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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, 2003,
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.)
650 FROM ROAD, 07652
PARAMUS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 267-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT;
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Based on the closing sales price of the Common Stock as of July 31, 2002,
the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $171,969,093. 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 7, 2003 were 8,525,080 and 3,400,906, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to registrant's 2003
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
Movado Group, Inc. is a designer, manufacturer and distributor of
quality watches with prominent brands sold in almost every major
category comprising the watch industry. Unless the context indicates
otherwise, all references to the "Company" or "MGI" include Movado
Group, Inc. and its subsidiaries. The Company was incorporated in New
York in 1967 under the name North American Watch Corporation to
acquire Piaget Watch Corporation and Corum Watch Corporation, which
had been, respectively, the exclusive importers and distributors of
Piaget and Corum watches in the United States since the 1950's. The
Company sold its Piaget and Corum distribution businesses in fiscal
2000 and changed the Company's name to Movado Group, Inc. in 1996.
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. The Movado
brand was established in 1881 and has since become the flagship brand of the
Company.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share (the "Common Stock"). On October 21,
1997, the Company completed a secondary stock offering in which 1,500,000 shares
of Common Stock were issued. On May 21, 2001, the Company moved from the NASDAQ
National Market to The New York Stock Exchange ("NYSE"). The Common Stock is
traded on the NYSE under the trading symbol MOV.
The Company operates internationally through wholly-owned subsidiaries in
Switzerland, Hong Kong, Canada, Japan and Singapore. Its executive offices are
located in Paramus, New Jersey.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and Asia.
According to the Federation of the Swiss Watch Industry, Swiss finished watch
production was 28.3 million units or approximately 10.6 billion Swiss francs in
2002, an increase of 0.4% or 44 million Swiss francs above 2001 production. The
Company's Swiss watch brands include Movado, Concord, ESQ and Coach.
1
The Company divides the watch market into six principal categories as set forth
in the following table:
Primary Category of
Suggested Retail Movado Group, Inc.
Market Category Price Range Brands
--------------- ----------- ------
Exclusive $10,000 and over Concord
Luxury $1,000 to $9,999 Concord and Movado
Premium $500 to $999 Movado
Moderate $125 to $499 ESQ, Coach and Movado
Fashion Watch Market $55 to $124 Tommy Hilfiger
Mass Market Less than $55 -
The Company's Concord watches compete primarily in the Luxury category of the
market, although certain Concord watches compete in the Exclusive category. The
Company's Movado watches compete primarily in the Premium category of the
market, although certain Movado watches compete in the Luxury and Moderate
categories. The Company's Coach and ESQ brands compete in the Moderate category.
The Company entered the Fashion Watch Market category in March 2001 with the
launch of the Tommy Hilfiger line of watches manufactured, distributed and
marketed under a license agreement with Tommy Hilfiger Licensing, Inc. The
Company does not sell watches in the Mass Market category.
Exclusive Watches
Exclusive watches are usually made of precious metals, including 18 karat gold
or platinum, and may be set with precious gems, including diamonds, emeralds,
rubies and sapphires. These watches are primarily mechanical or quartz-analog
watches. Mechanical watches keep time with intricate mechanical movements
consisting of an arrangement of wheels, jewels and winding and regulating
mechanisms. Quartz-analog watches have quartz movements in which time is
precisely calibrated to the regular frequency of the vibration of quartz
crystal. Exclusive watches are manufactured almost entirely in Switzerland. In
addition to the Company's Concord watches, well-known brand names of Exclusive
watches include Audemars Piguet, Patek Philippe, Piaget and Vacheron Constantin.
Luxury Watches
Luxury watches are either quartz-analog watches or mechanical watches. These
watches typically are made with either 14 or 18 karat gold, stainless steel or a
combination of gold and stainless steel, and are occasionally set with precious
gems. Luxury watches are primarily manufactured in Switzerland. In addition to a
majority of the Company's Concord and 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 Asia. In addition to a majority
of the Company's Movado watches, well-known brand names of Premium watches
include Gucci, Rado and Raymond Weil.
2
Moderate Watches
Most Moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in Asia and Switzerland. These watches typically are made
with gold finish, stainless steel, brass or a combination of gold finish and
stainless steel. In addition to the Company's Movado, ESQ and Coach brands,
well-known brand names of watches in the Moderate category include Anne Klein,
Bulova, Citizen, Gucci, Guess, Seiko and Wittnauer.
Fashion Watch Market Watches
Watches comprising the Fashion Watch Market are primarily quartz-analog watches
but also include some digital watches. Digital watches, unlike quartz-analog
watches, have no moving parts. Instead, time is kept by electronic microchips
and is displayed as discrete Arabic digits illuminated on the watch face by
light emitting diodes (LED's) or liquid crystal displays (LCD's). Watches in the
Fashion Watch Market category are generally made with stainless steel, gold
finish, brass and/or plastic and are manufactured primarily in Asia. Fashion
Watch Market watches are based on designs and use features that attempt to
reflect current and emerging fashion trends. Many are sold under licensed
designer and brand names that are well-known principally in the apparel
industry. In addition to the Company's Tommy Hilfiger brand, other well-known
brands of Fashion Watch Market watches include Anne Klein II, DKNY, Fossil,
Guess, Kenneth Cole and Swatch.
Mass Market Watches
Mass Market watches typically consist of digital watches and analog watches made
from stainless steel, brass and/or plastic and are manufactured in Asia.
Well-known brands include Casio, Citizen, Pulsar, Seiko and Timex.
PRODUCTS
During fiscal 2003, the Company marketed five distinctive brands of watches:
Movado, Concord, ESQ, Coach and Tommy Hilfiger, which compete in the Exclusive,
Luxury, Premium, Moderate and Fashion Watch Market categories. The Company
designs, manufactures and contracts for the assembly of Movado and Concord
watches primarily in Switzerland for sale throughout the world. ESQ and Tommy
Hilfiger watches are manufactured to the Company's specifications by independent
contractors located in Asia. ESQ watches are presently sold primarily in North
America and the Caribbean. Tommy Hilfiger watches are presently sold in North
America, the Caribbean, Latin America, South America and Europe. Coach watches
are assembled in Switzerland by independent contractors and sold primarily in
North America, the Caribbean and Asia.
Movado
Founded in 1881 in La Chaux-de-Fonds, Switzerland, the Movado brand today
includes a line of watches based on the design of the world famous Movado Museum
watch and a number of other watch collections with more traditional dial
designs. The design for the Movado Museum watch was the first watch design
chosen by the Museum of Modern Art for its permanent collection. It has since
been honored by 10 other museums throughout the world. All Movado watches have
Swiss movements and are made with 14 or 18 karat gold, 18 karat gold finish,
stainless steel or a combination of 18 karat gold finish and stainless steel.
The majority of Movado watches have suggested retail prices between $395 and
$5,000.
3
Concord
Concord was founded in 1908 in Bienne, Switzerland. All Concord watches have
Swiss movements and are made with solid 18 karat or 14 karat gold, stainless
steel or a combination of 18 karat gold and stainless steel. The majority of
Concord watches have suggested retail prices between $1,000 and $15,000.
Coach
During fiscal 1999, the Company introduced Coach watches under an exclusive
license with Coach, Inc. All Coach watches contain Swiss movements and are made
with stainless steel, gold finish or a combination of stainless steel and gold
finish with leather straps, stainless steel bracelets or gold finish bracelets.
The suggested retail prices range from $125 to $495.
ESQ
ESQ was launched in the second half of fiscal 1993 under an exclusive license
agreement with The Hearst Corporation. All ESQ watches contain Swiss movements
and are made with stainless steel, gold finish or a combination of stainless
steel and gold finish, with leather straps, stainless steel bracelets or gold
finish bracelets. The ESQ brand consists of sport and fashion watches with
suggested retail prices ranging from $120 to $495, with features and styles
comparable to more expensive watches.
Tommy Hilfiger
The Company launched Tommy Hilfiger watches in March 2001, under an exclusive
agreement with Tommy Hilfiger Licensing, Inc., marketed under the TOMMY
HILFIGER(R) and TOMMY(R) labels. Tommy Hilfiger watches feature quartz, digital
or analog-digital movements, with stainless steel, titanium, aluminum,
silver-tone, two-tone or gold-tone cases and bracelets, and leather, fabric,
plastic or rubber straps. The line includes fashion and sport models with
suggested retail prices from $55 to $155.
Retail Operations
The Company operates in two retail sectors, the luxury boutique market and the
outlet market. During fiscal 2003, retail sales were $53.9 million or 18.0% of
consolidated net sales. At January 31, 2003, the Company's retail operations
consisted of 10 Movado Boutiques and 26 outlet stores. Two additional Movado
Boutiques opened in February 2003. The Movado Boutiques, the first of which
opened in 1998, sell selected models of Movado watches as well as proprietary
jewelry, tabletop and accessories. The jewelry, tabletop and accessory products
are sold exclusively in the Movado Boutiques. The outlet stores sell
discontinued models and factory seconds of all of the Company's watches,
jewelry, tabletop and accessories.
Other Revenue
Other revenue includes sales from the Company's after sales service (watch
repair) operations and shipping income. During fiscal 2003, other revenue
amounted to $8.3 million or 2.8% of consolidated net sales.
4
WARRANTY AND REPAIR
The Company has service facilities around the world including five Company-owned
service facilities and approximately 217 authorized independent service centers
worldwide. The Company conducts training sessions for and distributes technical
information and updates to repair personnel in order to maintain consistency and
quality at its service facilities and authorized independent service centers.
The Company's products are covered by limited warranties against defects in
materials and workmanship for periods ranging from one to ten years from the
date of purchase for movements and up to five years for the gold plating on the
Movado watch casings and bracelets. Products that are returned under warranty to
the Company are generally serviced by the Company's employees at its service
facilities.
The Company retains adequate levels of component parts to facilitate after sales
service of its watches for an extended period of time after the discontinuance
of such watches from its core range line.
ADVERTISING
Advertising is important to the successful marketing of the Company's watches.
Hence, the Company devotes significant resources to advertising. Since 1972, the
Company has maintained its own in-house advertising department which today
focuses primarily on the implementation and management of global marketing and
advertising strategies. The Company utilizes the creative development of
advertising campaigns from outside agencies. Advertising expenditures totaled
approximately 16.8%, 19.0% and 19.4% of net sales in fiscal 2003, 2002 and 2001,
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. In addition, advertising is developed by targeting consumers
with particular demographic characteristics appropriate to the image and price
range of the brand. Advertisements are placed predominately in magazines and
other print media, but are also created for radio and television campaigns,
catalogues, outdoor and promotional materials.
BACKLOG
Historically, the Company has generated a significant portion of its backlog
during the international trade fair held annually in Basel, Switzerland. The
Basel Watch and Jewelry Fair is held in March or April every year and is the
showcase for all global watch and jewelry companies where new product offerings
are introduced and orders are taken for deliveries throughout the course of the
year. As a result of the turmoil in the Middle East and public health warnings
regarding the condition known as Severe Acute Respiratory Syndrome or SARS, a
significant number of the Company's global customers did not attend the Basel
Watch and Jewelry Fair held in April 2003 and, as a result, there was a
significant reduction in orders entered. Over the course of the next few months,
the Company plans to use alternative means to introduce its new products to
those customers who were not able to attend the fair. At April 16, 2003 the
Company had unfilled orders of approximately $51.7 million compared to $57.2
million at April 16, 2002. The unfilled orders include both confirmed orders and
orders the Company believes will be confirmed based on the historic experience
with the customers. It is customary for many of the Company's customers not to
confirm their future orders with a formal purchase order until shortly before
their desired delivery.
SOURCES AND AVAILABILITY OF SUPPLIES
Concord and Movado watches are generally assembled in Switzerland by independent
third party subcontract assemblers with some assembly at the Concord
manufacturing facility in Bienne, Switzerland. Movado and Concord watches are
assembled using Swiss movements and other components obtained from third party
suppliers. Coach watches are assembled in Switzerland by
5
independent assemblers using Swiss movements and other components obtained from
third party suppliers in Switzerland and elsewhere. ESQ and Tommy Hilfiger
watches are assembled by independent contractors in Asia. ESQ watches are
manufactured using Swiss movements and other components purchased from third
party suppliers principally located in Asia. Tommy Hilfiger watches are
manufactured using movements and other components purchased from third party
suppliers located in Asia.
A majority of the watch movements used in the manufacture of Movado, Concord and
ESQ watches are purchased from two suppliers. The Company obtains other watch
components for all of its manufactured brands, including movements, cases,
hands, dials, bracelets and straps from a number of other suppliers. Precious
stones used in the Company's watches are purchased from various suppliers and
are set in Switzerland. The Company does not have long-term supply contract
commitments with any of its component parts suppliers.
COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of The Swatch Group, Ltd., a large Swiss-based competitor, no
single company competes with the Company across all of its brands. Certain
companies, however, compete with Movado Group, Inc. with respect to one or more
of its watch brands. Certain of these companies have, and other companies that
may enter the Company's markets in the future may have, substantially greater
financial, distribution, marketing and advertising resources than the Company.
The Company's future success will depend, to a significant degree, upon its
continued ability to compete effectively with regard to, among other things, the
style, quality, price, advertising, marketing, distribution and availability of
supply of its watch brands.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks MOVADO(R) and CONCORD(R) as well as
trademarks for the Movado Museum dial design, and related trademarks
for watches and jewelry in the United States and in numerous other
countries.
The Company licenses ESQUIRE(R), ESQ(R) and related trademarks on an exclusive
basis for use in connection with the manufacture, distribution, advertising and
sale of watches pursuant to an agreement with The Hearst Corporation ("Hearst
License Agreement"). The current term of the Hearst License Agreement expires
December 31, 2006 but contains options for renewal at the Company's discretion
through December 31, 2018.
The Company licenses the trademark COACH(R) and related trademarks on an
exclusive basis for use in connection with the manufacture, distribution,
advertising and sale of watches pursuant to an agreement with Coach, Inc.
("Coach License Agreement"). The Coach License Agreement expires on January 31,
2008.
Under an agreement with Tommy Hilfiger Licensing, Inc. ("THLI"), the Company has
been granted the exclusive license to use the trademark TOMMY HILFIGER(R) and
related trademarks in connection with the manufacture of watches worldwide and
in connection with the marketing, advertising, sale and distribution of watches
at wholesale (and at retail through its outlet stores) in North America, Europe,
Hong Kong, Australia, Southeast Asia (excluding Japan and Korea), the Caribbean,
duty free and U.S. military shops worldwide. In addition, the Company has been
granted the right to sell such watches in Latin and South America. The initial
term of the license agreement with THLI expires December 31,
6
2006 but can be extended at the request of the Company through December 31, 2011
if it is in compliance with all material terms of the agreement.
The Company also owns and has pending applications for a number of design
patents in the United States and internationally for various watch designs, as
well as designs of watch cases, bracelets and jewelry.
The Company actively seeks to protect and enforce its intellectual property
rights by working with industry associations, anti-counterfeiting organizations,
private investigators and law enforcement authorities, including the United
States Customs Service and, when necessary, sues infringers of its trademarks
and patents. Consequently, the Company is involved from time to time in
litigation or other proceedings to determine the enforceability, scope and
validity of these rights. With respect to the trademarks MOVADO(R) and
CONCORD(R) and certain other related trademarks, the Company has received
exclusion orders that prohibit the importation of counterfeit goods or goods
bearing confusingly similar trademarks into the United States. In accordance
with Customs regulations, these exclusion orders, however, cannot cover the
importation of gray-market Movado or Concord watches because the Company is the
manufacturer of such watches. All of the Company's exclusion orders are
renewable.
EMPLOYEES
As of January 31, 2003, the Company had approximately 900 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
Overview
The Company divides its business into three business segments: "Wholesale,"
"Retail" and "Other." The Company's wholesale segment includes the design,
manufacture and distribution of quality watches. The Company's retail segment,
which is operated exclusively within the United States, includes the Company's
Movado Boutiques and outlet operations. The Company's other segment includes
after sales service and shipping. See Note 14 to the Consolidated Financial
Statements for financial information regarding segment data.
Within wholesale there are two major geographic segments: "Domestic," which
includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and "International," which includes the
results of all other Company operations. The Company's international operations
are principally conducted in Europe, the Middle East and Asia and its
international assets are substantially located in Europe. The retail business
segment operates exclusively within the United States.
Domestic Wholesale
The Company sells all of its brands in the domestic market primarily through
major jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc. and
Zale Corporation; department stores, such as Finlay Fine Jewelry, Macy's,
Neiman-Marcus and Saks Fifth Avenue; and independent jewelers. Sales to trade
customers in the United States, Canada and the Caribbean are made directly by
the Company's
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sales organization of approximately 105 employees. Of these employees, sales
representatives are responsible for a defined geographic territory, specialize
in a particular brand and sell to and service the independent jewelers within
their territory. Their compensation is based on salary plus commission. The
sales force also consists of account executives and account representatives who,
respectively, sell to and service the chain and department store accounts. The
latter typically handle more than one of the Company's brands and are
compensated based on salary and incentives. In South America, the Company sells
Tommy Hilfiger watches through an independent distributor.
The Company's domestic sales are traditionally greater during the Christmas and
holiday season and are significantly more seasonal than its international sales.
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 56.8%, 55.0% and 59.6% of the Company's net sales for the fiscal
years ending January 31, 2003, 2002 and 2001, respectively. The amount of net
sales and operating income generated during the second half of each fiscal year
depends upon the general level of retail sales during the Christmas and holiday
season, as well as economic conditions and other factors beyond the Company's
control. The Company does not expect any significant change in the seasonality
of its domestic business in the foreseeable future.
International Wholesale
The Company sells Movado, Concord and Coach watches internationally through its
own sales force of approximately 30 employees operating from the Company's sales
and distribution offices in Hong Kong, Singapore and Switzerland. In addition,
the Company sells Movado, Concord, Coach and Tommy Hilfiger watches through a
network of approximately 125 independent distributors operating in numerous
countries around the world. A majority of the Company's arrangements with its
international distributors are long-term, generally require certain minimum
purchases and restrict the distributor from selling competitive products.
International sales tend to be less seasonal than domestic sales, particularly
those derived from the Middle Eastern and Asian markets.
Retail
The Company operates in two retail sectors, the luxury boutique market and the
outlet market. The Company operates 12 Movado Boutiques in the luxury boutique
market where Movado watches are sold as well as Movado jewelry, tabletop,
accessories and other product line extensions. In the outlet market the Company
operates 26 outlet stores, which sell the Company's discontinued models and
factory seconds, providing the Company with an organized and efficient method of
reducing inventory without competing directly with trade customers.
AVAILABLE INFORMATION
The Company's Internet address is www.movadogroupinc.com and it makes available
through that website its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the Securities and Exchange
Commission.
8
Item 2. Properties
The Company leases various facilities in the United States, Canada, Switzerland
and Asia for its corporate, manufacturing, distribution and sales operations.
The Company's leased facilities are as follows:
Square Lease
Location Function Footage Expiration
- -------- -------- ------- ----------
Moonachie, New Jersey Watch assembly, distribution 100,000 May 2010
and repair
Paramus, New Jersey Executive offices 63,600 June 2013
Bienne, Switzerland Corporate functions, watch 53,600 January 2007
sales, distribution,
assembly and repair
Markham, Canada Office, distribution and repair 11,200 June 2007
Kowloon, Hong Kong Watch sales, distribution 8,800 June 2004
and repair
Hackensack, New Jersey Warehouse 6,600 July 2004
New York, New York Public relations office 2,700 April 2008
Grenchen, Switzerland Watch sales 2,800 December 2005
Coral Gables, Florida Caribbean office 1,500 November 2006
Tokyo, Japan Watch sales 1,200 June 2004
Singapore Watch sales, distribution 1,100 August 2004
and repair
The Company believes that its existing facilities are suitable and adequate for
its current operations. The Company leases retail space averaging 1,600 square
feet per store with leases expiring from July 2003 to June 2013 for the
operation of the Company's 26 outlet stores. The Company also leases retail
space for the operation of its Movado Boutiques, each of which averages 2,100
square feet (with the exception of the Company's flagship Movado Boutique in New
York City which is 4,700 square feet) under leases expiring from January 2005 to
December 2012. Three Movado Boutique leases were recently signed for openings
during fiscal 2004.
The Company also owns approximately 2,400 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions. The Company is currently leasing out this facility.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings arising in the normal
course of its business. The Company believes that none of these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's operating results, liquidity or its financial position.
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 2003.
9
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of April 8, 2003, there were 46 holders of record of Class A Common Stock
and, the Company estimates, approximately 2,724 beneficial owners of the Common
Stock represented by 449 holders of record. The Common Stock is traded on the
New York Stock Exchange under the symbol "MOV" and on April 8, 2003, the closing
price of the Common Stock was $19.24. The quarterly high and low closing prices
for the fiscal years ended January 31, 2003 and 2002 were as follows:
Fiscal 2003 Fiscal 2002
----------- -----------
Quarter Ended Low High Low High
- ------------- --- ---- --- ----
April 30 $17.19 $22.69 $12.75 $16.69
July 31 $18.04 $25.03 $15.46 $20.20
October 31 $14.69 $19.92 $14.45 $19.51
January 31 $16.52 $19.84 $16.30 $19.45
In connection with the October 7, 1993 public offering, each share of the then
currently existing Class A Common Stock was converted into 10.46 shares of new
Class A Common Stock, par value of $.01 per share (the "Class A Common Stock").
Each share of Common Stock is entitled to one vote per share and each share of
Class A Common Stock is entitled to 10 votes per share on all matters submitted
to a vote of the shareholders. Each holder of Class A Common Stock is entitled
to convert, at 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 Class A Common
Stock is not publicly traded and consequently, there is currently no established
public trading market for these shares.
During each fiscal year ended January 31, 2003 and 2002, the Board of Directors
approved four $0.03 per share quarterly cash dividends to Common Stock and Class
A Common Stock shareholders. The declaration and payment of future dividends, if
any, will be at the sole discretion of the Board of Directors and will depend
upon the Company's profitability, financial condition, capital and surplus
requirements, future prospects, terms of indebtedness and other factors deemed
relevant by the Board of Directors. See Notes 4 and 5 to the Consolidated
Financial Statements regarding contractual restrictions on the Company's ability
to pay dividends.
10
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,
-----------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of income data:
Net sales $ 300,077 $ 299,725 $ 320,841 $ 295,067 $ 277,836
--------- --------- --------- --------- ---------
Cost of sales 115,907 115,653 123,392 126,667 111,766
Selling, general and
administrative 152,394 157,799 163,317 152,631 133,395
--------- --------- --------- --------- ---------
Total expenses 268,301 273,452 286,709 279,298 245,161
--------- --------- --------- --------- ---------
Operating income 31,776 26,273 34,132 15,769 32,675
Interest expense, net 3,916 5,415 6,443 5,372 5,437
Gain on disposition of business -- -- -- 4,752 --
Income before taxes and
cumulative effect of a change in
accounting principle 27,860 20,858 27,689 15,149 27,238
Provision for income taxes (1) 7,801 3,735 6,922 1,428 6,265
--------- --------- --------- --------- ---------
Income before cumulative effect
of a change in accounting principle 20,059 17,123 20,767 13,721 20,973
Cumulative effect of a change in
accounting principle -- (109) -- -- --
--------- --------- --------- --------- ---------
Net income (2) (3) $ 20,059 $ 17,014 $ 20,767 $ 13,721 $ 20,973
========= ========= ========= ========= =========
Net income per share-Basic $ 1.69 $ 1.46 $ 1.78 $ 1.10 $ 1.63
Net income per share-Diluted (2) (3) $ 1.65 $ 1.42 $ 1.75 $ 1.06 $ 1.58
Basic shares outstanding 11,870 11,683 11,651 12,527 12,842
Diluted shares outstanding 12,190 12,007 11,866 12,890 13,256
Cash dividends declared per share $ 0.12 $ 0.12 $ 0.105 $ 0.10 $ 0.08
Balance sheet data (end of period):
Working capital $ 219,420 $ 153,932 $ 154,637 $ 157,465 $ 191,033
Total assets 345,154 290,676 290,405 259,649 296,375
Long-term debt 35,000 35,000 40,000 45,000 55,000
Shareholders' equity 236,212 172,470 159,470 147,815 162,608
(1) Reflects a lower estimated tax rate adjustment in fiscal 2002 due to a
shift in global earnings mix.
(2) Fiscal 2000, includes an $8.3 million pre-tax or $0.46 per share after tax
one-time charge and $4.8 million pre-tax or $0.28 per share after tax gain
from the sale of the Company's Piaget business. Excluding these items, net
income would have been $15.9 million or $1.24 per share on a diluted
basis.
(3) Fiscal 2002, includes pre-tax expense of $2.7 million relating to a
one-time severance and early retirement charge. Excluding the one-time
severance and early retirement charge and income tax rate adjustment, net
income would have been $16.9 million or $1.40 per diluted share.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
Statements in this annual report on Form 10-K, including statements under this
Item 7 and elsewhere in this report as well as statements in future filings by
the Company with the Securities and Exchange Commission ("SEC"), in the
Company's press releases and oral statements made by or with the approval of an
authorized executive officer of the Company, which are not historical in nature,
are intended to be, and are hereby identified as, "forward-looking statements"
for purposes of the safe harbor provided by the Private Securities Litigation
Reform Act of 1995. These statements are based on current expectations,
estimates, forecasts and projections about the Company, its future performance,
the industry in which the Company operates and management's assumptions. Words
such as "expects", "anticipates", "targets", "goals", "projects", "intends",
"plans", "believes", "seeks", "estimates", "may", "will", "should" and
variations of such words and similar expressions are also intended to identify
such forward-looking statements. The Company cautions readers that
forward-looking statements include, without limitation, those relating to the
Company's future business prospects, projected operating or financial results,
revenues, working capital, liquidity, capital needs, plans for future
operations, expectations regarding capital expenditures and operating expenses,
effective tax rates, margins, interest costs, and income as well as assumptions
relating to the foregoing. Forward-looking statements are subject to certain
risks and uncertainties, some of which cannot be predicted or quantified. Actual
results and future events could differ materially from those indicated in the
forward-looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the SEC including, without limitation, the
following: general economic and business conditions which may impact disposable
income of consumers in the United States and the other significant markets where
the Company's products are sold, changes in consumer preferences and popularity
of particular designs, new product development and introduction, competitive
products and pricing, seasonality, availability of alternative sources of supply
in the case of the loss of any significant supplier, the loss of significant
customers, the Company's dependence on key employees and officers, the
continuation of licensing arrangements with third parties, ability to secure and
protect trademarks, patents and other intellectual property rights, ability to
lease new stores on suitable terms in desired markets and to complete
construction on a timely basis, continued availability to the Company of
financing and credit on favorable terms, business disruptions, disease, general
risks associated with doing business outside the United States including,
without limitation, import duties, tariffs, quotas, political and economic
stability, and success of hedging strategies with respect to currency exchange
rate fluctuations.
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.
Approximately 13% 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 seasonal. There are two major selling seasons in the
Company's domestic markets: the Spring season, which includes school graduations
and several holidays and, most importantly, the Christmas and holiday season.
Major selling seasons in certain international markets center on significant
local holidays that occur in late Winter or early Spring. These markets are a
less
12
significant portion of the Company's business and, therefore, their impact is
far less than that of the selling seasons in North America.
Retail Sales. The Company's retail operations consist of 12 Movado Boutiques and
26 outlet stores located throughout the U.S. The Company does not have any
overseas retail operations.
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: brand and product sales mix, product pricing strategy,
manufacturing costs and the U.S. dollar/Swiss franc exchange rate.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Luxury and premium retail price point
models generally earn lower gross margins than 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 selling prices. Gross margins from the sale
of watches in the Movado Boutiques exceed those of the wholesale business since
the Company earns full channel margins from manufacture to point of sale to the
consumer.
All of the Company's brands compete with a number of other brands on the basis
of not only styling but also wholesale and retail price. The Company's ability
to improve margins through price increases is therefore, to some extent,
constrained by competitors' actions.
Manufacturing costs of the Company's brands consist primarily of component
costs, internal and subcontractor assembly costs and unit overhead costs
associated with the Company's supply chain operations in Switzerland and Asia.
The Company seeks to control and reduce component and subcontractor labor costs
through a combination of negotiations with existing suppliers and alternative
sourcing. The Company's supply chain operations consist of logistics management
of assembly operations and product sourcing in Switzerland and Asia and minor
assembly in Switzerland. Through aggressive productivity improvement efforts,
the Company has controlled the level of overhead costs and maintained
flexibility in its cost structure by outsourcing a significant portion of its
component and assembly requirements and expects to extend this strategy over the
near term.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's production costs and, therefore, its gross margins. The Company hedges
its Swiss franc purchases using a combination of forward contracts, purchased
currency options and spot purchases. The Company's hedging program has, in the
recent past, been reasonably successful in stabilizing product costs and 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.
13
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and entertainment, expenses associated with the Basel Watch and Jewelry
Fair and other industry trade shows and operating costs incurred in connection
with the Company's retail business. Sales commissions vary with overall sales
levels. Retail operating expenses consist primarily of salaries and store rents.
Distribution expenses consist primarily of salaries of distribution staff,
rental and other occupancy costs, security, depreciation and amortization of
furniture and leasehold improvements and shipping supplies.
General and administrative expenses consist primarily of salaries and other
employee compensation, employee benefit plan costs, office rent, management
information systems costs, bad debts, patent and trademark expenses and various
other general corporate expenses.
Operating expenses over the last three years reflects the net effect of the
Company's efforts to reduce spending, implement productivity improvements, and
at the same time, invest in strategic growth initiatives, including the Movado
Boutique expansion and the launch of the Tommy Hilfiger watch line.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to MGI's consolidated
financial statements. The preparation of these financial statements and the
application of the most critical of those policies require management to make
judgments based on estimates and assumptions that affect the information
reported. On an on-going basis, management reevaluates its estimates and
judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, financing operations, warranty
obligation, and contingencies and litigation. Management bases its estimates and
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources on historical experience, contractual
commitments and on various other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Management believes the following are the
critical accounting policies requiring significant judgments and estimates used
in the preparation of its consolidated financial statements.
Revenue Recognition
The Company recognizes its revenue upon transfer of title and risk of loss, or
in the case of retail sales, at the time of register receipt. The Company
estimates returns and sales and cash discount allowances in the same period the
revenue is recorded. These estimates are based upon historical analysis,
customer agreements and/or currently known factors that arise in the normal
course of business. While such returns and allowances have historically been
within management's expectations and the provisions established, future actual
experience may differ from that experienced in the past.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may be
uncollectible in the future. Estimates are used in determining the allowance for
doubtful accounts and are based on the Company's on-going credit evaluations of
the customers and customer payment history and account aging. While the actual
bad debt losses have historically been within the Company's expectations and the
allowances established, there can be no guarantee that the Company will continue
to experience the same bad debt loss rates. As of January 31, 2003, there were
no known situations with any of the Company's major customers which would
indicate the customer's inability to make their required payments.
14
Inventories
The Company values its inventory at the lower of cost or market using the
first-in, first-out (FIFO) method. The cost of finished goods and component
inventories, held by overseas subsidiaries, are determined using average cost.
The Company's management regularly reviews its sales to customers and customers'
sell-through at retail to determine excess or obsolete inventory reserves.
Inventory with less than acceptable turn rates is classified as discontinued
and, together with the related component parts which can be assembled into
saleable finished goods, is sold through the Company's outlet stores. When
management determines that finished product and components are unsaleable in the
Company's outlet stores, a reserve is established for the cost of those products
and components. These estimates could vary significantly, either favorably or
unfavorably, from actual requirements depending on future economic conditions,
customer inventory levels or competitive conditions which may differ from our
expectations.
Long-lived Assets
The Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
Warranty
All watches sold by the Company are covered by limited warranties against
defects in material and workmanship for periods ranging from one to ten years
from the date of purchase for movements and up to five years for the gold
plating for Movado watch cases and bracelets. The Company records an estimate
for future warranty costs based on historical repair costs. Warranty costs have
historically been within the Company's expectations and the provisions
established. If such costs were to substantially exceed estimates, this could
have an adverse affect on the Company's operating results.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more likely than not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
15
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2003
compared to fiscal 2002 and fiscal 2002 compared to fiscal 2001 along with a
discussion of the changes in financial condition during fiscal 2003.
The following are net sales by business segment (in thousands):
Fiscal Years Ended January 31,
------------------------------
2003 2002 2001
---- ---- ----
Wholesale:
Domestic $200,690 $196,900 $231,121
International 37,212 46,821 44,937
Retail 53,882 47,172 39,303
Other 8,293 8,832 5,480
-------- -------- --------
Net Sales $300,077 $299,725 $320,841
======== ======== ========
The following table presents the Company's results of operations expressed as a
percentage of net sales for the fiscal years indicated:
Fiscal Years Ended January 31,
------------------------------
2003 2002 2001
---- ---- ----
% of net sales % of net sales % of net sales
-------------- -------------- --------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 38.6% 38.6% 38.5%
----- ----- -----
Gross profit 61.4% 61.4% 61.5%
Selling, general and administrative
expenses 50.8% 52.6% 50.9%
----- ----- -----
Operating income 10.6% 8.8% 10.6%
Interest expense, net 1.3% 1.8% 2.0%
Income before taxes and cumulative
effect 9.3% 7.0% 8.6%
Provision for income taxes 2.6% 1.2% 2.1%
----- ----- -----
Income before cumulative effect 6.7% 5.8% 6.5%
Cumulative effect of a change in
accounting principle -- (0.1%) --
----- ----- -----
Net income 6.7% 5.7% 6.5%
===== ===== =====
Fiscal 2003 Compared to Fiscal 2002
Net Sales
Net sales in fiscal 2003 were $300.1 million, slightly above fiscal 2002 sales
of $299.7 million. The wholesale business overall decreased by $5.8 million or
2.4%. The domestic wholesale business increased by 1.9% or $3.8 million. The
domestic sales increase was fueled by the door expansion and strong retail sell
through of the Tommy Hilfiger brand, double-digit growth in the Coach brand with
the introduction of successful new products and higher sales in the Movado brand
driven by strong new product introductions and solid marketing support. The
increases were offset by lower volume in the luxury Concord brand and the
moderately priced ESQ brand. The international wholesale business was below
fiscal 2002 by $9.6 million or 20.5%. In constant dollars, international
wholesale sales decreased by 26.9%. The weak economic environment in Europe and
Asia resulted in sales declines in the Concord and Movado brands of $12.0
million or 28.3%. This was partially offset by sales increases in the
16
Tommy Hilfiger brand as a result of the launch in four European markets and
higher sales in the Coach brand in Japan and the duty free business in Asia.
Sales in the Company's retail segment increased by $6.7 million or 14.2% due
mainly to year on year increases in three new Movado Boutiques and three new
outlet stores opened in the later half of fiscal 2002 plus the opening of one
new outlet store in the later part of fiscal 2003. In addition, comparable store
sales increased by 4.2% and 5.5% in the Movado Boutiques and outlet stores,
respectively. At January 31, 2003, the Company owned and operated 10 Movado
Boutiques and 26 outlets as compared to 10 Movado Boutiques and 25 outlets at
January 31, 2002.
Other sales, which includes domestic and international after sales service and
shipping income, declined by $0.5 million or 6.1%. This was primarily the result
of lower after sales service revenues due to the closing of three of the Company
operated service centers.
Gross Margin
Gross margin for the year remained strong at 61.4% and was consistent with
fiscal 2002 results.
Operating Expenses
Operating expenses of $152.4 million reflect a 3.4% decline from $157.8 million
in fiscal 2002. In constant dollars, operating expenses were $151.0 million or
4.3% below fiscal 2002. The decrease in operating expenses of $5.4 million was
the result of a $6.4 million reduction in marketing and advertising or 11.3%,
slight reductions in distribution expense and general and administrative
expenses of $1.1 million or 2.0%, somewhat offset by an increase in selling
expenses of $2.1 million or 4.7%.
The decrease in advertising and marketing resulted from decreased media and
co-op spending in the international wholesale business of $2.7 million, which
was commensurate with the decline in sales volume, reduced fixed spending under
the Tommy Hilfiger license agreement of $1.5 million, and a reduced level of
spending for media and production costs in the domestic wholesale business.
The decrease in distribution and general and administrative expenses of $1.1
million resulted from the inclusion of a $2.7 million one-time severance and
early retirement charge in the fiscal 2002 results, and reductions in travel and
entertainment, payroll and other operating expenses as a result of on-going cost
reduction initiatives. These decreases were partially offset by increases in
bonus expense, higher rental expense and higher legal and bad debt expenses.
Selling expenses increased by $2.1 million primarily due to increased spending
in support of the growth of the Company's retail business, primarily the
expansion of its Movado Boutiques. Three Movado Boutiques and three outlet
stores that were opened in the later part of fiscal 2002 operated for a full
year in fiscal 2003. This resulted in higher costs in the retail segment of $2.9
million or 17.9%. Somewhat offsetting these costs were reduced payroll and
travel and entertainment spending in the domestic wholesale business.
Interest Expense
Interest expense in fiscal 2003 declined by $1.5 million from $5.4 million in
fiscal 2002 to $3.9 million in fiscal 2003. The decrease was due to
significantly lower weighted average bank borrowings in addition to a lower
effective interest rate on the borrowings. The average borrowings for fiscal
2003 were $67.9 million or 17.6% lower than fiscal 2002 borrowings of $82.4
million. This was due to favorable cash flow and working capital management.
17
Income Taxes
The Company's income tax provision amounted to $7.8 million and $3.7 million in
fiscal 2003 and 2002, respectively. This represents a 28% effective tax rate in
fiscal 2003 versus an 18% rate for fiscal 2002. The effective tax rate in fiscal
2003 of 28% is more indicative of the Company's expected effective tax rate from
its future operations. The 18% effective tax rate in fiscal 2002 reflected a
decrease in the Company's U.S. source earnings as a percentage of the overall
earnings mix.
Fiscal 2002 Compared to Fiscal 2001
Net Sales
Net sales decreased by 6.6% to $299.7 million in fiscal 2002 from $320.8 million
in fiscal 2001. This decrease was the result of the U.S. recession and the
economic conditions resulting from the tragic events surrounding September 11,
2001. Domestic brand sales decreased by 14.8% or $34.2 million. The domestic
sales decline was the result of the economic uncertainty that surrounded the
second half of fiscal 2002, which resulted in our retailers delaying their
purchases so that they were much closer to their selling season and their
reluctance to build their inventory levels. These sales declines were partially
offset by the launch of the Tommy Hilfiger brand. International brand sales
increased by 4.2% with increases of 5.5% in the Concord brand and 4.3% in the
Movado brand.
Sales in the Company's retail segment increased by $7.9 million or 20.0% due
mainly to the Company opening three new outlets and three new Boutiques. In
addition, comparable store sales increased by 7.1% and 4.7% in the Movado
Boutiques and outlet stores, respectively. At January 31, 2002, the Company
owned and operated 10 Movado Boutiques and 25 outlets as compared to seven
Movado Boutiques and 23 outlets at January 31, 2001.
Other sales, which include domestic and international service and shipping
income, increased by 61.2% or $3.4 million due to an increase in service and
shipping revenue.
Gross Margin
Gross margin decreased slightly to 61.4% in fiscal 2002 from 61.5% in fiscal
2001. The decrease in gross margin reflects lower margins in our wholesale
segment, which decreased due to a change in the product sales mix offset by
higher margins in our retail operations due to higher margin products offered at
retail.
Operating Expenses
Operating expenses decreased 3.4% to $157.8 million in fiscal 2002 from $163.3
million in fiscal 2001. The decrease in operating expenses related to several
areas, including advertising and marketing expense decrease of $5.3 million or
8.6%; selling expense decrease of $0.1 million or 0.2%; general and
administrative expense decrease of $3.0 million or 6.3%; and somewhat offset by
an increase in distribution expense of $2.9 million or 34.7%.
The decrease in advertising expense was the result of a headcount reduction and
a decrease in cooperative advertising programs offset by an increase in media
expenditures and costs related to the launch of the Tommy Hilfiger brand.
18
Selling expense remained flat compared to fiscal 2001 even with an increase in
spending for the Company's growth initiatives. During fiscal 2002, the Company
opened two Movado Boutiques and its flagship Movado Boutique in New York City,
three new outlet stores and launched the Tommy Hilfiger watch line in the U.S.
These investments were offset by decreases in sales commissions and bonuses
which declined due to decreased sales.
The decrease in general and administrative expenses is the result of the
Company's cost reduction initiatives and a decrease in bonus expense due to the
Company not meeting corporate earnings targets. These savings were partially
offset by the severance and early retirement charge of $2.7 million recorded in
the third quarter of fiscal 2002.
Distribution expense reflects the costs associated with the relocation and
expansion to a new state-of-the-art distribution center, which was occupied in
February 2001. These expenses include occupancy costs, security systems and
depreciation.
Interest Expense
Net interest expense in fiscal 2002 decreased by $1.0 million from $6.4 million
in fiscal 2001 to $5.4 million in fiscal 2002. The net decrease was due to a
lower average interest rate on the short-term bank borrowings from approximately
8.2% in fiscal 2001 to 4.8% in fiscal 2002, partially offset by an increase of
the weighted average short-term bank borrowings. In addition, a $5.0 million
payment on the long-term borrowings was made in January 2001. Interest for this
borrowing was reduced by approximately $0.3 million.
Income Taxes
The Company's income tax provision amounted to $3.7 million and $6.9 million in
fiscal 2002 and 2001, respectively, or 18% of pretax income for fiscal 2002 and
25% of pretax income for fiscal 2001. During fiscal 2002, the Company's
estimated effective annual tax rate changed from 28% to 18%, reflecting a
decrease in the Company's U.S. source earnings as a percentage of the overall
earnings mix. The tax expense for the third quarter of fiscal 2002 was adjusted
for the difference between the 18% annual tax rate versus the 28% tax rate used
to record tax expense for the six months ended July 31, 2001.
LIQUIDITY AND FINANCIAL POSITION
At January 31, 2003, the Company had $38.4 million of cash equivalents as
compared to $17.0 million in the prior year. The increase in cash was primarily
derived from $33.3 million generated by operating activities, somewhat offset by
cash used for capital expenditures and trademarks of $7.0 million and repayment
of debt of $11.5 million.
The Company's major source of funds has been cash generated from operations. In
fiscal 2003, 2002 and 2001, the Company generated from operations $33.3 million,
$16.5 million and $25.3 million, respectively. This positive cash flow has been
the source to fund the Company's growth initiatives, including working capital,
capital expenditures, the Company's stock repurchase program and debt repayment.
Accounts receivable at January 31, 2003 were $94.4 million as compared to $92.0
million in the prior year. In constant dollars, accounts receivable at January
31, 2003 were $92.8 million or 0.9% above prior year due to the sales increase
in the fourth quarter year over year.
19
Inventories at January 31, 2003 were $111.7 million as compared to $98.6 million
in the prior year. Since 43% of the inventory is held in Switzerland and Canada,
the year on year translation in the balance sheet includes the effect of the
weaker U.S. dollar in fiscal 2003. In constant dollars, inventories at January
31, 2003 were $102.7 million or 4.2% above prior year. The Company expects that
inventory levels in fiscal 2004 will remain consistent with fiscal 2003 levels.
The Company used cash of $7.0 million in fiscal 2003, $14.7 million in fiscal
2002 and $11.7 million in fiscal 2001 for investing activities, primarily for
capital expenditures.
Capital expenditures totaling $6.5 million in fiscal 2003 relate primarily to
the build out of two new Movado Boutique stores opened in the Miami, Florida
area in February 2003, various information system projects and enhancements, the
addition of a state-of-the-art jewelry vault in the distribution center and the
addition of a new outlet store. Capital expenditures amounting to $13.9 million
in fiscal 2002 relate primarily to the relocation of the Company's U.S.
headquarters, opening two new Movado Boutiques and the flagship Movado Boutique
in New York City, various information systems projects and expansion of the
Company's network of outlet stores. The Company's capital expenditures for
fiscal 2001 amounted to $10.8 million. Expenditures in fiscal 2001 were
primarily for management information systems projects, the addition of two
Movado Boutiques and one outlet store and the build out of the new distribution
center in Moonachie, New Jersey. The Company expects that annual capital
expenditures in the near term will approximate the levels experienced in fiscal
2001. These expenditures will relate primarily to leasehold improvements,
furniture and fixtures for new Movado Boutiques, management information systems
projects and store renovations.
Cash used in financing activities amounted to $11.1 million in fiscal 2003. This
compares to $6.9 million and $17.4 million of cash used in financing activities
in fiscal 2002 and 2001, respectively. Cash used in financing activities during
fiscal 2003 and 2002 was primarily for repayment of bank debt and the annual
repayment of the Senior Notes.
At January 31, 2003 the Company had two series of Senior Notes outstanding.
Senior Notes due January 31, 2005 were originally issued in a private placement
completed in fiscal 1994. These notes have required annual principal payments of
$5.0 million since January 1998 and bear interest of 6.56% per annum. The
Company repaid $5.0 million in principal amount of these notes in each of fiscal
2003, 2002 and 2001. At January 31, 2003, $10.0 million in principal amount of
these notes remained outstanding.
During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes
under a Note Purchase and Private Shelf Agreement dated November 30, 1998. The
$25.0 million Series A Senior Notes bear interest at 6.90%, mature on October
30, 2010 and are subject to annual repayments of $5.0 million commencing October
31, 2006.
On March 21, 2001, the Company entered into a new Note Purchase and Private
Shelf Agreement which allows for the issuance, for up to three years after the
date thereof, of senior promissory notes in the aggregate principal amount of up
to $40.0 million with maturities up to 12 years from their original date of
issuance. As of January 31, 2003 and 2002, there were no amounts outstanding
under the agreement.
20
The components of long-term debt as of January 31 were as follows (in
thousands):
2003 2002
---- ----
Senior Notes $10,000 $15,000
Series A Senior Notes 25,000 25,000
------- -------
35,000 40,000
Less current portion -- 5,000
------- -------
Long-term debt $35,000 $35,000
======= =======
On June 22, 2000, the Company completed the renewal of its revolving credit and
working capital lines with its bank group. That agreement provides for a three
year $100.0 million unsecured revolving line of credit and $15.0 million of
uncommitted working capital lines. At January 31, 2003, the Company had no
outstanding borrowings under its bank lines as compared to $6.5 million at
January 31, 2002. The decrease in borrowings at the end of fiscal 2003 as
compared to fiscal 2002 was primarily due to higher net income and favorable
working capital management. The current line of credit expires on June 22, 2003.
The Company is in the process of renewing a new multi-year revolving line of
credit that will be completed prior to June 22, 2003.
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program. There
were no shares repurchased under the repurchase program during fiscal 2003 and
fiscal 2002. As of January 31, 2003, the Company had authority to repurchase
additional shares for up to $4.5 million against an aggregate authorization of
$30.0 million.
Minimum annual rentals at January 31, 2003 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):
2004 $ 7,922
2005 7,452
2006 7,054
2007 6,363
2008 5,095
Thereafter 19,387
--------
$ 53,273
========
Cash dividends in fiscal 2003 and 2002 amounted to $1.4 million each year
compared to $1.2 million in fiscal 2001.
At January 31, 2003, the Company had working capital of $219.4 million as
compared to $153.9 million in the prior year. The increase in working capital
was predominantly the result of higher cash, lower debt and an increase in
assets related to hedging derivatives and the translation of Swiss and Canadian
inventories. The Company ended fiscal 2003 with no short-term borrowings and net
debt of -$3.4 million as compared to $6.5 million in short-term borrowings and
net debt of $29.5 million ending fiscal 2002.
21
The net debt to capitalization at January 31, 2003 was -1.4% as compared to
17.1% at January 31, 2002. In fiscal 2003, the Company had a cash balance
greater than the total debt which resulted in negative net debt.
In summary, the Company made significant progress in generating positive cash
flow from operating activities in each of the fiscal years 2003, 2002 and 2001.
The Company believes it will continue to generate positive cash flow from
operations in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial reporting
for legal obligations and costs associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company is
required to adopt the provisions of SFAS No. 143 effective for fiscal 2004. The
Company does not expect the adoption of this standard to have a significant
impact on its consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. This statement supercedes the EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including certain costs incurred in a
restructuring)." SFAS No. 146 requires that liabilities associated with exit or
disposal activities initiated after adoption be recognized and measured at fair
value when incurred, as opposed to at the date an entity commits to the exit or
disposal plans. The Company is still evaluating the impact of adopting this
pronouncement on its consolidated financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded on the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees, including
indemnifications, that an entity has issued and a rollforward of the entity's
product warranty liabilities. The Company will apply the recognition provisions
of FIN 45 prospectively to guarantees issued or modified after December 31,
2002. The disclosure provisions of FIN 45 are effective for financial statements
of interim periods or annual periods ending after December 15, 2002. See Note 1
under "Warranty Costs." The Company is currently in the process of evaluating
the potential impact that the adoption of the recognition provisions of FIN 45
will have on its consolidated financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
in financial statements about the effects of stock-based compensation. The
adoption of SFAS No. 148 is not expected to have a significant impact on the
Company's consolidated financial position and results of operations.
22
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's primary market risk exposure relates to foreign currency exchange
risk (see Note 6 to the Consolidated Financial Statements). The majority of the
Company's purchases are denominated in Swiss francs. The Company reduces its
exposure to the Swiss franc exchange rate risk through a hedging program. Under
the hedging program, the Company purchases various financial instruments,
predominately forward and option contracts. These derivatives are either used to
(a) hedge the Company's Swiss franc payables and are fair valued with the change
in fair value reflected in earnings or (b) are documented as SFAS No. 133 cash
flow hedges, and the gains and losses on this latter hedging activity are first
reflected in Other Comprehensive Income ("OCI"), and then later classified to
earnings. In both cases, the earnings impact is partially offset by the effects
of currency movements on the underlying hedged transactions. If the Company did
not engage in a hedging program, any change in the Swiss franc to local currency
would have an equal effect on the entities' cost of sales. In addition, the
Company hedges its Swiss franc payable exposure with forward contracts. As of
January 31, 2003, the Company's entire forward contracts hedging portfolio
consisted of 189 million Swiss francs equivalent for various expiry dates
ranging through December 19, 2003. The Company also has 30 million in Swiss
francs option contracts for various expiry dates ranging through January 30,
2004.
Additionally, the Company has a much smaller hedging program related to gold
used in the manufacturing of the Company's watches. Under this hedging program,
the Company purchases various commodity derivative instruments, primarily future
contracts. These derivatives are documented as SFAS No. 133 cash flow hedges,
and gains and losses on these derivative instruments are first reflected in OCI,
and later reclassified to earnings, partially offset by the effects of gold
market price changes on the underlying actual gold purchases. If the Company did
not engage in a gold hedging program, any changes in the gold price would have
an equal effect on the entities' cost of sales. As of January 31, 2003, the
Company's gold future contract hedge portfolio consisted of 6,000 ounces of
future purchases for various expiry dates ranging through May 23, 2003.
In November 2002, the Company's Board of Directors authorized the hedging of the
Company's Swiss franc denominated investment in its wholly-owned Swiss
subsidiaries using purchase options under certain limitations. These hedges are
treated as net investment hedges under SFAS No. 133. As of January 31, 2003, the
Company's purchased option hedge portfolio related to net investment hedging
amounted to 18 million Swiss francs with various expiry dates ranging through
November 10, 2005.
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, 2003 and the fixed rates were unfavorable.
23
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, 2003, 2002 and 2001 F-2
Consolidated Balance Sheets at January 31, 2003 and 2002 F-3
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 31, 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6 to F-22
Valuation and Qualifying Accounts and Reserves II S-1
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
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 2003 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 2003 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 2003 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 2003 annual meeting of shareholders and is incorporated herein
by reference.
Item 14. Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The Company's management, including our Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Company's "disclosure
controls and procedures," as such term is defined in Rules 13a-14(c) and
15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended,
within 90 days of the filing date of this Annual Report on Form 10-K. Based upon
their evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company would be made known to them, particularly during the period in which
this Annual Report on Form 10-K was being prepared.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, since the date the
controls were evaluated.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the systems are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all future conditions, regardless of how remote.
25
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
--------------------------------------
1. Financial Statements:
See Financial Statements Index on page 24 included in Item 8 of part
II of this report.
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying
Accounts and Reserves
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index on pages 31 through 36 of this report.
(b) Current Reports on Form 8-K
---------------------------
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOVADO GROUP, INC.
(Registrant)
Dated: April 30, 2003 By: /s/ Gedalio Grinberg
------------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Dated: April 30, 2003 /s/ Gedalio Grinberg
------------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Dated: April 30, 2003 /s/ Efraim Grinberg
------------------------------------------
Efraim Grinberg
President and Chief Executive Officer
Dated: April 30, 2003 /s/ Richard J. Cote
------------------------------------------
Richard J. Cote
Executive Vice President and
Chief Operating Officer
Dated: April 30, 2003 /s/ Eugene J. Karpovich
------------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
Dated: April 30, 2003 /s/ Margaret Hayes Adame
------------------------------------------
Margaret Hayes Adame
Director
Dated: April 30, 2003 /s/ Donald Oresman
------------------------------------------
Donald Oresman
Director
27
Dated: April 30, 2003 /s/ Leonard L. Silverstein
------------------------------------------
Leonard L. Silverstein
Director
Dated: April 30, 2003 /s/ Alan H. Howard
------------------------------------------
Alan H. Howard
Director
28
CERTIFICATIONS
I, Efraim Grinberg, certify that:
1. I have reviewed this annual report on Form 10-K of Movado Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the Audit Committee of registrant's Board of Directors (or
persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 30, 2003
By: /s/ Efraim Grinberg
--------------------------------
Efraim Grinberg
President and Chief Executive Officer
29
I, Eugene J. Karpovich, certify that:
1. I have reviewed this annual report on Form 10-K of Movado Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the Audit Committee of registrant's Board of Directors (or
persons performing the equivalent functions):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 30, 2003
By: /s/ Eugene J. Karpovich
--------------------------------
Eugene J. Karpovich
Senior Vice President and Chief
Financial Officer
30
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
3.1 Restated By-Laws of the Registrant. Incorporated by
reference to Exhibit 3.1 filed with the Company's
Registration Statement on Form S-1 (Registration No.
33-666000).
3.2 Restated Certificate of Incorporation of the
Registrant as amended. Incorporated herein by
reference to Exhibit 3(i) to the Registrant's
Quarterly Report on Form 10-Q filed for the quarter
ended July 31, 1999.
4.1 Specimen Common Stock Certificate. Incorporated
herein by reference to Exhibit 4.1 to the
Registrant's Annual Report on Form 10-K for the year
ended January 31, 1998.
4.2 Note Agreement, dated as of November 9, 1993, by and
between the Registrant and the Prudential Insurance
Company of America. Incorporated herein by reference
to Exhibit 4.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended October 31, 1993.
4.3 Note Purchase and Private Shelf Agreement dated as
of November 30, 1998 between the Registrant and The
Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit 10.31 to
the Registrant's Annual Report on Form 10-K for the
year ended January 31, 1999.
4.4 Note Purchase and Private Shelf Agreement dated as
of March 21, 2001 between the Registrant and The
Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit 4.4 to
the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2001.
10.1 Amendment Number 1 to License Agreement dated
December 9, 1996 between Registrant as Licensee and
Coach, a division of Sara Lee Corporation as
Licensor, dated as of February 1, 1998. Incorporated
herein by reference to exhibit 10.1 to
31
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1998.
10.2 Agreement, dated January 1, 1992, between The Hearst
Corporation and the Registrant, as amended on
January 17, 1992. Incorporated herein by reference
to Exhibit 10.8 filed with the Company's
Registration Statement on Form S-1 (Registration No.
33-666000).
10.3 Letter Agreement between the Registrant and The
Hearst Corporation dated October 24, 1994 executed
October 25, 1995 amending License Agreement dated as
of January 1,1992, as amended. Incorporated herein
by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
October 31, 1995.
10.4 Registrant's 1996 Stock Incentive Plan amending and
restating the 1993 Employee Stock Option Plan.
Incorporated herein by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1996.
10.5 Lease dated August 10, 1994 between Rockefeller
Center Properties, as landlord and SwissAm, Inc., as
tenant for space at 630 Fifth Avenue, New York, New
York. Incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 31, 1994.
10.6 Death and Disability Benefit Plan Agreement dated
September 23, 1994 between the Registrant and
Gedalio Grinberg. Incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended October 31, 1994.*
10.7 Registrant's amended and restated Deferred
Compensation Plan for Executives effective January
1, 1998. Incorporated herein by reference to Exhibit
10.25 to the Registrant's Annual Report on Form 10-K
for the year ended January 31, 1998.*
32
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.8 License Agreement dated December 9, 1996 between the
Registrant and Sara Lee Corporation. Incorporated
herein by reference to Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the year
ended January 31, 1997.
10.9 First Amendment to Lease dated April 8, 1998 between
RCPI Trust, successor in interest to Rockefeller
Center Properties ("Landlord") and Movado Retail
Group, Inc., successor in interest to SwissAm, Inc.
("Tenant") amending lease dated August 10, 1994
between Landlord and Tenant for space at 630 Fifth
Avenue, New York, New York. Incorporated herein by
reference to Exhibit 10.37 to the Registrant's
Annual Report on Form 10-K for the year ended
January 31, 1998.
10.10 Second Amendment dated as of September 1, 1999 to
the December 1, 1996 license agreement between Sara
Lee Corporation and Registrant. Incorporated herein
by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999.
10.11 License Agreement entered into as of June 3, 1999
between Tommy Hilfiger Licensing, Inc. and
Registrant. Incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1999.
10.12 License Agreement entered into as of October 31,
1999 by and between Movado Corporation, Movado Watch
Company S.A. and Lantis Eyewear Corporation.
Incorporated herein by reference to Exhibit 10.34 to
the Registrant's Annual Report on Form 10-K for the
year ended January 31, 2000.
10.13 Severance Agreement dated December 15, 1999, and
entered into December 16, 1999 between the
Registrant and Richard J. Cote. Incorporated herein
by reference to Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the year ended
January 31, 2000. *
33
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.14 Lease made December 21, 2000 between the Registrant
and Mack-Cali Realty, L.P. for premises in Paramus,
New Jersey together with First Amendment thereto
made December 21, 2000. Incorporated herein by
reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for the year ended
January 31, 2000.
10.15 Credit Agreement dated June 22, 2000 among the
Registrant, the Chase Manhattan Bank as
Administrative Agent, and as Swingline Bank, and as
issuing Bank, Fleet Bank, N.A. as Syndication Agent,
The Bank of New York as Documentation 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 filed for the quarter
ended July 31, 2000.
10.16 Lease agreement dated May 22, 2000 between Forsgate
Industrial Complex and the Registrant for premises
located at 105 State Street, Moonachie, New Jersey.
Incorporated herein by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q filed
for the quarter ended April 30, 2000.
10.17 Second Amendment of Lease dated July 26, 2001
between Mack-Cali Reality, L.P., as landlord, and
Movado Group, Inc., as tenant, further amending
lease dated as of December 21, 2000. Incorporated
herein by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q filed for
the quarter ended October 31, 2001.
10.18 Third Amendment of Lease dated November 6, 2001
between Mack-Cali Realty, L.P., as lessor and Movado
Group, Inc., as lessee, for additional space at
Mack-Cali II, One Mack Drive, Paramus, NJ.
Incorporated herein by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q filed
for the quarter ended October 31, 2001.
10.19 Amendment Number 2 to Registrant's 1996 Stock
Incentive Plan dated March 16, 2001. Incorporated
herein by reference to Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the year
ended January 31, 2002.*
34
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.20 Amendment Number 3 to Registrant's 1996 Stock
Incentive Plan approved June 19, 2001. Incorporated
herein by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for the year
ended January 31, 2002. *
10.21 Amendment Number 3 to License Agreement dated
December 9, 1996, as previously amended, between the
Registrant, Movado Watch Company S.A. and Coach,
Inc. dated as of January 30, 2003. Incorporated
herein by reference to Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for the year
ended January 31, 2002.
10.22 Amended and Restated Master Promissory Note
Agreement dated June 21, 2001 between the Registrant
and Fleet National Bank. Incorporated herein by
reference to Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended
January 31, 2002.
10.23 Line of Credit Letter Agreement dated August 20,
2001 between the Registrant and The Bank of New
York. Incorporated herein by reference to Exhibit
10.31 to the Registrant's Annual Report on Form 10-K
for the year ended January 31, 2002.
10.24 First Amendment to the License Agreement dated June
3, 1999 between Tommy Hilfiger Licensing, Inc.,
Registrant and Movado Watch Company S.A. entered
into January 16, 2002. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 31, 2002.
10.25 Second Amendment to the License Agreement dated June
3, 1999 between Tommy Hilfiger Licensing, Inc.,
Registrant and Movado Watch Company S.A. entered
into August 1, 2002. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
July 31, 2002.
35
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.26 Letter Agreement dated August 14, 2002 amending Line
of Credit Agreement between the Registrant and the
Bank of New York dated August 20, 2001. Incorporated
herein by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 31, 2002.
10.27 Line of Credit Letter Agreement dated March 4, 2003
between the Registrant and Fleet National Bank.
10.28 Endorsement Agreement dated as of April 4, 2003
between the Registrant and The Grinberg Family
Trust.
21.1 Subsidiaries of the Registrant.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Constitutes a compensatory plan or arrangement.
36
REPORT OF INDEPENDENT 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 15(a)(1) on page 26 present fairly, in all material
respects, the financial position of Movado Group, Inc. and its subsidiaries at
January 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) on page 26 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 of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 13, 2003
F-1
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended January 31,
-----------------------------
2003 2002 2001
---- ---- ----
Net sales $ 300,077 $ 299,725 $ 320,841
--------- --------- ---------
Costs and expenses:
Cost of sales 115,907 115,653 123,392
Selling, general and administrative 152,394 157,799 163,317
--------- --------- ---------
268,301 273,452 286,709
--------- --------- ---------
Operating income 31,776 26,273 34,132
Interest expense, net 3,916 5,415 6,443
--------- --------- ---------
Income before income taxes and cumulative
effect of a change in accounting principle 27,860 20,858 27,689
Provision for income taxes 7,801 3,735 6,922
--------- --------- ---------
Income before cumulative effect of a change
in accounting principle 20,059 17,123 20,767
Cumulative effect of a change in accounting
principle, net of a tax benefit of $42 -- (109) --
--------- --------- ---------
Net income $ 20,059 $ 17,014 $ 20,767
========= ========= =========
Basic income per share
Income before cumulative effect of a
change in accounting principle $ 1.69 $ 1.47 $ 1.78
Cumulative effect of a change in
accounting principle -- (0.01) --
--------- --------- ---------
Net income per share $ 1.69 $ 1.46 $ 1.78
========= ========= =========
Weighted basic average shares outstanding 11,870 11,683 11,651
========= ========= =========
Diluted income per share
Income before cumulative effect of a
change in accounting principle $ 1.65 $ 1.43 $ 1.75
Cumulative effect of a change in
accounting principle -- (0.01) --
--------- --------- ---------
Net income per share $ 1.65 $ 1.42 $ 1.75
========= ========= =========
Weighted diluted average shares outstanding 12,190 12,007 11,866
========= ========= =========
See Notes to Consolidated Financial Statements
F-2
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31,
-----------
2003 2002
---- ----
ASSETS
- ------
Current assets:
Cash $ 38,365 $ 16,971
Trade receivables, net 94,438 92,014
Inventories, net 111,736 98,589
Other 36,646 19,467
--------- ---------
Total current assets 281,185 227,041
Property, plant and equipment, net 39,939 38,726
Other assets 24,030 24,909
--------- ---------
Total assets $ 345,154 $ 290,676
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loans payable to banks $ -- $ 6,500
Current portion of long-term debt -- 5,000
Accounts payable 22,712 23,824
Accrued liabilities 22,735 25,417
Current taxes payable 11,467 8,646
Deferred taxes payable 4,851 3,722
--------- ---------
Total current liabilities 61,765 73,109
--------- ---------
Long-term debt 35,000 35,000
Deferred and noncurrent income taxes 4,229 1,513
Other liabilities 7,948 8,584
--------- ---------
Total liabilities 108,942 118,206
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued -- --
Common Stock, $0.01 par value, 20,000,000 shares
authorized; 10,057,367 and 9,797,776 shares
issued, respectively 101 98
Class A Common Stock, $0.01 par value, 10,000,000
shares authorized; 3,428,277 and 3,509,733 shares
issued and outstanding, respectively 34 35
Capital in excess of par value 72,145 69,484
Retained earnings 172,287 153,830
Accumulated other comprehensive income (loss) 19,386 (23,286)
Treasury Stock, 1,547,156 and 1,544,487 shares at
cost, respectively (27,741) (27,691)
--------- ---------
Total shareholders' equity 236,212 172,470
--------- ---------
Total liabilities and shareholders' equity $ 345,154 $ 290,676
========= =========
See Notes to Consolidated Financial Statements
F-3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended January 31,
-----------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 20,059 $ 17,014 $ 20,767
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,369 7,550 6,341
Deferred and noncurrent income taxes 2,399 (1,859) (1,629)
Provision for losses on accounts receivable 1,987 1,384 2,386
Provision for inventories 830 756 1,710
Loss on disposition of leasehold
improvements, furniture and fixtures -- 492 --
Tax benefit from stock options exercised 489 685 287
Changes in current assets and liabilities:
Trade receivables (2,602) 4,185 (5,134)
Inventories (4,815) (5,372) (20,043)
Other current assets 7,471 64 (3,383)
Accounts payable (2,989) (4,443) 11,142
Accrued liabilities (3,545) (2,375) 9,322
Deferred and current taxes payable 2,465 (3,051) 9,800
Other noncurrent assets 3,824 (6,234) (5,960)
Other noncurrent liabilities (636) 7,750 (335)
-------- -------- --------
Net cash provided by operating activities 33,306 16,546 25,271
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,525) (13,902) (10,833)
Trademarks (514) (807) (852)
-------- -------- --------
Net cash used in investing activities (7,039) (14,709) (11,685)
-------- -------- --------
Cash flows from financing activities:
Repayment of Senior Notes (5,000) (5,000) (5,000)
Net payment of current bank borrowings (6,500) (2,300) (4,700)
Stock options exercised and other changes 2,172 1,780 840
Dividends paid (1,602) (1,360) (1,206)
Repurchase of Common Stock (135) -- (7,329)
-------- -------- --------
Net cash used in financing activities (11,065) (6,880) (17,395)
-------- -------- --------
Effect of exchange rate changes on cash 6,192 (1,045) 253
-------- -------- --------
Net increase (decrease) in cash 21,394 (6,088) (3,556)
Cash at beginning of year 16,971 23,059 26,615
-------- -------- --------
Cash at end of year $ 38,365 $ 16,971 $ 23,059
======== ======== ========
See Notes to Consolidated Financial Statements
F-4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumulated
Class A Capital in Other
Preferred Common Common Excess of Retained Comprehensive Treasury
Stock Stock Stock Par Value Earnings Income(Loss) Stock
--------- -------- -------- ---------- -------- ------------- --------
Balance, January 31, 2000 $ -- $ 95 $ 35 $ 66,113 $118,615 ($16,462) ($20,581)
Net income 20,767
Dividends ($0.105 per share) (1,206)
Stock options exercised, net
of tax of $287 1 1,129
Common Stock repurchased (7,329)
Foreign currency translation
adjustment (1,707)
-------- -------- -------- -------- -------- -------- --------
Balance, January 31, 2001 $ -- $ 96 $ 35 $ 67,242 $138,176 ($18,169) ($27,910)
Net income 17,014
Dividends ($0.12 per share) (1,360)
Stock options exercised, net
of tax of $685 2 1,863
Employee stock bonus plan 219
Supplemental executive 379
retirement plan
Accounting change, net of tax 367
of $143
Net unrealized gain on
investments, net of tax
of $77 199
Effective portion of
unrealized loss on hedging
contracts, net of tax of $99 (449)
Foreign currency translation
adjustment (5,234)
-------- -------- -------- -------- -------- -------- --------
Balance, January 31, 2002 $ -- $ 98 $ 35 $ 69,484 $153,830 ($23,286) ($27,691)
Net income 20,059
Dividends ($0.12 per share) (1,602)
Stock options exercised, net
of tax of $489 2 2,631
Employee stock bonus plan 85
Common Stock repurchased (135)
Supplemental executive 30
retirement plan
Net unrealized loss on
investments, net of tax
of $25 (82)
Effective portion of
unrealized gain on hedging
contracts, net of tax of $2,709 4,584
Foreign currency translation
adjustment 38,170
Conversion of Class A Common
Stock to Common Stock 1 (1)
-------- -------- -------- -------- -------- -------- --------
Balance, January 31, 2003 $ -- $ 101 $ 34 $ 72,145 $172,287 $ 19,386 ($27,741)
======== ======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements
F-5
NOTES TO MOVADO GROUP INC.'S CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Movado Group, Inc. (the "Company") is a designer, manufacturer and distributor
of quality watches with prominent brands in almost every price category
comprising the watch industry. In fiscal 2003, the Company marketed five
distinctive brands of watches: Movado, Concord, ESQ, Coach and Tommy Hilfiger,
which compete in most segments of the watch market.
The Company designs and manufactures Concord and Movado watches primarily
through its subsidiaries and third party contract assemblers in Switzerland, as
well as in the United States, for sale throughout the world. ESQ and Tommy
Hilfiger watches are manufactured to the Company's specifications by independent
contractors located in Asia. Coach watches are assembled in Switzerland by
independent suppliers. Tommy Hilfiger watches are presently sold in North
America, the Caribbean, Latin America, South America and Europe. 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,
through a wholly-owned domestic subsidiary, the Company sells Movado watches, as
well as proprietary Movado jewelry, tabletop and accessories directly to
consumers in its Movado Boutiques. Additionally, the Company operates a number
of outlet stores throughout the United States, through which it sells
discontinued and second merchandise.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances have been eliminated.
Translation of Foreign Currency Financial Statements and Foreign Currency
Transactions
The financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at average exchange
rates for the year. Foreign currency transaction gains and losses are charged or
credited to income as incurred. Foreign currency translation gains and losses
are reflected in the equity section of the Company's consolidated balance sheet
in accumulated other comprehensive income (loss).
Cash and Cash Equivalents
Cash equivalents are considered all highly liquid investments with original
maturities at date of purchase of three months or less.
F-6
Trade Receivables
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Concord and Tommy Hilfiger watches are also
marketed outside the U.S. through a network of independent distributors.
Accounts receivable are stated net of allowances for doubtful accounts,
estimated returns and sales and cash discounts of $22.2 million and $19.6
million at January 31, 2003 and 2002, respectively. At January 31, 2003 and
2002, Zale Corporation accounted for 11% and 13% 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 and component parts inventories held
by overseas subsidiaries are determined using average cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of furniture and equipment is provided using the straight-line
method based on the estimated useful lives of assets, which range from three to
ten years. Leasehold improvements are amortized using the straight-line method
over the lesser of the term of the lease or the estimated useful life of the
leasehold improvement. Computer software costs related to the development of
major systems are capitalized as incurred and are amortized over their useful
lives. Maintenance and repair costs are charged to earnings while expenditures
for major renewals and improvements are capitalized. Upon the disposition of
property, plant and equipment, the accumulated depreciation is deducted from the
original cost and any gain or loss is reflected in current earnings.
Long-lived Assets
The Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
Capitalized Software Costs
The Company capitalizes certain computer software costs after technological
feasibility has been established. The costs are amortized utilizing the
straight-line method over the economic lives of the related products ranging
from three to seven years. Computer software amortization expense for fiscal
2003, 2002 and 2001 was $3.0 million, $2.6 million and $1.9 million,
respectively.
F-7
Intangibles
Intangible assets consist primarily of trademarks and are recorded at cost.
Trademarks are generally amortized over ten years. The Company continually
reviews intangible assets to evaluate whether events or changes have occurred
that would suggest an impairment of carrying value. An impairment would be
recognized when expected undiscounted future operating cash flows are lower than
the carrying value. At January 31, 2003 and 2002, intangible assets at cost were
$6.9 million and $5.7 million, respectively, and related accumulated
amortization of intangibles was $3.0 million and $2.0 million, respectively.
Amortization expense for fiscal 2003, 2002 and 2001 was $0.6 million, $0.5
million and $0.5 million, respectively.
Derivative Instruments
The Company utilizes derivative financial instruments to reduce foreign currency
fluctuation risks. In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. They require that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Changes in the fair value of those instruments will
be reported in earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of the derivative and
the effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value of cash flows of the asset or liability hedged. The
Company adopted SFAS No. 133, as amended, in fiscal 2002, which resulted in the
Company recording a transition adjustment to recognize its derivative
instruments at fair value. This transition adjustment was an after-tax reduction
to net income of approximately $0.1 million and an after-tax charge to
accumulated other comprehensive income ("AOCI") of approximately $0.4 million.
In addition, in the consolidated statement of cash flows, the Company presents
cash flows from derivative instruments accounted for as cash flow hedges in the
same category as the cash flows from the items being hedged.
Revenue Recognition
The Company recognizes its revenue upon transfer of title and risk of loss or,
in the case of retail sales, at the time of register receipt. The Company
estimates returns and sales and cash discount allowances in the same period the
revenue is recorded. These estimates are based upon historical analysis,
customer agreements and/or currently known factors that arise in the normal
course of business.
Preopening Costs
Costs associated with the opening of new retail and outlet stores are expensed
in the period incurred.
Advertising
The Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Advertising expense for fiscal
2003, 2002 and 2001 amounted to $50.5 million, $56.9 million and $62.3 million,
respectively. As of January 31, 2003 and 2002, accrued
F-8
advertising was included in the consolidated balance sheets in the amount of
$3.1 million and $2.9 million, respectively.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and cost of goods sold,
respectively, in accordance with Emerging Issues Task Force (EITF) Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs."
Warranty Costs
The Company has warranty obligations in connection with the sale of its watches.
The Company's products are covered by limited warranties against defects in
materials and workmanship for periods ranging from one to ten years from the
date of purchase for movements and up to five years for the gold plating on the
Movado watch casings and bracelets. The costs incurred to provide for these
warranty obligations are estimated and recorded as an accrued liability at the
time of sale. The Company estimates its warranty cost at the point of sale for a
given product based on historical failure rates and related costs to repair. As
of January 31, 2003 and 2002, the reserve balances for warranty costs were $0.9
million and $0.6 million, respectively.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applies to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more likely than not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
Earnings Per Share
The Company presents net income per share on a basic and diluted basis. Basic
earnings per share is computed using weighted average shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of shares outstanding adjusted for dilutive common stock equivalents.
The weighted average number of shares outstanding for basic earnings per share
were 11,870,000, 11,683,000 and 11,651,000 for fiscal 2003, 2002 and 2001,
respectively. For diluted earnings per share, these amounts were increased by
320,000, 324,000 and 215,000 in fiscal 2003, 2002 and 2001, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans.
F-9
Stock-based Compensation
Employee stock options are accounted for under the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense has not been recognized for stock
options granted at or above fair value. Had compensation expense been determined
and recorded based upon the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," net earnings and earnings per share
would have been reduced to pro forma amounts as follows:
2003 2002 2001
---- ---- ----
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net Income $ 20,059 $ 16,439 $ 17,014 $ 14,249 $ 20,767 $ 19,135
Net Income per share-Basic $ 1.69 $ 1.38 $ 1.46 $ 1.22 $ 1.78 $ 1.64
Net Income per share-Diluted $ 1.65 $ 1.35 $ 1.42 $ 1.19 $ 1.75 $ 1.61
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $9.71, $7.74 and $4.72 per
share in fiscal 2003, 2002 and 2001, respectively. The following
weighted-average assumptions were used for grants in 2003, 2002 and 2001:
dividend yield of 0.62% for fiscal 2003, 0.71% for fiscal 2002 and 0.86% for
fiscal 2001; expected volatility of 46% for fiscal 2003, 50% for fiscal 2002 and
48% for fiscal 2001; risk-free interest rates of 5.23% for fiscal 2003, 4.81%
for fiscal 2002 and 6.67% for fiscal 2001 and expected lives of seven years for
fiscal 2003, 2002 and 2001.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stockholders' Equity
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary buy-back program
throughout fiscal 2003. There were no shares repurchased under the repurchase
program during fiscal 2003 and fiscal 2002. As of January 31, 2003, the Company
had authorization to repurchase shares up to an additional $4.5 million against
an aggregate authorization of $30.0 million.
Recently Issued Accounting Standards
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and financial reporting
for legal obligations and costs associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company is
required to adopt the provisions of SFAS No. 143 effective for fiscal 2004. The
Company does not
F-10
expect the adoption of this standard to have a significant impact on its
consolidated financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. This statement supercedes the EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including certain costs incurred in a
restructuring)." SFAS No. 146 requires that liabilities associated with exit or
disposal activities initiated after adoption be recognized and measured at fair
value when incurred, as opposed to at the date an entity commits to the exit or
disposal plans. The Company is still evaluating the impact of adopting this
pronouncement on its consolidated financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded on the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees, including
indemnifications, that an entity has issued and a rollforward of the entity's
product warranty liabilities. The Company will apply the recognition provisions
of FIN 45 prospectively to guarantees issued or modified after December 31,
2002. The disclosure provisions of FIN 45 are effective for financial statements
of interim periods or annual periods ending after December 15, 2002. See Note 1
under "Warranty Costs." The Company is currently in the process of evaluating
the potential impact that the adoption of the recognition provisions of FIN 45
will have on its consolidated financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and frequent
disclosures in financial statements about the effects of stock-based
compensation. The adoption of SFAS No. 148 is not expected to have a significant
impact on the Company's consolidated financial position and results of
operations.
Reclassification
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2003 presentation.
F-11
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
2003 2002
---- ----
Finished goods $ 73,148 $ 67,412
Component parts 40,649 37,253
Work-in-process 2,262 2,075
--------- ---------
116,059 106,740
Less: inventories reserve (4,323) (8,151)
--------- ---------
$ 111,736 $ 98,589
========= =========
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 31, at cost, consisted of the following
(in thousands):
2003 2002
---- ----
Furniture and equipment $ 31,393 $ 26,657
Computer software 24,338 20,235
Leasehold improvements 21,420 20,334
-------- --------
77,151 67,226
Less: accumulated depreciation (37,212) (28,500)
-------- --------
$ 39,939 $ 38,726
======== ========
Depreciation expense for fiscal 2003, 2002 and 2001 was $7.6 million, $6.8
million and $5.7 million, respectively.
NOTE 4 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
The Company's revolving credit facility with its domestic bank group was entered
into in June 2000 to provide for a three year $100.0 million unsecured revolving
line of credit. The line of credit expires on June 22, 2003. The Company is in
the process of renewing a new multi-year revolving line of credit that is
expected to be completed prior to June 22, 2003. In addition, certain members
within the bank group provided for $15.0 million of uncommitted working capital
lines of credit at January 31, 2003 and 2002, respectively. As of January 31,
2003, one bank in the domestic bank group issued five irrevocable standby
letters of credit for retail and operating facility leases to various landlords
and Canadian payroll to the Royal Bank of Canada totaling $0.6 million with
expiry dates through June 30, 2003. The Company pays a facility fee on the
unused portion of the credit facility. The agreement also contains certain
financial covenants including an interest coverage ratio, and certain
restrictions that limit the Company on the sale, transfer or distribution of
corporate assets, including dividends, and limit the amount of debt outstanding.
The Company was in compliance with these restrictions and covenants at January
31, 2003 and 2002. The domestic unused line of credit was $115.0 million and
$108.5 million at January 31, 2003 and 2002, respectively.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.8 million Swiss francs at both January 31, 2003 and 2002, with dollar
equivalents of approximately $6.5 million and $5.1 million, respectively, of
which a maximum of $5.0 million can be drawn. As of January 31, 2003, the Swiss
bank
F-12
has made guarantees to certain Swiss third party obligations of approximately
1.0 million Swiss francs. There are no restrictions on transfers in the form of
dividends, loans or advances to the Company by its foreign subsidiaries.
There were no outstanding borrowings against the Company's aggregate demand
lines of credit at January 31, 2003. Outstanding borrowings of $6.5 million
existed at January 31, 2002. Aggregate maximum and average monthly outstanding
borrowings against the Company's lines of credit and related weighted average
interest rates during fiscal 2003 and 2002 were as follows (dollars in
thousands):
Fiscal Year Ended January 31,
-----------------------------
2003 2002
---- ----
Maximum borrowings $38,425 $52,250
Average monthly borrowings $27,958 $37,493
Weighted average interest rate 2.8% 4.8%
Weighted average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
NOTE 5 - LONG-TERM DEBT
The components of long-term debt as of January 31 were as follows (in
thousands):
2003 2002
---- ----
Senior Notes $10,000 $15,000
Series A Senior Notes 25,000 25,000
------- -------
35,000 40,000
Less: current portion -- 5,000
------- -------
Long-term debt $35,000 $35,000
======= =======
Senior Notes due January 31, 2005 (the "Senior Notes") were issued in a private
placement completed in fiscal 1994 and bear interest at 6.56% per annum, payable
semiannually on July 31 and January 31, and are subject to annual payments of
$5.0 million commencing January 31, 1998. The payment for fiscal 2004 is not
payable until February 3, 2004 and as such is classified as noncurrent. In
fiscal 2003 the payment was due in the current fiscal year and was accordingly
classified as a current liability. The Company has the option to prepay amounts
due to holders of the Senior Notes at 100% of the principal plus a "make-whole"
premium and accrued interest.
The Series A Senior Notes ("Series A Senior Notes") were issued on December 1,
1998 under a Note Purchase and Private Shelf Agreement and bear interest at
6.90% per annum. Interest is payable semiannually on April 30 and October 30.
These notes mature on October 30, 2010 and are subject to annual payments of
$5.0 million commencing on October 31, 2006.
On March 21, 2001, the Company entered into a new Note Purchase and Private
Shelf Agreement, which allows for the issuance for up to three years after the
date thereof, of senior promissory notes in the aggregate principal amount of up
to $40.0 million with maturities up to 12 years from their original date of
issuance. As of January 31, 2003 the Company had no borrowings under this
agreement.
F-13
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, 2003 and 2002.
NOTE 6 - HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company's policy is to enter into forward exchange contracts and purchased
foreign currency options to reduce exposure to adverse fluctuations in foreign
exchange rates and, to a lesser extent, in commodity prices related to its
purchases of watches. When entered into, the Company formally documents these
derivative instruments as a cash flow hedge of a specific underlying exposure,
as well as the risk management objectives and strategies for undertaking the
hedge transactions. The Company formally assesses, both at the inception and at
each financial quarter thereafter, the effectiveness of the derivative
instrument hedging the underlying forecasted cash flow transaction which is
being hedged. Any ineffectiveness related to the derivative financial
instruments' change in fair value will be recognized in the period in which the
ineffectiveness was calculated.
During fiscal 2003, the Company's risk management policy was modified to include
net investment hedging of the Company's Swiss franc-denominated investment in
its wholly-owned subsidiaries located in Switzerland. When entered into for this
purpose, the Company formally documents the derivative instrument as a net
investment hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions. The
Company formally assesses, both at the inception and at each financial quarter
thereafter, the effectiveness of the derivative instrument hedging the net
investment.
All of the Company's derivative instruments have liquid markets to assess fair
value. The Company does not enter into any derivative instruments for trading
purposes.
As of January 31, 2003, the balance of deferred net gains on
derivative instruments documented as cash flow hedges included in
accumulated other comprehensive income ("AOCI") was $4.4 million, net
of tax of $2.9 million, compared to $0.4 million in net losses at
January 31, 2002, net of a tax benefit of $0.1 million. The Company
estimates that $3.3 million of the deferred net gains at January 31,
2003 will be realized into earnings over the next 12 months as a
result of transactions that are expected to occur over that period.
The primary underlying transaction which will cause the amount in AOCI
to affect cost of goods sold consists of the Company's sell through of
inventory purchased predominantly in Swiss francs. The maximum length
of time the Company is hedging its exposure to the fluctuation in
future cash flows for forecasted transactions is 24 months. For the
years ended January 31, 2003 and 2002, the Company reclassified net
gains from AOCI to earnings of approximately $1.7 million and $0.6
million, respectively.
During fiscal 2003 and 2002, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio. However, the
Company incurred a $0.3 million loss, net of a tax benefit of $0.2 million, for
the amounts excluded in the assessment of the derivative hedge portfolio
effectiveness for fiscal year 2003, compared to a $2.2 million loss in fiscal
2002, net of a tax benefit of $0.5 million. The Company also recorded, a $0.2
million gain, net of tax of $0.1 million, resulting from a discontinued cash
flow hedge in fiscal year 2002 because the original forecasted
F-14
transaction did not occur by the end of the original specified time period. The
Company records these transactions in the cost of sales of the consolidated
statements of income.
The balance of net loss included in the cumulative foreign currency translation
adjustment associated with derivatives documented as net investment hedges was
$0.3 million, net of a tax benefit of $0.2 million as of January 31, 2003. Under
SFAS No. 133, changes in fair value of these instruments are recognized in AOCI
to offset the change in the value of the net investment being hedged.
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of January 31, 2003 (in millions):
January 31, 2003
Fair Value Maturities
---------- ----------
Forward exchange contracts $ 12.6 2003
Commodity future contracts $ 0.3 2003
Purchased foreign currency
options $ 3.0 2003-2005
------
$ 15.9
======
The Company estimates the fair value of its foreign currency derivatives based
on quoted market prices or pricing models using current market rates. These
derivative instruments are currently reflected in other assets or current
liabilities.
NOTE 7 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 6.56% Senior Notes and 6.90% Series A Senior
Notes approximate 104% and 108% of the carrying value of the notes,
respectively, as of January 31, 2003. The fair value was calculated based upon
the present value of future cash flows discounted at estimated borrowing rates
for similar debt instruments or upon estimated prices based on current yields
for debt issues of similar quality and terms.
F-15
NOTE 8 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2003, 2002
and 2001 consists of the following components (in thousands):
2003 2002 2001
---- ---- ----
Current:
U.S. Federal $ 3,454 $ 480 $ 3,124
U.S. State and Local 134 (165) 498
Non-U.S 445 1,221 2,607
------- ------- -------
4,033 1,536 6,229
------- ------- -------
Noncurrent:
U.S. Federal -- -- --
U.S. State and Local -- -- --
Non-U.S 3,165 1,109 1,674
------- ------- -------
3,165 1,109 1,674
------- ------- -------
Deferred:
U.S. Federal 775 1,057 (1,948)
U.S. State and Local (65) 26 (385)
Non-U.S (107) 7 1,352
------- ------- -------
603 1,090 (981)
------- ------- -------
Provision for income taxes $ 7,801 $ 3,735 $ 6,922
======= ======= =======
Significant components of the Company's deferred income tax assets and
liabilities for the fiscal year ended January 31, 2003 and 2002 consist of the
following (in thousands):
2003 Deferred Tax 2002 Deferred Tax
----------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Operating loss carry forwards $ 1,159 $ -- $ 1,480 $ --
Rent accrual 257 -- 195 --
Inventory reserve 2,364 5,025 2,554 4,058
Receivable allowance 1,941 1,079 2,181 895
Deferred compensation 3,718 -- 3,552 --
FAS 133 -- 2,668 -- --
Depreciation/amortization 23 -- 597 --
Other 1,537 308 681 --
-------- -------- -------- --------
10,999 9,080 11,240 4,953
Valuation allowance (950) -- (1,480) --
-------- -------- -------- --------
Total $ 10,049 $ 9,080 $ 9,760 $ 4,953
======== ======== ======== ========
As of January 31, 2003, the Company had foreign net operating loss carryforwards
of approximately $4.8 million, which are available to offset taxable income in
future years. As of January 31, 2003, the Company maintained a valuation
allowance with respect to the tax benefit of certain foreign net operating loss
carryforwards. Since the Company's foreign deferred tax assets relate primarily
to its former sales office in Germany, which is currently operated by an
independent distributor, the Company's assessment is that a portion of the
foreign deferred tax assets will not likely be utilized in the
F-16
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,
-----------------------------
2003 2002 2001
---- ---- ----
Provision for income taxes at the U.S. statutory rate $ 9,751 $ 7,262 $ 9,691
Lower effective foreign income tax rate (4,110) (4,332) (3,621)
Change in valuation allowance (12) 110 (75)
Tax provided on repatriated earnings of foreign 1,856 1,377 265
subsidiaries
State and local taxes, net of federal benefit 44 (139) 113
Other, net 272 (543) 549
------- ------- -------
Total $ 7,801 $ 3,735 $ 6,922
======= ======= =======
In fiscal 2003, the Company recognized a tax benefit of $0.3 million from
realization of domestic and of certain foreign net operating loss carryforwards.
No provision has been made for federal income or withholding taxes which may be
payable on the remittance of the undistributed retained earnings of foreign
subsidiaries approximating $183 million at January 31, 2003, as those earnings
are considered reinvested for an indefinite period. As a result of various tax
planning strategies available to the Company, it is not practical to estimate
the amount of tax, if any, that may be payable on the eventual distribution of
such earnings.
NOTE 9 - OTHER ASSETS
In fiscal 1996, the Company entered into an agreement with a trust which owned
an insurance policy issued on the lives of the Company's Chairman and his
spouse. Under this agreement, the trust assigned the insurance policy to the
Company as collateral to secure repayment by the trust of interest-free loans
made by the Company to the trust in amounts equal to the premiums on said
insurance policy (approximately $741,000 per annum). The agreement required the
trust to repay the loans from the proceeds of the policy. At January 31, 2003
and 2002, the Company had outstanding loans from the trust of $5.2 million and
$4.6 million, respectively. On April 4, 2003 the agreement was amended and
restated to transfer the policy (which at that time had a cash surrender value
of $4,595,591) from the trust to the Company in partial repayment of the then
outstanding loan balance which, as of that date, was reduced to $591,269.
NOTE 10 - LEASES, COMMITMENTS AND CONTINGENCIES
The Company leases office, distribution, retail and manufacturing facilities and
office equipment under operating leases, which expire at various dates through
June 2013. Certain of the leases provide for renewal options and escalation
clauses for real estate taxes and other occupancy costs. Rent expense for
equipment and distribution, factory and office facilities under operating leases
was approximately $8.9 million, $7.7 million and $8.2 million in fiscal 2003,
2002 and 2001, respectively. Minimum annual
F-17
rentals at January 31, 2003 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):
2004 $ 7,922
2005 7,452
2006 7,054
2007 6,363
2008 5,095
Thereafter 19,387
--------
$ 53,273
========
Due to the nature of its business as a luxury consumer goods distributor, the
Company is exposed to various commercial losses. The Company believes it is
adequately insured against such losses.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. Company contributions and expenses of administering the
Employee Savings Plan amounted to $0.7 million, $0.6 million and $0.5 million in
fiscal 2003, 2002 and 2001, 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 2003, 2002 and 2001, the Company
recorded an expense related to the SERP of approximately $0.5 million, $0.5
million and $0.4 million, respectively.
During fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not
in the SERP. Under the terms of this Stock Bonus Plan, the Company contributes a
discretionary amount to the trust established under the plan. Each plan
participant vests after five years in 100% of their respective prorata portion
of such contribution. For fiscal 2003, 2002 and 2001, the Company recorded an
expense of $0.1 million, $0.2 million and $0.1 million, respectively, related to
this plan.
On September 23, 1994, the Company entered into a Death and Disability Benefit
Plan agreement with the Company's Chairman. Under the terms of the agreement, in
the event of the Chairman's death or disability, the Company is required to make
an annual benefit payment of approximately $300,000 to his spouse for the lesser
of ten years or her remaining lifetime. Neither the agreement nor the benefits
payable thereunder are assignable and no benefits are payable to the estates or
heirs of the Chairman or his spouse. Results of operations include an
actuarially determined charge related to this plan of approximately $0.1 million
in each of the fiscal years 2003, 2002 and 2001.
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
F-18
"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 3,500,000 shares of
Common Stock. Options granted to participants under the Plan generally become
exercisable in equal installments over three or five years and remain
exercisable until the tenth anniversary of the date of grant. The option price
may not be less than the fair market value of the stock at the time the options
are granted.
Transactions in stock options under the Plan since fiscal 2000 are summarized as
follows:
Weighted-
Outstanding Average
Options Exercise Price
------- --------------
January 31, 2000 1,556,417 15.65
Options granted 244,050 8.72
Options exercised (103,387) 8.15
Options forfeited (82,779) 18.86
--------- -----
January 31, 2001 1,614,301 15.09
Options granted 911,700 17.26
Options exercised (231,301) 8.29
Options forfeited (118,028) 19.70
--------- -----
January 31, 2002 2,176,672 16.47
Options granted 324,450 20.10
Options exercised (177,748) 9.08
Options forfeited (53,614) 18.77
--------- -----
January 31, 2003 2,269,760 17.52
========= =====
Options exercisable at January 31, 2003, 2002 and 2001 were 1,095,797, 796,015
and 813,587, respectively.
The following table summarizes outstanding and exercisable stock options as of
January 31, 2003:
Weighted-
Average Weighted-
Remaining Weighted-Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ------------------- ----------- ------------ ---------------- ----------- ---------
$ 5.95 - $ 8.92 257,033 5.4 $ 8.21 139,853 $ 7.96
$ 8.93 - $11.90 181,801 3.0 $ 9.94 181,801 $ 9.94
$11.91 - $14.87 508,776 7.0 $14.05 247,683 $13.71
$14.88 - $17.85 186,400 7.9 $17.15 68,002 $17.06
$17.86 - $20.82 328,975 8.6 $19.72 58,434 $20.01
$20.83 - $23.80 368,750 7.4 $21.27 179,184 $21.21
$23.81 - $26.77 384,025 6.8 $24.96 176,840 $25.11
$26.78 - $29.75 54,000 5.3 $29.58 44,000 $29.55
- ------ ------ --------- --- ------ --------- ------
2,269,760 6.8 $17.52 1,095,797 $16.59
- ------ ------ --------- --- ------ --------- ------
F-19
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) for the twelve
months ended January 31, 2003, 2002 and 2001 are as follows (in thousands):
2003 2002 2001
---- ---- ----
Balance at beginning of Fiscal Year ($23,286) ($18,169) ($16,462)
Accounting change, net of tax -- 367 --
Net unrealized gain (loss) on investment,
net of tax (82) 199 --
Effective portion of unrealized gain
(loss) on hedging contracts, net of tax 4,584 (449) --
Foreign currency translation adjustment 38,170 (5,234) (1,707)
-------- -------- --------
Balance at end of Fiscal Year $ 19,386 ($23,286) ($18,169)
======== ======== ========
NOTE 13 - OTHER CHARGES
During the quarter ended October 31, 2001, the Company recorded a severance and
early retirement charge associated with a head count reduction of 38 U.S.
corporate and operations workforce spread across employee classes. The charge
associated with this reduction was $2.7 million pre-tax. At January 31, 2003 and
2002, $0.5 million and $2.2 million were included in accrued liabilities,
respectively.
NOTE 14 - SEGMENT INFORMATION
The Company divides its business into two major geographic segments: "Domestic,"
which includes the result of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and "International," which includes the
results of all other Company operations. The Company's international operations
are principally conducted in Europe, the Middle East and Asia. The Company's
international assets are substantially located in Europe.
The Company conducts its business primarily in three operating segments:
"Wholesale," "Retail" and "Other." The Company's wholesale segment includes the
designing, manufacturing and distribution of quality watches. Retail includes
the Movado Boutiques and outlet stores. Other segment includes the Company's
service center operations and shipping. 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.
F-20
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Operating Income (Loss)
--------- -----------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Wholesale $ 420,429 $ 394,196 $ 462,039 $ 30,110 $ 25,813 $ 35,867
Retail 53,882 47,172 39,303 512 (719) (1,183)
Other 8,293 8,832 5,480 1,154 1,179 (552)
Elimination (1) (182,527) (150,475) (185,981) -- -- --
--------- --------- --------- --------- --------- ---------
Consolidated total $ 300,077 $ 299,725 $ 320,841 $ 31,776 $ 26,273 $ 34,132
========= ========= ========= ========= ========= =========
Total Assets Capital Expenditures
------------ --------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Wholesale $268,236 $238,102 $236,711 $ 4,019 $ 8,029 $ 8,311
Retail 34,217 31,177 29,068 2,142 5,271 2,184
Other -- -- -- 4 5 7
Corporate (2) 42,701 21,397 24,626 360 597 331
-------- -------- -------- -------- -------- --------
Consolidated total $345,154 $290,676 $290,405 $ 6,525 $ 13,902 $ 10,833
======== ======== ======== ======== ======== ========
Depreciation and Amortization
-----------------------------
2003 2002 2001
---- ---- ----
Wholesale $6,077 $5,701 $4,460
Retail 1,852 1,507 1,157
Other 61 41 41
Corporate 379 301 683
------ ------ ------
Consolidated total $8,369 $7,550 $6,341
====== ====== ======
Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Long-lived Assets
--------- -----------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Domestic $ 275,730 $ 263,869 $ 304,265 $ 26,530 $ 26,770 $ 18,483
International 206,874 186,331 202,557 13,409 11,956 14,423
Elimination (1) (182,527) (150,475) (185,981) -- -- --
--------- --------- --------- --------- --------- ---------
Consolidated total $ 300,077 $ 299,725 $ 320,841 $ 39,939 $ 38,726 $ 32,906
========= ========= ========= ========= ========= =========
Income (Loss) Before Taxes
--------------------------
2003 2002 2001
---- ---- ----
Domestic $ 6,236 ($ 759) $ 5,469
International 21,624 21,617 22,220
-------- -------- --------
Consolidated total $ 27,860 $ 20,858 $ 27,689
======== ======== ========
(1) Elimination of intercompany sales.
(2) Corporate assets represent cash and fixed assets.
F-21
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2003 and 2002 (in thousands, except per share amounts):
Quarter Ended
-------------
1st 2nd 3rd 4th
--- --- --- ---
Fiscal 2003
Net sales $ 57,271 $ 72,244 $ 91,023 $ 79,539
Gross profit $ 35,179 $ 44,373 $ 55,775 $ 48,843
Net income $ 332 $ 5,372 $ 8,808 $ 5,547
Per share:
Net income:
Basic $ 0.03 $ 0.45 $ 0.74 $ 0.47
Diluted $ 0.03 $ 0.44 $ 0.73 $ 0.46
Fiscal 2002
Net sales $ 56,512 $ 78,352 $ 90,103 $ 74,758
Gross profit $ 34,944 $ 47,988 $ 55,879 $ 45,261
Net income (loss) ($237) $ 5,125 $ 7,524 $ 4,602
Per share:
Net income (loss):
Basic ($0.02) $ 0.44 $ 0.64 $ 0.39
Diluted ($0.02) $ 0.42 $ 0.63 $ 0.38
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 16 - 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,
-----------------------------
2003 2002 2001
---- ---- ----
Cash paid during the year for:
Interest $3,559 $4,963 $6,634
Income taxes $6,583 $9,118 $2,992
F-22
Schedule II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Provision
beginning charged to Currency Net Balance at
Description of year operations revaluation write-offs end of year
----------- ------- ---------- ----------- ---------- -----------
Year ended January 31, 2003: $ 4,070 $ 1,987 $ 93 ($915) $ 5,235
Allowance for doubtful accounts
Year ended January 31, 2002:
Allowance for doubtful accounts $ 4,442 $ 1,384 ($16) ($1,740) $ 4,070
Year ended January 31, 2001:
Allowance for doubtful accounts $ 3,604 $ 2,386 $ 3 ($1,551) $ 4,442
Balance at Provision
beginning charged to Currency Net Balance at
of year operations revaluation write-offs end of year
------- ---------- ----------- ---------- -----------
Year ended January 31, 2003:
Inventory reserve $ 8,151 $ 1,829 $ 848 ($6,505) $ 4,323
Year ended January 31, 2002:
Inventory reserve $ 9,607 $ 885 ($479) ($1,862) $ 8,151
Year ended January 31, 2001:
Inventory reserve $ 7,035 $ 3,550 $ 46 ($1,024) $ 9,607
Balance at Provision/
beginning (benefit) Currency Balance at
of year to operation revaluation Adjustments end of year
------- ------------ ----------- ----------- -----------
Year ended January 31, 2003:
Deferred tax assets valuation $ 1,480 ($12) $ 86 ($604) $ 950
Year ended January 31, 2002:
Deferred tax assets valuation $ 1,383 $ 110 ($13) $ -- $ 1,480
Year ended January 31, 2001:
Deferred tax assets valuation $ 1,439 ($75) $ 19 $ -- $ 1,383
S-1