuance of such watches from its core range line. The
Company decided that it would no longer retain this level of non-core component
inventories and took steps to begin assembling some of these components into
finished watches for resale through liquidation channels and its outlet stores.
In connection with this assembly process, the Company determined that assembly
of a certain portion of the non-core components would require significant
additional investment in logistics, material and labor to produce watches and
that the return on this investment would not be adequate to warrant the effort.
Accordingly, the Company recorded a fourth quarter charge to reduce this portion
of its non-core components to estimated net realizable value and will pursue
sale or disposal of these components.
ADVERTISING
Advertising is important to the successful marketing of the Company's watches.
Hence, the Company devotes significant resources to advertising. Since 1972 and
until fiscal year 2000, the Company maintained its own in-house advertising
department. In fiscal 2000, the Company restructured its advertising department
to focus primarily on the implementation and management of global marketing and
advertising programs and shifted the creative development of advertising
campaigns to an outside agency with no increase in cost. Advertising
expenditures totaled approximately 21.0%, 19.4% and 20.9% of net sales in fiscal
2000, 1999 and 1998, 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 and is developed by targeting consumers
with particular demographic characteristics appropriate to the image and price
range of the brand. Advertisements are placed predominately in magazines and
other print media, but are also created for television campaigns, catalogues and
promotional materials.
SALES AND DISTRIBUTION
Overview
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 and the Far East.
Domestic Wholesale
The Company sells all of its brands 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.
Sales to trade customers in the United States and Canada are made directly by
the Company's sales force of approximately 100 employees who typically
specialize in a particular brand. A majority of the sales force is compensated
solely on the basis of commissions, which are determined as a percentage of
sales. One trade customer accounted for 13%, 10% and 12% of the Company's net
sales for fiscal 2000, 1999 and 1998, respectively. At January 31, 2000 and
1999, the same trade customer accounted for 18% and 15% of consolidated trade
receivables, respectively.
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International Wholesale
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 45 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
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 product line extensions in 5 company-operated Movado Boutiques. The
Company also operates 22 outlet stores which sell discontinued and sample
merchandise and factory seconds, providing the Company with an organized and
efficient method of reducing inventory without competing directly with trade
customers.
BACKLOG
At March 31, 2000, the Company had unfilled customer orders of approximately
$49.8 million, compared to approximately $28.7 million at March 31, 1999 (based
on currency exchange rates in effect on March 31, 2000). The Company believes
the backlog is affected by a variety of factors, including seasonality and the
scheduling of the manufacture and shipment of products. The March 31, 2000
backlog includes orders resulting from the Basel Trade Fair, which were not
included in the March 31, 1999 backlog, due to the timing of the date of the
fair. Excluding orders resulting from the Basel Trade Fair, the backlog at March
31, 2000 was $35.4 million, as compared to $28.7 million at March 31, 1999.
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
Concord watches are generally assembled at the Company's manufacturing facility
in Bienne, Switzerland with some off-site assembly performed principally by
independent Swiss watchmakers. Movado watches are assembled primarily in
Switzerland by independent third party subcontract assemblers. Certain lower
price point Movado models are assembled by sub-contractors in the Far East.
Movado and Concord watches are assembled using Swiss movements and other
components obtained from third-party suppliers. Coach watches are assembled in
Switzerland by independent assemblers using Swiss movements and other components
obtained from third-party suppliers in Switzerland and elsewhere. ESQ watches
are assembled 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 and Switzerland. The Company does not
have long-term supply contracts with any of its component parts suppliers.
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COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of the 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 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, PATENTS AND LICENSING AGREEMENTS
Movado Group, Inc. owns the trademarks MOVADO(R), CONCORD(R), VIZIO(R), as well
as trademarks for the Movado Museum dial design, 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, 2003 but contains options for renewal at the Company's discretion through
December 31, 2018. The Company licenses the trademark COACH(R) and related
trademarks on an exclusive basis for use in connection with the manufacture,
distribution, advertising and sale of watches pursuant to an agreement with
Coach, a division of Sara Lee Corporation ("Coach License Agreement"). Subject
to meeting certain performance goals, the Coach License Agreement expires in
March, 2008.
The Company has also entered into a license agreement with Tommy Hilfiger
Licensing, Inc. ("THLI"), the initial term of which expires December 31, 2005
but which can be extended at the request of the Company through December 31,
2010 if it is in compliance with all material terms of the agreement. Under the
agreement with THLI, the Company has been granted the exclusive license to use
the trademark TOMMY HILFIGER(R) and related trademarks in connection with the
manufacture of watches worldwide and in connection with the marketing,
advertising, sale and distribution of watches at wholesale (and at retail
through its outlet stores) in the United States, Canada, the Caribbean, and in
duty free and U.S. military shops worldwide.
In connection with the sale of the Piaget business to VLG, and the Corum
business to Corum Switzerland, the Company assigned the trademark PIAGET(R) for
watches and jewelry and certain related trademarks in the United States to VLG
and assigned the trademark CORUM(R) and certain related trademarks in the United
States to Corum Switzerland.
The Company also owns and has pending applications for a number of design
patents in the United States and internationally for various watch designs, as
well as designs of watch cases and bracelets.
The Company actively seeks to protect and enforce its intellectual property
rights by working with industry associations, anti-counterfeiting organizations,
private investigators and law enforcement authorities, including the United
States Customs Service and, when necessary, suing infringers of its trademarks
and patents. Consequently, the Company is involved from time to time in
litigation or other proceedings to determine the enforceability, scope and
validity of these rights. With respect to the trademarks MOVADO(R) and
CONCORD(R) and certain other related trademarks, the Company has received
exclusion orders that prohibit the importation of counterfeit goods or goods
bearing confusingly similar trademarks into the United States. In accordance
with Customs regulations, these exclusion orders, however, cannot cover the
importation of gray-
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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, 2000, the Company has approximately 930 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 and the Far East and its international assets are substantially located
in Europe. Other international operations constituted less than 10% of
consolidated total assets for all periods presented.
The Company's domestic sales are traditionally greater during the Christmas and
holiday season and are significantly more seasonal than its international sales.
Consequentially, 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 60.3%, 60.2% and 61.2% of the Company's net sales for the fiscal
years ended January 31, 2000, 1999 and 1998, 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 design,
manufacture and distribution of quality watches. The Company's other segment
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 Watch assembly and distribution 57,000 May 2002
Bienne, Switzerland Corporate functions, watch sales, 52,000 January 2007
distribution, assembly and repair
Lyndhurst, New Jersey Executive offices 28,000 December 2001
Woodcliff Lake, New Jersey Executive offices 19,400 March 2001
Markham, Canada Office and distribution 11,200 June 2007
Hackensack, New Jersey Warehouse 6,600 July 2004
New York, New York Watch repair and Public Relations 4,900 April 2008
Office
Hong Kong Watch sales, distribution and repair 5,800 June 2001
Los Angles, California Watch repair 3,000 December 2002
Miami, Florida Watch repair 2,600 October 2001
Grenchen, Switzerland Watch sales 2,600 March 2005
Toronto, Canada Office 1,600 June 2000
Japan Watch sales 1,500 Month to Month
Singapore Watch sales, distribution and repair 1,100 August 2001
The Company leases retail space averaging 1,300 square feet per store with
leases expiring from November 2000 to October 2006 for the operation of the
Company's 22 outlet stores. The Company also leases retail space for the
operation of each of its five Movado Boutiques averaging 1,800 square feet per
store with leases expiring from January 2005 to August 2008.
The Company also owns approximately 2,400 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions. The Company is currently subletting this facility.
The Company is currently exploring available alternatives in connection with the
presently scheduled expiration in March 2001 of its Woodcliff Lake, New Jersey
lease and the December 2001 and May 2002 scheduled expiration of its facilities
in Lyndhurst, New Jersey. The Company is currently exploring available
alternatives for relocation of its U.S. distribution operations currently
conducted in Lyndhurst, New Jersey.
The Company believes that its existing facilities are adequate for its current
operations but that it will require some expanded distribution and warehouse
space in order to handle reasonably foreseeable sales growth.
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Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the normal
course of its business. The Company believes that none of these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's operating results, liquidity or its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company during the
fourth quarter of fiscal 2000.
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PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of March 24, 2000, there were 47 holders of record of the Class A Common
Stock and, the Company estimates, approximately 2,100 beneficial owners of the
Common Stock represented by 403 holders of record. The Common Stock is traded on
the NASDAQ National Market under the symbol "MOVA" and on March 24, 2000, the
closing price of the Common Stock was $ 10.00. The quarterly high and low
closing prices for the fiscal years ended January 31, 2000 and 1999 were as
follows:
FISCAL 2000 FISCAL 1999
----------- -----------
QUARTER ENDED LOW HIGH LOW HIGH
- ------------- --- ---- --- ----
April 30 $20.75 $25.75 $21.00 $30.44
July 31 $22.88 $27.75 $24.00 $30.25
October 31 $21.63 $27.13 $15.13 $24.75
January 31 $18.63 $25.38 $17.63 $26.63
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 the fiscal year ended January 31, 2000, the Board of Directors approved
four $0.025 per share quarterly cash dividends to shareholders of record of the
Common Stock and Class A Common Stock. During the fiscal year ended January 31,
1999, 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. Amounts
are in thousands except per share amounts.
FISCAL YEAR ENDED JANUARY 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Net Sales $295,067 $277,836 $237,005 $215,107 $185,867
-------- -------- -------- -------- --------
Cost of sales 126,667 111,766 97,456 95,031 83,502
Selling, general and administrative 152,631 133,395 113,593 99,657 84,315
-------- -------- -------- -------- --------
Total expenses 279,298 245,161 211,049 194,688 167,817
-------- -------- -------- -------- --------
Operating income 15,769 32,675 25,956 20,419 18,050
Gain on disposition of business 4,752
Net interest expense 5,372 5,437 5,383 4,874 4,450
-------- -------- -------- -------- --------
Income before income taxes 15,149 27,238 20,573 15,545 13,600
Provision for income taxes 1,428 6,265 4,731 3,853 3,876
-------- -------- -------- -------- --------
Net income (1) $ 13,721 $ 20,973 $ 15,842 $ 11,692 $ 9,724
======== ======== ======== ======== ========
Net income per share-Basic $ 1.10 $ 1.63 $ 1.35 $ 1.04 $ 0.86
Net income per share-Diluted (1) $ 1.06 $ 1.58 $ 1.29 $ 1.02 $ 0.86
Basic shares outstanding 12,527 12,842 11,736 11,273 11,263
Diluted shares outstanding 12,890 13,256 12,236 11,489 11,327
Cash dividends declared per share $ 0.100 $ 0.080 $ 0.080 $ 0.064 $ 0.053
BALANCE SHEET DATA (END OF PERIOD):
Working capital $158,730 $191,033 $157,103 $126,690 $132,679
Total assets 267,186 296,375 249,069 208,443 200,380
Long-term debt 45,000 55,000 35,000 40,000 40,000
Shareholders' equity 147,815 162,608 145,533 103,870 104,841
(1) Includes $8.3 million pretax or $0.46 per share after tax one-time charge
and $4.8 million pretax or $0.28 per share after tax gain from the sale of the
Company's Piaget business. Excluding these items, net income was $15.9 million
or $1.24 per share on a diluted basis.
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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, 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
Wholesale 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 and effectiveness of advertising
and marketing expenditures, and product pricing decisions. Fiscal 2000 sales
were also impacted by the sale of the Piaget and Corum businesses.
Approximately 20% of the Company's total sales are from international markets
and therefore reported sales are affected by foreign exchange rates. Significant
portions of the Company's international sales are billed in Swiss francs and
translated to U.S. dollars at average exchange rates for financial reporting
purposes.
The Company's business is very seasonal. There are two major selling seasons in
the Company's domestic markets: the Spring season, which includes school
graduations and several holidays, and, most importantly, the Christmas and
holiday season. Major selling seasons in certain international markets center
around significant local holidays that occur in late Winter or early Spring.
These markets are a less significant portion of the Company's business and
therefore, their impact is far less than that of the selling seasons in North
America.
During fiscal 2000, the Company completed the sale of both the Piaget and Corum
distribution businesses and substantially all the assets associated with these
businesses. Prior to the sale, the Company had been the exclusive distributor of
these brands in North America.The Company completed the sale of its Piaget
business to VLG in February 1999 and sold its Corum business to Corum
Switzerland in January 2000. The disposition of these brands negatively impacted
sales in fiscal 2000.
Retail Sales. The Company's retail operations consist of 22 outlet stores
located throughout the U.S. and five full-priced Movado Boutiques. The Company
does not have any overseas retail operations.
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The significant factors that influence annual sales volumes in the Company's
retail operations are similar to those that influence domestic wholesale
operations. In addition, many of the Company's outlet stores are located near
vacation destinations, and therefore, the seasonality of these stores is driven
by the peak tourist season associated with these locations.
Gross Margins. The Company's overall gross margins are primarily affected by
four major factors: sales mix, product pricing strategy, manufacturing costs and
the U.S. dollar/Swiss franc exchange rate.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Luxury and premium retail price point
models generally earn lower gross margins than more popular moderate price
models. Gross margins in the Company's outlet business are lower than those of
the wholesale business since the outlets primarily sell seconds and discontinued
models that generally command lower retail prices. Gross margins in the full
priced Movado Boutiques exceed those of the wholesale business since the Company
earns full channel margins from manufacture to point of sale in this business.
All of the Company's brands compete with a number of other brands on the basis
of not only styling but also wholesale and retail price. The Company's ability
to improve margins through price increases is, therefore, to some extent,
constrained by competitors' actions. In addition, the Company's wholesale
operation periodically engages in liquidation sales of discontinued models at
reduced prices. The level of these sales in a particular period can also have a
significant impact on the Company's gross margins.
Manufacturing costs of the Company's brands consist primarily of component
costs, internal and subcontractor assembly costs and unit overhead costs
associated with the Company's supply chain operations in the U.S., Switzerland
and the Far East. The Company seeks to control and reduce component and
subcontractor labor costs through a combination of negotiations with existing
suppliers and alternative sourcing. The Company's supply chain operations
consist of logistics and minor assembly in the U.S. and Switzerland and a
product sourcing operation in the Far East. The Company has historically
controlled the level of overhead costs and maintained flexibility in its cost
structure by outsourcing a significant portion of its component and assembly
requirements and expects to extend this strategy over the near term.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's 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 and therefore gross margins 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 markets around the world
in which the Company sells its products.
Selling expenses consist primarily of sales commissions, sales force 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 rents.
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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 general corporate expenses.
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 all of the Company's watch brands, both
domestically and internationally; additions to the Company's sales force;
salaries and rents associated with additional outlet stores and the Movado
Boutiques; the addition of staff to support distribution, inventory management
and customer service requirements coincident with growth of the Company's
business; and general and administrative expenses, such as employee benefits and
the development of the Company's information systems infrastructure.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
Net Sales. Comparative net sales by product class were as follows:
FISCAL 2000 FISCAL 1999 FISCAL 1998
(IN THOUSANDS)
Concord, Movado, Coach and ESQ:
Domestic $ 200,480 $180,909 $153,835
International 56,185 50,940 40,028
Piaget and Corum (726) 13,934 17,045
Other 39,128 32,053 26,097
--------- -------- --------
Net Sales $ 295,067 $277,836 $237,005
========= ======== ========
Total net sales increased 6.2% for the year ended January 31, 2000. Sales from
ongoing operations, excluding the disposed Piaget and Corum distribution
businesses, increased 13.4% to $295.8 million from $260.9 million in the prior
year. Domestic sales of the Company's core Concord, Movado, ESQ and Coach brands
increased 10.8%. All of the Company's core brands experienced high single or low
double-digit percentage growth rates in the domestic market. International sales
of the Company's core brands increased 10.3% led by the continuing international
rollout of the Coach watch brand in the Far East, which resulted in a near
doubling of Coach watch international sales in fiscal 2000. International sales
of the Concord brand also increased approximately 10%.
Other net sales, which includes the Company's outlet stores, Movado Boutiques
and after sales service business, increased 22% over the prior year. This growth
was primarily attributable to double digit comparable store sales gains in both
the outlets and the Boutiques and new store openings in both of these retail
venues, offset by a decrease in after sales service revenues as a result of the
sale of the Piaget business.
Gross Margins. The gross margin for fiscal 2000 was 57.1% as compared to 59.8%
for fiscal 1999. The fiscal 2000 gross margin included a one-time charge of $5.0
million to write down non-core component inventories. The Company's non-core
component inventory is the result of stockpiling component parts necessary to
support after sales service of core product, which is subsequently discontinued
due to new product model introductions.
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During fiscal 1999, the Company initiated a project to convert such of its
non-core component inventory that is no longer necessary for after sales service
into finished watches for sale through liquidation channels or the Company's
outlet division. While this program was successful in converting a portion of
such total non-core component inventory into saleable finished watches in fiscal
2000 and the Company expects to continue this program, there will inevitably be
some residual non-core component inventory that will not be cost effective to
attempt to assemble into finished product.
Fiscal 2000 gross margins also reflect a $2.3 million negative adjustment to
inventory following physical counts conducted at year-end. The Company believes
the inventory adjustment was caused by issues associated with the existing
distribution environment and implementation of new information systems in the
U.S. in fiscal 2000. The Company's U.S. sales have increased significantly in
recent years resulting in a corresponding increase in unit volumes processed by
and warehoused in the existing U.S. distribution facility which operates in
converted office space located in Lyndhurst, NJ. Managing the unit volume growth
was also complicated by the implementation in 1999 of new information systems
requiring distribution personnel to adjust to new technology, procedures and
practices in conducting product shipment and warehouse operations. The Company
has transitioned to the new information system environment and will address the
physical space constraints issue by relocating its distribution operations to
more traditional warehouse space (see Operating Expenses below). The new larger
space will permit the Company to employ more effective and efficient product
handling and storage practices.
Excluding the charges described above, gross margins for fiscal 2000 were 59.5%
of sales compared to 59.8% in fiscal 1999. This decrease is primarily
attributable to fourth quarter sales mix, which included a higher level of lower
margin liquidation sales and outlet sales than the previous year. This was due,
in part, to underproduction of higher margin core range products and
substitution of lower margin non-core items to meet demand for product. Higher
levels of liquidation and outlet sales also reflected the Company's commitment
to reduce working capital employed in the business.
The Company's gross margin increased from 58.9% in fiscal 1998 to 59.8% in
fiscal 1999, 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 2000 were $152.6 million or
51.7% of net sales as compared to $133.4 million or 48.0% of net sales in fiscal
1999. Fiscal 2000 operating expenses include a $1.0 million fourth quarter
nonrecurring charge associated with the planned relocation of the Company's U.S.
distribution operations. This charge includes a write-off of assets that are not
transferable to the new facility as well as lease termination costs associated
with exiting the Company's existing facility.
Excluding this charge, operating expenses were $151.6 million or 51.4% of sales
compared to $133.4 million or 48.0% of sales in the prior year. The increase in
operating expenses of approximately 14% or $18 million relates to several areas,
including (1) advertising and marketing expenses, which increased $8.1 million
or 15%; (2) selling expenses, which increased $4.5 million or 12%; (3)
distribution costs, which increased $1.3 million or 21%, and (4) general and
administrative expenses, which increased $4.3 million or 12%.
The increase in advertising costs related to increased media and cooperative
advertising programs with retailers in support of the Company's brands, higher
advertising production costs due to the launch of new media campaigns for both
the Concord and ESQ brands, increased spending on point of sale support material
such as displays and product brochures, and the development of a new advertising
and marketing management team.
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Selling expenses increased in both the Company's wholesale and retail
businesses. Selling expenses in the wholesale business primarily reflect higher
levels of sales commissions due to sales increases across the Company's brands.
Headcount increases in the Coach and ESQ brands to support growth also resulted
in increased compensation and travel expenses. Selling expenses for fiscal 2000
also reflect the first year of amortization of the Company's major trade show
exhibition facility constructed for use at the annual Basel International Watch
and Jewelry Show.
Increases in selling expenses associated with the Company's retail operations
relate primarily to the addition of four new outlets and one Movado Boutique in
fiscal 2000 as well as the annualization of costs of stores opened during fiscal
1999.
Distribution expenses are largely variable in nature and these expenses grew
proportionately with increases in unit volume shipments.
Increases in general and administrative expenses were primarily in the area of
human resources and information systems. The Company experienced increases in
employee benefit costs associated with a growing workforce as well as recruiting
fees, specifically associated with the hiring of two senior executives in the
fourth quarter. Information systems related expenses increased as the Company
began amortizing its significant investment in its new U.S. core system
effective with the March 1999 implementation date and incurred Year 2000
remediation expenses relative to systems in the Switzerland and its other
international subsidiaries. The Company also added information systems support
personnel in fiscal 2000.
Interest Expense. Net interest expense in fiscal 2000 was consistent with the
previous year amounting to $5.4 million. Gross interest expense increased by
$676,000 or 12.4% due primarily to the first full year of interest expense on
$25 million of 6.9% Series A Senior Notes which were issued in December 1998.
These increases were offset largely by interest income from the investment of
the $28.4 million proceeds from the Company's sale of the Piaget business in
February 1999.
Net interest expense for fiscal 1999 and 1998 was $5.4 million and consisted
primarily of interest on the Company's 6.56% Senior Notes, 6.90% Series A Senior
Notes, revolving lines of credit and borrowings against working capital lines.
Income Taxes. The Company's income tax provision amounted to $1.4 million, $6.3
million, and $4.7 million for fiscal 2000, 1999 and 1998, respectively, or 9.4%
of pretax income for fiscal 2000 and 23.0% for fiscal 1999 and 1998. The 9.4%
effective rate for fiscal 2000 reflects a tax benefit as a result of a current
year net operating loss in the Company's U.S. operations. Also, 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 near term future
effective tax rate will increase to the 20% to 28% range reflecting the
Company's current expectation that domestic earnings will gradually increase as
a percentage of the overall earnings mix. However, there can be no assurance of
this result 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.
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LIQUIDITY AND FINANCIAL POSITION
Cash flows from operating activities in fiscal 2000 were $28.3 million compared
to a use of cash in operations of $9.1 million in fiscal 1999 and $6.1 million
in fiscal 1998. The improvement in operating cash flows in fiscal 2000 resulted
from a reduction in working capital, in particular, inventories and accounts
receivable. Operating cash flows in fiscal 1999 and 1998 were negative due to
increases in both inventory and accounts receivable.
The Company generated net positive cash flows from investing activities in
fiscal 2000 of $17.5 million primarily as a result of the sale of its Piaget
business to VLG for $28.4 million in cash. This compared to $10.9 million and
$9.1 million cash utilized in investing activities in fiscal 1999 and 1998,
respectively, primarily for capital expenditures.
Capital expenditures amounted to $10.1 million in fiscal 2000 and related
primarily to management information systems projects, the addition of four new
outlet stores and one Movado Boutique, and construction of a major tradeshow
exhibition facility used annually at the Basel International Watch and Jewelry
show. The Company's capital expenditures for fiscal 1999 and fiscal 1998
amounted to $11.7 million and $7.6 million, respectively. Expenditures in fiscal
1999 were primarily related to planned expenditures for 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. 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 annual capital expenditures in
the near term will approximate the levels experienced in fiscal 2000 and 1999
and will relate primarily to relocating its U.S. distribution operations,
various information systems projects and leasehold improvements associated with
additional outlet stores.
Cash used in financing activities amounted to $22.1 million in fiscal 2000. This
compares to $18.6 million and $21.3 million of cash provided by financing
activities in fiscal 1999 and 1998, respectively.
At January 31, 2000 the Company had two series of Senior Notes outstanding.
Senior Notes due January 31, 2005 were originally issued in a private placement
completed in fiscal 1994. These notes have required annual principal payments of
$5.0 million since January 1998. The Company repaid $10 million and $5 million
in principal amount of these notes in fiscal 2000 and fiscal 1999, respectively.
At January 31, 2000, $25 million in principal amount of these notes remained
outstanding.
During fiscal 1999, the Company issued $25 million of Series A Senior Notes
under a Note Purchase and Private Shelf Agreement dated November 30, 1998. This
agreement allows for the issuance for up to two years from 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 original date of issuance.
The $25 million Series A Senior Notes issued in fiscal 1999 bear interest at
6.90% and mature on October 30, 2010. The Notes are subject to annual repayments
of $5.0 million commencing October 31, 2006.
The Company finances its seasonal working capital requirements through
borrowings under its bank lines of credit. The Company borrows from its bank
group under both a $90 million unsecured revolving line and $31.6 million of
annually renewable working capital lines of credit. Borrowings under the
revolving line are governed by a three-year agreement among the Company and its
bank group. The agreement was originally dated July 23, 1997 and was last
amended in March 2000 to revise certain financial covenants and substantially
increase the Company's ability to purchase shares under its ongoing share
repurchase program. The Company
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20
is presently in discussions with its bank group regarding a renewal of the
agreement and expects to complete the renewal by May 2000. Due to significant
increases in market interest spreads since the July 23, 1997 agreement was
completed, the Company expects that interest spreads contained in the new
revolving credit agreement will be significantly higher than those contained in
the current agreement. The Company is also renegotiating its annually renewable
working capital lines coincident with renewal of the revolving credit facility
since these lines are with three members of the Company's bank group that are
party to the revolving credit facility. At January 31, 2000, the Company had
$13.5 million of outstanding borrowings under its bank lines as compared to $7.2
million at January 31, 1999.
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program
throughout fiscal 2000. Current year purchases under the repurchase program
amounted to $17.6 million. As of the date of the filing of this report on Form
10-K, the Company had remaining $10.2 million against an aggregate authorization
of $30 million.
During fiscal 1999, the Company repurchased $2.9 million of stock under a
400,000 share program that had been authorized by the Board of Directors in
March 1998. This program had been put in place to mitigate the dilutive impact
of employee compensation programs.
Cash dividends in fiscal 2000 amounted to $1.2 million compared to $1.0 million
in fiscal 1999 and $0.9 million in fiscal 1998.
Cash and cash equivalents at January 31, 2000 amounted to $26.6 million compared
to $5.6 million at January 31, 1999. Net debt to total capitalization at January
31, 2000 was 20% as compared to 27% at January 31, 1999.
In summary, the Company made significant progress in fiscal 2000 improving its
liquidity by selling underperforming assets (Piaget and Corum) and significantly
reducing working capital committed to the business per sales dollar generated,
primarily through the success of its inventory reduction programs. The Company
plans to continue to focus on improving its cash flows in fiscal 2001.
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 to be
recorded on the balance sheet at fair value and established new accounting
practices for hedge instruments. SFAS 133 was originally scheduled for
implementation for fiscal years ending after June 15, 1999, however, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137 which defers the effective date of SFAS 133 for one year. For
the Company, SFAS 133 will be effective for the first quarter of fiscal 2002.
Management is currently analyzing the effect that SFAS 133 is expected to 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. Under
the hedging program, the Company purchases various financial instruments,
predominately forward and option contracts. Gains and losses on financial
instruments resulting from this hedging activity are offset by the
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21
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, 2000, the Company's hedging portfolio consisted of
various dates ranging through January 29, 2001 with an average forward rate of
1.5063 Swiss francs per dollar. The Company has $147.0 million of option
contracts with a maturity date of February 15, 2001. The option contracts have
an average strike price of 1.5621 Swiss francs per dollar. As of January 31,
2000, the carrying value of the options amounted to approximately $2.7 million,
which represents the unamortized premium of the option and a fair market value
of approximately $1.6 million.
In addition, the Company has certain debt obligations with variable interest
rates, which are based on LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The difference between the market
based interest rates at January 31, 2000 and the fixed rates was minimal.
YEAR 2000
The Company initiated a project in 1997 (the "Project") to improve and
standardize data and computer technology and consequentially all obsolete
hardware and software either have been replaced with systems that are Year 2000
compliant or, in the case of certain business applications software in
Switzerland, Canada and the Far East, have been made Year 2000 compliant pending
replacement. As part of the Project, new client/server core business
applications software supporting manufacturing, distribution, sales, accounting
and after-sales service was implemented in the U.S. in March 1999. The Company
expects to complete the implementation of this software in Switzerland during
fiscal 2001 and in Canada and the Far East thereafter.
The Company monitored the Year 2000 system status of customers and vendors
involved with electronic data interchange ("EDI") with our systems by the use of
questionnaires.
As of the date of filing of this Annual Report on Form 10-K, all of the
Company's mission-critical systems have been successfully tested for Year 2000
compliance, and the Company has not experienced any significant Year 2000
problems with any of those systems or with the systems of any suppliers or
customers with whom the Company is involved in EDI. Although the Company has not
experienced any significant Year 2000 problems to date, it plans to continue to
monitor the situation closely.
While we cannot be sure that we have been completely successful in our efforts
to address the Year 2000 issue or that problems could not still arise that would
cause a material adverse effect on our operating results or financial condition,
we believe that our most reasonably likely worst-case scenario would relate to
problems with the systems of third parties rather that with our internal
systems. We are limited in our efforts to address the Year 2000 issue as it
relates to third parties, however, and rely solely on the assurances of these
third parties as to their Year 2000 preparedness.
Costs associated with systems replacement and modification to become Year 2000
compliant under the contingency plan (outside of the Project) were $0.3 million.
The estimated cost of the Project is approximately $12.0 million. The total
amount expended on the Project through January 31, 2000 was approximately $10.2
million. 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.
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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 for the fiscal years ended
January 31, 2000, 1999 and 1998 F-2
Consolidated Balance Sheets at January 31, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 31, 2000, 1999 and
1998 F-5
Notes to Consolidated Financial Statements F-6 to F-18
Valuation and Qualifying Accounts and Reserves II S-1
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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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 2000 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 2000 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 2000 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 2000 annual meeting of shareholders and is incorporated herein
by reference.
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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 21 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 26 through 31 of this report.
(b) Reports on Form 8-K
None.
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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 19, 2000 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 19, 2000 /s/ Gedalio Grinberg
--------------------
Gedalio Grinberg
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: April 19, 2000 /s/ Efraim Grinberg
-------------------
Efraim Grinberg
President
Dated: April 19, 2000 /s/ Richard J. Cote
-------------------
Richard J. Cote
Executive Vice President of Finance and
Administration
Dated: April 19, 2000 /s/ Kenneth J. Adams
--------------------
Kenneth J. Adams
Senior Vice President and Chief Financial Officer
(Chief Financial Officer)
Dated: April 19, 2000 /s/ Glenn E. Tynan
------------------
Glenn E. Tynan
Vice President and Corporate Controller
(Principal Accounting Officer)
Dated: April 19, 2000 /s/ Margaret Hayes Adame
------------------------
Margaret Hayes Adame
Director
24
26
Dated: April 19, 2000 /s/ Donald Oresman
------------------
Donald Oresman
Director
Dated: April 19, 2000 /s/ Leonard L. Silverstein
--------------------------
Leonard L. Silverstein
Director
Dated: April 19, 2000 /s/ Alan H. Howard
------------------
Alan H. Howard
Director
25
27
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 July 31,
1999.
4.1 Specimen Common Stock Certificate. Incorporated herein by reference
to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for
the year ended January 31, 1998.
4.2 Note Agreement, dated as of November 9, 1993, by and between the
Registrant and The Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31,
1993.
4.3 Note Purchase and Private Shelf Agreement dated as of November 30,
1998 between the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended January
31, 1999.
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.
26
28
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
10.3 Agreement, dated January 1, 1992, between The Hearst Corporation and
the Registrant, as amended on January 17, 1992. Incorporated herein
by reference to Exhibit 10.8 filed with Company's Registration
Statement on Form S-1 (Registration No. 33-666000).
10.4 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.
10.5 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 10.10
filed with Company's Registration Statement on Form S-1
(Registration No. 33-666000).
10.6 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.**
10.7 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.
10.8 Line of Credit Letter Agreement dated February 25, 1998 between the
Registrant and Marine Midland Bank, N.A Incorporated herein by
reference to Exhibit 10.14 to Registrant's Annual Report on Form
10-K for the year Ended January 31, 1998.
10.9 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).
27
29
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
10.10 Letter Agreement dated November 25, 1992 between Concord Watch
Company, S.A. and Swiss Bank Corporation (English Translation).
Incorporated herein by reference to Exhibit 10.19 filed with
Company's Registration Statement on Form S-1 (Registration No.
33-666000).
10.11 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 10.20 filed with
Company's Registration Statement on Form S-1 (Registration No.
33-666000).
10.12 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.
10.13 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.
10.14 Death and Disability Benefit Plan Agreement dated September 23, 1994
between the Registrant and Gedalio Grinberg, Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1994.**
10.15 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.**
10.16 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.**
28
30
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 Line of Credit Letter Agreement dated August 5, 1997 between the
Registrant and The Bank of New York, 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.
10.23 Second Amendment dated as of September 1, 1999 to the December 1,
1996 license agreement between Sara Lee Corporation and Registrant.
Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999.
29
31
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
10.24 License Agreement entered into as of June 3, 1999 between Tommy
Hilfiger Licensing, Inc. and Registrant. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1999.
10.25 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.
10.26 Amendment dated as of June 10, 1998 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.
10.27 Amendment and waiver dated as of November 17, 1998 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.
10.28 Amendment dated as of March 17, 2000 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.
10.29 Amendment dated as of March 24, 2000 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.
10.30 Second Amendment of Lease dated as of December 23, 1998 between
Meadowlands Associates, as landlord and the Registrant, as tenant,
further amending lease dated as of October 31, 1986
10.31 Lease termination agreement dated as of February 1, 2000 between
PW/MS OP SUB I, LLC, successor in interest to Belle Mead
Corporation, landlord, and Movado Group, Inc., tenant, terminating
lease dated as of April 15, 1996, as amended, respecting premises
located at 1200 Wall Street West, Lyndhurst, New Jersey.
30
32
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
10.32 Sublease made as of October 26, 1999 between Merck-Medco Managed
Care, L.L.C. as sublessor and Registrant as Sublessee for premises
at 300 Tice Boulevard, Woodcliff Lake, New Jersey.
10.33 Third Amendment of lease dated as of February 17, 2000 between
Meadowlands Associates, as landlord, and the Registrant, as tenant,
further amending lease dated as of October 31, 1986.
10.34 License Agreement entered into as of October 31, 1999 by and Between
Movado Corporation, Movado Watch Company S.A. and Lantis Eyewear
Corporation.*
10.35 Severance Agreement dated December 15, 1999, and entered into
December 16, 1999 between the Registrant and Richard J. Cote.**
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
* Confidential portions of Exhibit 10.34 have been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule
24b-2 of the Securities Exchange Act of 1934.
** Constitutes a compensatory plan or arrangement.
31
33
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) on page 23 presents fairly, in all material
respects, the financial position of Movado Group, Inc. and its subsidiaries at
January 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2000, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index appearing under Item 14(a)(2) on page 23 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
400 Campus Drive
Florham Park, New Jersey
April 11, 2000
F-1
34
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------------
2000 1999 1998
--------- --------- ---------
Net sales $ 295,067 $ 277,836 $ 237,005
--------- --------- ---------
Costs and expenses:
Cost of sales 126,667 111,766 97,456
Selling, general and administrative 152,631 133,395 113,593
--------- --------- ---------
279,298 245,161 211,049
--------- --------- ---------
Operating income 15,769 32,675 25,956
Net interest expense 5,372 5,437 5,383
Gain on disposition of business 4,752 -- --
--------- --------- ---------
Income before income taxes 15,149 27,238 20,573
Provision for income taxes 1,428 6,265 4,731
--------- --------- ---------
Net income $ 13,721 $ 20,973 $ 15,842
========= ========= =========
Net income per share - Basic $ 1.10 $ 1.63 $ 1.35
========= ========= =========
Net income per share - Diluted $ 1.06 $ 1.58 $ 1.29
========= ========= =========
COMPREHENSIVE INCOME:
Net Income $ 13,721 $ 20,973 $ 15,842
Other comprehensive income, net of tax:
Foreign currency translation adjustment (10,456) (869) (3,281)
--------- --------- ---------
Comprehensive income $ 3,265 $ 20,104 $ 12,561
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
35
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 31,
---------------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash $ 26,615 $ 5,626
Trade receivables, net 103,795 109,102
Inventories, net 77,075 104,027
Assets held for sale -- 22,187
Other 19,341 21,489
--------- ---------
Total current assets 226,826 262,431
Plant, property and equipment, net 27,593 22,998
Other assets 12,767 10,946
--------- ---------
$ 267,186 $ 296,375
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 13,500 $ 2,200
Current portion of long-term debt 5,000 10,000
Accounts payable 17,562 28,999
Accrued liabilities 26,602 20,020
Deferred and current taxes payable 5,432 10,179
--------- ---------
Total current liabilities 68,096 71,398
--------- ---------
Long-term debt 45,000 55,000
Deferred and noncurrent foreign income taxes 5,105 5,728
Other liabilities 1,170 1,641
--------- ---------
Total liabilities 119,371 133,767
--------- ---------
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; 9,496,529 and 9,419,781 shares issued, respectively 95 94
Class A Common Stock, $0.01 par value, 10,000,000 shares
authorized; 3,509,733 and 3,530,922 shares issued and
outstanding, respectively 35 35
Capital in excess of par value 66,113 65,332
Retained earnings 118,615 106,141
Accumulated other comprehensive income (16,462) (6,006)
Treasury stock, 920,690 and 159,019 shares at cost, respectively (20,581) (2,988)
--------- ---------
Total shareholders' equity 147,815 162,608
--------- ---------
Commitments and contingencies (Note 9)
$ 267,186 $ 296,375
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
36
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $ 13,721 $ 20,973 $ 15,842
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 5,189 5,380 4,121
Deferred and noncurrent foreign income taxes (1,636) 1,764 483
Provision for losses on accounts receivable 1,077 1,304 1,005
Provision for losses on inventory 7,263 -- --
Gain on disposition of business (4,752) -- --
Changes in current assets and liabilities:
Trade receivables 2,469 (24,693) (18,699)
Inventories 14,609 (19,925) (12,988)
Other current assets (6,269) (1,265) (2,565)
Accounts payable (7,004) 4,108 263
Accrued liabilities 4,464 3,352 3,841
Deferred and current taxes payable (2,532) 229 3,481
Decrease (increase) in other noncurrent assets 2,305 (314) (592)
Decrease in other noncurrent liabilities (629) (29) (307)
-------- -------- --------
Net cash provided by (used in) operating activities 28,275 (9,116) (6,115)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (10,125) (11,707) (7,638)
Proceeds from disposition of business 28,409 -- --
Goodwill, trademarks and other intangibles (755) (1,835) (1,421)
Sale of subsidiary -- 2,646 --
-------- -------- --------
Net cash provided by (used in) investing activities 17,529 (10,896) (9,059)
-------- -------- --------
Cash flows from financing activities:
Repayment of Senior Notes (10,000) (5,000) --
Proceeds from issuance of Common Stock, net of underwriting discounts -- -- 29,609
and offering expenses
Proceeds from issuance of Series A Senior Notes -- 25,000 --
Net proceeds from (payment of) current bank borrowings 6,300 2,200 (7,570)
Principal payments under capital leases (69) (387) (275)
Stock options exercised 499 627 431
Dividends paid (1,247) (1,026) (939)
Purchase of treasury stock (17,593) (2,860) --
-------- -------- --------
Net cash (used in) provided by financing activities (22,110) 18,554 21,256
-------- -------- --------
Effect of exchange rate changes on cash (2,705) (3,790) (93)
-------- -------- --------
Net increase (decrease) in cash 20,989 (5,248) 5,989
Cash at beginning of year 5,626 10,874 4,885
-------- -------- --------
Cash at end of year $ 26,615 $ 5,626 $ 10,874
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
37
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Class A Capital in
Preferred Common Common Excess of Retained
Stock Stock Stock Par Value Earnings
--- --------- --------- --------- ---------
Balance, January 31, 1997 $-- $ 65 $ 48 $ 34,450 $ 71,291
Net income 15,842
Dividends ($0.08 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 adjustment
Conversion of Class A Common
Stock to Common Stock 13 (12)
--- --------- --------- --------- ---------
Balance, January 31, 1998 -- 93 36 64,475 86,194
Net income 20,973
Dividends ($0.08 per share) (1,026)
Stock options exercised, net of tax
benefit 857
Common stock repurchased
Foreign currency translation adjustment
Conversion of Class A Common
Stock to Common Stock 1 (1)
--- --------- --------- --------- ---------
Balance, January 31, 1999 -- 94 35 65,332 106,141
Net income 13,721
Dividends ($0.10 per share) (1,247)
Stock options exercised, net of tax
benefit 781
Common stock repurchased
Foreign currency translation adjustment
Conversion of Class A Common
Stock to Common Stock 1
--- --------- --------- --------- ---------
Balance, January 31, 2000 $-- $ 95 $ 35 $ 66,113 $ 118,615
=== ========= ========= ========= =========
Accumulated
Other Comp-
Rehensive Treasury
Income Stock
--------- ---------
Balance, January 31, 1997 ($ 1,856) ($ 128)
Net income
Dividends ($0.08 per share)
Stock options exercised
Proceeds from issuance of common
stock, net of underwriting discounts
and offering expenses
Foreign currency translation adjustment (3,281)
Conversion of Class A Common
Stock to Common Stock
--------- ---------
Balance, January 31, 1998 (5,137) (128)
Net income
Dividends ($0.08 per share)
Stock options exercised, net of tax
benefit
Common stock repurchased (2,860)
Foreign currency Translation adjustment (869)
Conversion of Class A Common
Stock to Common Stock
--------- ---------
Balance, January 31, 1999 (6,006) (2,988)
Net income
Dividends ($0.10 per share)
Stock options exercised, net of tax
benefit
Common stock repurchased (17,593)
Foreign currency translation adjustment (10,456)
Conversion of Class A Common
Stock to Common Stock
--------- ---------
Balance, January 31, 2000 ($ 16,462) ($ 20,581)
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
38
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 2000, the Company marketed five
distinctive brands of watches: Movado, Concord, ESQ, Coach and Corum, which
compete in most segments of the watch market.
The Company designs and manufactures Concord and Movado watches primarily
through its subsidiaries in Switzerland, as well as in the United States, for
sale throughout the world. 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 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, tabletop 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. In fiscal 2000, 1999 and 1998 the Company
recorded foreign currency transaction gains of $0.8 million, $3.6 million and
$5.1 million, respectively. Foreign currency translation gains and losses are
reflected in the equity section of the Company's consolidated balance sheet in
accumulated other comprehensive income.
Sales and trade receivables
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado and Concord 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 $3,604,000 and $2,567,000 at January 31, 2000 and 1999,
respectively. One individual
F-6
39
trade customer accounted for 13%, 10% and 12% of the Company's consolidated net
sales in fiscal 2000, 1999 and 1998, respectively. At January 31, 2000 and 1999,
one trade customer accounted for 18% and 15% of consolidated trade receivables,
respectively.
The Company's concentrations of credit risk arise primarily from accounts
receivable related to trade customers during the peak selling seasons. The
Company has significant accounts receivable balances due from major department
store chains. The Company's results of operations could be materially adversely
affected in the event any of these customers or a group of these customers
defaulted on all or a significant portion of their obligations to the Company as
a result of financial difficulties.
Inventories
Inventories are valued at the lower of cost or market. The cost of domestic
finished goods inventories is determined primarily using the first-in, first-out
(FIFO) method. The cost 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, consisted of the following
(in thousands):
2000 1999
-------- --------
Furniture and equipment $ 40,820 $ 34,586
Leasehold improvements 11,026 11,096
-------- --------
51,846 45,682
Less: accumulated depreciation (24,253) (22,684)
-------- --------
$ 27,593 $ 22,998
======== ========
Depreciation of furniture and equipment is provided using the straight-line
method based on the estimated useful lives of assets, which range from three to
ten years. Leasehold improvements are amortized using the straight-line method
over the lesser of the term of the lease or the estimated useful life of the
leasehold improvement.
Goodwill and other intangibles
Other intangible assets consist primarily of trademarks and are recorded at
cost. Trademarks are generally amortized over ten years. Goodwill is amortized
over 40 years. The Company continually reviews goodwill and other intangible
assets to evaluate whether events or changes have occurred that would suggest an
impairment of carrying value. An impairment would be recognized when expected
undiscounted future operating cash flows are lower than the carrying value. At
January 31, 2000 and 1999, goodwill and other intangible assets at cost were
$4,358,000 and $5,448,000, respectively, and related accumulated amortization of
goodwill and other intangibles was $1,068,000 and $2,322,000, respectively.
F-7
40
Advertising
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Advertising expenses for fiscal
2000, 1999 and 1998, amounted to $61.8 million, $53.8 million and $49.6 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, 2000 and
1999 were $1,905,000 and $2,098,000, respectively.
Earnings per share
The Company presents net income per share on a 'basic' and 'diluted' basis.
Basic earnings per share is computed using weighted average shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of shares outstanding adjusted for dilutive common stock
equivalents.
The weighted average number of shares outstanding for basic earnings per share
were 12,527,000, 12,842,000, and 11,736,000 for fiscal 2000, 1999 and 1998,
respectively. For diluted earnings per share, these amounts were increased by
363,000, 414,000 and 500,000 in fiscal 2000, 1999 and 1998, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans. 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
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program
throughout fiscal 2000. Current year purchases under the repurchase program
amounted to $17.6 million. As of the date of the filing of this report on Form
10-K, the Company had remaining $10.2 million against an aggregate authorization
of $30 million.
F-8
41
During fiscal 1999, the Company repurchased $2.9 million of stock under a
400,000 share repurchase program that had been authorized by the Board of
Directors in March 1998. This program had been put in place to mitigate the
dilutive impact of employee compensation programs.
New 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 to be
recorded on the balance sheet at fair value and established new accounting
practices for hedge instruments. SFAS 133 was originally scheduled for
implementation for fiscal years ending after June 15, 2000, however, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137 which defers the effective date of SFAS 133 for one year. For
the Company, SFAS 133 will be effective for the first quarter of fiscal 2002.
Management is currently analyzing the effect that SFAS 133 is expected to have
on the Company's statement of position and results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the fiscal 2000
presentation.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
JANUARY 31,
------------------------
2000 1999
-------- --------
Finished goods $ 50,565 $ 64,438
Work-in-process and component parts 26,510 39,589
-------- --------
$ 77,075 $104,027
======== ========
NOTE 3 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
The Company's revolving credit and working capital lines with its domestic bank
groups 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 $31.6 million and $28.3 million of uncommitted
working capital lines of credit at January 31, 2000 and 1999, respectively. 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 debt outstanding. The Company amended the agreement in March
2000 to revise certain financial covenants and substantially increase the
Company's ability to repurchase stock. The Company was in compliance with these
restrictions and covenants at January 31, 2000. At January 31, 1999, the Company
included $5.0 million in long-term debt. The domestic unused line of credit was
$108.1 million and $111.1 million at January 31, 2000 and January 31, 1999,
respectively.
F-9
42
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 10.0 million Swiss francs and 8.0 million Swiss
francs, with dollar equivalents of approximately $6.0 million and $5.6 million
at January 31, 2000 and 1999, respectively, of which a maximum of $5 million can
be drawn. 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, 2000 and 1999. 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 $13.5 million at January 31, 2000 and $7.2 million at January 31, 1999.
Aggregate maximum and average monthly outstanding borrowings against the
Company's lines of credit and related weighted average interest rates during
fiscal 2000, 1999 and 1998 were as follows (in thousands):
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------
2000 1999 1998
------- ------- -------
Maximum borrowings $61,900 $70,900 $72,560
Average monthly borrowings $40,290 $41,229 $41,564
Weighted average interest rate 6.3% 6.9% 6.4%
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):
2000 1999
------- -------
Senior Notes $25,000 $35,000
Series A Senior Notes 25,000 25,000
Revolving Credit Line -- 5,000
------- -------
$50,000 $65,000
Less current portion 5,000 10,000
------- -------
Long-term debt $45,000 $55,000
======= =======
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 2000 and
1999. The Company has the option to prepay amounts due to holders of the Senior
Notes at 100% of the principal plus a "make-whole" premium and accrued interest.
The Series A Senior Notes ("Series A Senior Notes") were issued on December 1,
1998 under a Note Purchase and Private Shelf Agreement and bear interest at
6.90% per annum. Interest is payable semiannually on April 30 and October 30.
These notes mature on October 30, 2010 and are subject to annual payments of
$5.0 million commencing on October 31, 2006. The Note Purchase and Private Shelf
Agreement also provides for the
F-10
43
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 original 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, 2000.
Included in long-term debt at January 31, 1999 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 only 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.
The Company has established strict counterparty credit guidelines and only
enters into foreign currency transactions with financial institutions of
investment grade or better. To minimize the concentration of credit risk, the
Company enters into hedging transactions with each of these financial
institutions. 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, 2000 and 1999. Foreign currency forward contracts
included below mature within one year. Currency option contracts at January 31,
2000 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,
------------------------------------------------------------------
2000 1999
--------------------------- --------------------------
CONTRACT FAIR CONTRACT FAIR
AMOUNTS VALUES AMOUNTS VALUES
------- ------ ------- ------
Foreign Currency Forward Contracts $47,287 $42,732 $11,399 $11,511
Purchased Options $94,105 $1,638 $38,625 $2,829
F-11
44
The contract amounts of these foreign currency forward contracts 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, 2000 and 1999, the (payable
from) receivable to banks recorded in current assets associated with closed
contract positions was ($1,795,000) and $1,547,000, 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 $2.7 million and $3.1 million at
January 31, 2000 and 1999, respectively. These amounts were included in other
current assets on the accompanying balance sheets.
NOTE 6 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 6.56% Senior Notes and 6.9% Series A Senior
Notes approximate 96% and 90% of the carrying value of the notes, respectively,
as of January 31, 2000. The fair value was calculated based upon the present
value of future cash flows discounted at estimated borrowing rates for similar
debt instruments or upon estimated prices based on current yields for debt
issues of similar quality and terms.
F-12
45
NOTE 7 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2000, 1999
and 1998 consists of the following components (in thousands):
2000 1999 1998
------- ------- -------
Current:
U.S. Federal -- $ 1,500 $ 725
U.S. State and Local 11 444 192
Non-U.S 1,043 1,888 1,542
------- ------- -------
1,054 3,832 2,459
------- ------- -------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local -- -- --
Non-U.S 1,785 1,924 1,680
------- ------- -------
1,785 1,924 1,680
------- ------- -------
Deferred:
U.S. Federal (1,518) (750) --
U.S. State and Local -- -- --
Non-U.S 107 1,259 592
------- ------- -------
(1,411) 509 592
------- ------- -------
Provision for income taxes $ 1,428 $ 6,265 $ 4,731
======= ======= =======
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, 2000 and 1999
consist of the following (in thousands):
2000 DEFERRED TAX 1999 DEFERRED TAX
--------------------------- ---------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Operating loss carryforwards $ 2,706 $ -- $ 2,400 $ --
Rent accrual 291 -- 417 --
Inventory reserve 894 5,340 1,038 6,218
Receivable allowance 1,054 1,278 816 1,370
Depreciation/amortization 1,089 -- 1,191 --
Other 1,355 -- 948 22
------- ------- ------- -------
7,389 6,618 6,810 7,610
Valuation allowance (1,439) -- (2,660) --
------- ------- ------- -------
Total $ 5,950 $ 6,618 $ 4,150 $ 7,610
======= ======= ======= =======
F-13
46
As of January 31, 2000, the Company had domestic and foreign net operating loss
carryforwards of approximately $3.5 million and $3.9 million, respectively,
which are available to offset taxable income in future years. The domestic
losses begin to expire in fiscal 2020. As of January 31, 2000, the Company
maintained a valuation allowance with respect to the tax benefit of foreign net
operating loss carryforwards and other tax assets. Since the Company's foreign
deferred tax assets relate primarily to its former sales office in Germany,
which is currently operated by an independent distributor, the Company's
assessment is that a portion of the foreign deferred tax assets will not likely
be utilized in the foreseeable future. Management is continuing to evaluate the
appropriate level of allowance based on future operating results and changes in
circumstances.
The provision for income taxes differs from the amount determined by applying
the U.S. federal statutory rate as follows (in thousands):
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------------
2000 1999 1998
------- ------- -------
Provision for income taxes at the U.S. statutory rate $ 5,311 $ 9,533 $ 7,200
Realization of capital and operating loss carryforwards -- -- (88)
Lower effective foreign income tax rate (3,362) (3,685) (2,582)
Change in valuation allowance (1,221) -- --
Tax provided on repatriated earnings of foreign
subsidiaries 238 252 262
State and local taxes, net of federal benefit 8 134 127
Other 454 31 (188)
------- ------- -------
$ 1,428 $ 6,265 $ 4,731
======= ======= =======
In fiscal 2000 the Company recognized a tax benefit of $1,221 from realization
of certain foreign net operating loss carryforwards.
No provision has been made for taxes on foreign subsidiaries' undistributed
earnings of approximately $121 million at January 31, 2000, as those earnings
are considered to be reinvested for an indefinite period.
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 (approximately $740,000
per annum). Under the agreement, the trust will repay the loans from the
proceeds of the policy. The Company had loaned approximately $3.1 million and
$2.4 million under this agreement at January 31, 2000 and 1999, respectively.
F-14
47
NOTE 9 - LEASES, COMMITMENTS AND CONTINGENCIES
Rent expense for equipment and distribution, factory and office facilities under
operating leases was approximately $6.6 million, $5.5 million and $4.7 million
in fiscal 2000, 1999 and 1998, respectively. Minimum annual rentals at January
31, 2000 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):
2001 $6,264
2002 5,632
2003 3,383
2004 2,485
2005 2,351
2006 and thereafter 4,172
-------
$24,287
=======
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses. The Company believes it is
adequately insured against such losses.
NOTE 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 $556,000, $430,000 and $143,000 in fiscal
2000, 1999 and 1998, 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 2000, 1999 and 1998, the Company
recorded an expense related to the SERP of approximately $640,000, $338,000 and
$190,000, respectively.
During fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not
in the SERP. Under the terms of this stock bonus plan, the Company contributes a
discretionary amount to the trust established under the plan. Each plan
participant vests after five years in 100% of their respective pro-rata portion
of such contribution. For fiscal 2000 and 1999 the Company recorded an expense
of $159,000 and $209,000, respectively, related to this plan.
On September 23, 1994, the Company entered into a Death and Disability Benefit
Plan agreement with the Company's Chairman 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 $110,000, $101,000 and $92,000 for fiscal 2000, 1999 and
1998, respectively.
F-15
48
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 2,000,000 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.
Transactions in stock options under the Plan since fiscal 1997 are summarized as
follows:
WEIGHTED
OUTSTANDING AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
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 granted 436,550 21.56
Options exercised (54,266) 9.21
Options forfeited (109,477) 16.51
---------
January 31, 2000 1,556,417 $15.65
---------
Options exercisable at January 31, 2000, 1999 and 1998 were 701,814, 538,216 and
373,684, respectively.
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $11.18, $13.34 and $6.53
per share in fiscal 2000, 1999 and 1998, respectively. The following
weighted-average assumptions were used for grants in 2000, 1999 and 1998:
dividend yield of 0.45% for fiscal 2000, 0.3% for fiscal 1999 and 0.4% for
fiscal 1998; expected volatility of 40% for fiscal 2000, 45% for fiscal 1999 and
38% for fiscal 1998, risk-free interest rates of 6.75% for fiscal 2000, 4.7% for
fiscal 1999 and 5.6% for fiscal 1998, and expected lives of seven years for
fiscal 2000, 1999 and 1998.
F-16
49
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 2000, 1999 and 1998 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 2000, 1999 and 1998 would approximate
the pro forma amounts below (in thousands except per share data):
2000 1999 1998
---- ---- ----
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net Income $ 13,721 $ 12,216 $ 20,973 $ 19,856 $ 15,842 $ 15,306
Net Income per share-Basic $ 1.10 $ 0.98 $ 1.63 $ 1.55 $ 1.35 $ 1.30
Net Income per share-Diluted $ 1.06 $ 0.95 $ 1.58 $ 1.50 $ 1.29 $ 1.25
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.
The following table summarizes outstanding and exercisable stock options as of
January 31, 2000:
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED-
REMAINING -AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------------------------------------------------
$ 5.00 - $ 9.99 641,734 5.2 $8.48 524,730 $8.17
$10.00 - $14.99 215,133 7.0 $13.16 106,374 $13.16
$15.00 - $19.99 34,000 8.4 $16.08 8,300 $16.12
$20.00 - $24.99 471,000 9.4 $22.49 14,300 $23.08
$25.00 - $29.75 194,550 8.0 $27.35 48,110 $27.26
- -------------------------------------------------------------------------------------------------------------------------
$ 5.00 - $29.75 1,556,417 7.1 $15.65 701,814 $10.63
- -------------------------------------------------------------------------------------------------------------------------
NOTE 11 - SEGMENT INFORMATION
In fiscal 1999, 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 evaluated 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 result 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.
F-17
50
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 Policies". The
Company evaluates segment performance based on operating profit.
OPERATING SEGMENT DATA AS OF AND FOR THE FISCAL YEAR ENDED JANUARY 31 (IN
THOUSANDS):
NET SALES OPERATING PROFIT (LOSS)
-------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------- -------- --------
Wholesale $256,081 $245,783 $210,908 $14,187 $ 34,631 $ 24,277
Other 38,986 32,053 26,097 127 (1,597) 1,963
Elimination (1) -- -- -- 1,455 (359) (284)
-------- -------- -------- ------- -------- --------
Consolidated total $295,067 $277,836 $237,005 $15,769 $ 32,675 $ 25,956
======== ======== ======== ======= ======== ========
TOTAL ASSETS
---------------------------------------
2000 1999 1998
-------- -------- --------
Wholesale $214,769 $261,395 $221,634
Other 25,802 29,354 16,561
Corporate (2) 26,615 5,626 10,874
-------- -------- --------
Consolidated total $267,186 $296,375 $249,069
======== ======== ========
GEOGRAPHIC SEGMENT DATA AS OF AND FOR THE FISCAL YEAR ENDED JANUARY 31 (IN
THOUSANDS):
NET SALES LONG-LIVED ASSETS
------------------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
--------- --------- --------- ------- ------- -------
Domestic $ 267,160 $ 245,865 $ 196,064 $16,534 $17,222 $13,324
International 209,217 199,060 152,997 11,059 5,776 5,585
Elimination (3) (181,310) (167,089) (112,056) -- -- --
--------- --------- --------- ------- ------- -------
Consolidated total $ 295,067 $ 277,836 $ 237,005 $27,593 $22,998 $18,909
========= ========= ========= ======= ======= =======
INCOME (LOSS) BEFORE TAXES
----------------------------------------
2000 1999 1998
-------- -------- --------
Domestic $ (8,987) $ 2,096 $ 1,796
International 23,780 25,501 19,061
Elimination (3) 356 (359) (284)
-------- -------- --------
Consolidated total $ 15,149 $ 27,238 $ 20,573
======== ======== ========
(1) Elimination of inter-segment management fees.
(2) Corporate assets include cash.
(3) Elimination of intercompany sales between domestic and international
units.
F-18
51
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2000 and 1999 (in thousands, except per share amounts):
QUARTER ENDED
APRIL JULY OCTOBER JANUARY
30 31 31 31
------- ------- ------- --------
FISCAL 2000
Net sales $47,653 $69,538 $99,032 $ 78,844
Gross profit $29,035 $41,221 $61,641 $ 36,503
Net income (loss) $ 4,312 $ 4,422 $13,767 ($ 8,780)
PER SHARE:
Net income (loss):
Basic $ 0.34 $ 0.35 $ 1.10 ($ 0.70)
Diluted $ 0.33 $ 0.34 $ 1.07 ($ 0.68)
FISCAL 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
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,
--------------------------------
2000 1999 1998
------ ------ ------
Cash paid during the year for:
Interest $7,559 $5,274 $4,580
Income taxes $7,079 $4,585 $ 565
F-19
52
SCHEDULE II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT PROVISION
BEGINNING CHARGED TO CURRENCY NET BALANCE AT END
DESCRIPTION OF YEAR OPERATIONS REVALUATION WRITE-OFFS OF YEAR
----------- ------- ---------- ----------- ---------- -------
Year ended January 31, 2000:
Allowance for doubtful accounts $2,567 $2,553 ($21) ($1,495) $3,604
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
BALANCE AT PROVISION
BEGINNING CHARGED TO CURRENCY BALANCE AT END
OF YEAR OPERATIONS REVALUATION ADJUST. OF YEAR
------ ------- ----- ------- ------
Year ended January 31, 2000:
Inventory reserve $3,308 $5,113 ($436) ($ 950) $7,035
Year ended January 31, 1999:
Inventory reserve $2,853 $ 400 $ 55 $3,308
Year ended January 31, 1998:
Inventory reserve $2,755 $ 500 ($ 56) ($ 346) $2,853
BALANCE AT PROVISION
BEGINNING OF (BENEFIT) BALANCE AT
YEAR CHARGED ADJUSTMENTS END OF YEAR
---- ------- ----------- -----------
Year ended January 31, 2000:
Deferred tax assets valuation allowance $2,660 ($1,221) $0 $1,439
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
S-1