Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended January 31, 2005,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period From to
Commission File Number 1-16497
MOVADO GROUP, INC.
(Exact name of registrant as specified in its charter)
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:
Name of Each Exchange
Title of Each Class on which Registered
- ---------------------------------------- ----------------------------------------
Common stock, par value $0.01 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 31, 2004 was approximately $297,563,403 (based on the
closing sale price of the registrant's Common Stock on that date as reported on
the New York Stock Exchange). For purposes of this computation, each share of
Class A Common Stock is assumed to have the same market value as one share of
Common Stock into which it is convertible and only shares of stock held by
directors and executive officers were excluded.
The number of shares outstanding of the registrant's Common Stock and Class
A Common Stock as of March 31, 2005 were 18,303,621 and 6,801,812, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to registrant's 2005
annual meeting of shareholders (the "Proxy Statement") are incorporated by
reference in Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
FORWARD-LOOKING STATEMENTS
Statements in this annual report on Form 10-K, including, without limitation,
statements under Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission ("SEC"), in the Company's press releases and oral statements made by
or with the approval of an authorized executive officer of the Company, which
are not historical in nature, are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management's assumptions. Words such as "expects", "anticipates", "targets",
"goals", "projects", "intends", "plans", "believes", "seeks", "estimates",
"may", "will", "should" and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company's future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs, plans
for future operations, expectations regarding capital expenditures and operating
expenses, effective tax rates, margins, interest costs, and income as well as
assumptions relating to the foregoing. Forward-looking statements are subject to
certain risks and uncertainties, some of which cannot be predicted or
quantified. Actual results and future events could differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC including, without
limitation, the following: general economic and business conditions which may
impact disposable income of consumers in the United States and the other
significant markets where the Company's products are sold, general uncertainty
related to possible terrorist attacks and the impact on consumer spending,
changes in consumer preferences and popularity of particular designs, new
product development and introduction, competitive products and pricing,
seasonality, availability of alternative sources of supply in the case of the
loss of any significant supplier, the loss of significant customers, the
Company's dependence on key employees and officers, the ability to successfully
integrate the operations of acquired businesses without disruption to other
business activities, the continuation of licensing arrangements with third
parties, ability to secure and protect trademarks, patents and other
intellectual property rights, ability to lease new stores on suitable terms in
desired markets and to complete construction on a timely basis, continued
availability to the Company of financing and credit on favorable terms, business
disruptions, disease, general risks associated with doing business outside the
United States including, without limitation, import duties, tariffs, quotas,
political and economic stability, and success of hedging strategies with respect
to currency exchange rate fluctuations.
Item 1. Business
CORPORATE ORGANIZATION
Movado Group, Inc. is a designer, manufacturer, retailer and distributor of
quality watches as well as proprietary jewelry, tabletop and accessory products,
with prominent watch 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 changed its
name to Movado Group, Inc. in 1996. The Company sold its Piaget and Corum
distribution businesses in 1999 and 2000, respectively.
1
In 1970, the Company acquired the Swiss manufacturer of Concord watches, which
had been manufacturing Concord watches since 1908, and in 1983, the Company
acquired the U.S. distributor of Movado watches and substantially all the assets
related to the Movado watch brand from the Swiss manufacturer of Movado watches.
The Movado brand, which was established in 1881, has become the Company's
largest brand.
On October 7, 1993, the Company completed a public offering of 2,666,667 shares
of common stock, par value $.01 per share (the "Common Stock"). On October 21,
1997, the Company completed a secondary stock offering in which 1,500,000 shares
of Common Stock were issued. On May 21, 2001, the Company moved from the NASDAQ
National Market to the New York Stock Exchange ("NYSE"). The Common Stock is
traded on the NYSE under the trading symbol MOV.
On December 22, 2003, the Company signed a definitive agreement with LVMH Moet
Hennessy Louis Vuitton ("LVMH") to acquire Ebel S.A. and the worldwide business
related to the Ebel brand. On March 1, 2004, the Company completed the
acquisition of Ebel with the exception of Ebel's business in Germany, which was
completed on July 30, 2004. The Ebel brand, one of the world's premier luxury
watch brands, was established in La Chaux-de-Fonds, Switzerland in 1911.
The Company operates internationally through wholly-owned subsidiaries in
Switzerland, France, Germany, United Kingdom, Hong Kong, Canada, Japan,
Singapore and Bermuda. Its executive offices are located in Paramus, New Jersey.
INDUSTRY OVERVIEW
The largest markets for watches are North America, Western Europe and Asia. The
Company's watch brands include Movado, Ebel, Concord, ESQ, Coach, Tommy Hilfiger
and as of March 21, 2005, Hugo Boss.
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 Ebel and Concord
Luxury $1,500 to $9,999 Ebel, Concord and Movado
Premium $500 to $1,499 Movado
Moderate $100 to $499 ESQ, Coach and Hugo Boss
Fashion Market $55 to $99 Tommy Hilfiger
Mass Market Less than $55 -
The Company's Ebel and Concord watches compete primarily in the Luxury category
of the market, although certain Ebel and 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 category. The Company's Coach, ESQ and Hugo Boss brands compete in the
Moderate category. The Company's Tommy Hilfiger brand competes in the Fashion
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
2
watches have quartz movements in which time is precisely calibrated to the
regular frequency of the vibration of quartz crystal. Exclusive watches are
manufactured almost entirely in Switzerland. In addition to the Company's
Concord and Ebel watches, well-known brand names of Exclusive watches include
Audemars Piguet, Patek Philippe, Piaget and Vacheron Constantin.
Luxury Watches
Luxury watches are either quartz-analog watches or mechanical watches. These
watches typically are made with either 14 or 18 karat gold, stainless steel or a
combination of gold and stainless steel, and are occasionally set with precious
gems. Luxury watches are primarily manufactured in Switzerland. In addition to a
majority of the Company's Concord and Ebel watches and certain Movado watches,
well-known brand names of Luxury watches include Baume & Mercier, Breitling,
Cartier, Omega, Rolex and TAG Heuer.
Premium Watches
The majority of Premium watches are quartz-analog watches. These watches
typically are made with gold finish, stainless steel or a combination of gold
finish and stainless steel. Premium watches are manufactured primarily in
Switzerland, although some are manufactured in Asia. In addition to a majority
of the Company's Movado watches, well-known brand names of Premium watches
include Gucci, Rado and Raymond Weil.
Moderate Watches
Most Moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in Asia and Switzerland. These watches typically are made
with gold finish, stainless steel, brass or a combination of gold finish and
stainless steel. In addition to the Company's ESQ, Coach and Hugo Boss brands,
well-known brand names of watches in the Moderate category include Anne Klein,
Bulova, Citizen, Gucci, Guess, Seiko and Wittnauer.
Fashion Market Watches
Watches comprising the Fashion 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 Market category are generally made with stainless steel, gold finish,
brass and/or plastic and are manufactured primarily in Asia. Fashion 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 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.
3
PRODUCTS
During fiscal 2005, the Company marketed six distinctive brands of watches:
Movado, Ebel, Concord, ESQ, Coach and Tommy Hilfiger, which compete in the
Exclusive, Luxury, Premium, Moderate and Fashion Market categories. The Company
designs, manufactures and contracts for the assembly of Movado, Ebel and Concord
watches primarily in Switzerland for sale throughout the world. ESQ and Tommy
Hilfiger watches are manufactured to the Company's specifications by independent
contractors located in Asia. ESQ watches are presently sold primarily in North
America and the Caribbean. Tommy Hilfiger watches are presently sold throughout
the world. Coach watches are assembled in Switzerland by independent contractors
and sold primarily in North America and Japan.
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 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 $495 and
$4,000.
Ebel
The Ebel brand, one of the world's premier luxury watch brands, was established
in La Chaux-de-Fonds, Switzerland in 1911. All Ebel watches feature Swiss
movements and are made with solid 18 karat gold, stainless steel or a
combination of 18 karat gold and stainless steel. The majority of Ebel watches
have suggested retail prices between $2,100 and $26,000.
Concord
Concord was founded in 1908 in Bienne, Switzerland. All Concord watches have
Swiss movements and are made with solid 18 karat or 14 karat gold, stainless
steel or a combination of 18 karat gold and stainless steel. The majority of
Concord watches have suggested retail prices between $1,700 and $16,500.
Coach
During fiscal 1999, the Company introduced Coach watches under an exclusive
license with Coach, Inc. The majority of Coach watches contain Swiss movements
and are made with stainless steel, gold finish or a combination of stainless
steel and gold finish with leather straps, stainless steel bracelets or gold
finish bracelets. The majority of Coach watches have suggested retail prices
ranging from $230 to $600.
ESQ
ESQ was launched in the second half of fiscal 1993 under an exclusive license
agreement with The Hearst Corporation. All ESQ watches contain Swiss movements
and are made with stainless steel, gold finish or a combination of stainless
steel and gold finish, with leather straps, stainless steel bracelets or gold
finish bracelets. The ESQ brand consists of sport and fashion watches with
features and styles comparable to more expensive watches. The majority of ESQ
watches have suggested retail prices ranging from $175 to $325.
4
Tommy Hilfiger
The Company launched Tommy Hilfiger watches in March 2001, under an exclusive
agreement with Tommy Hilfiger Licensing, Inc., marketed under the TOMMY
HILFIGER(R) and TOMMY(R) labels. Tommy Hilfiger watches feature quartz, digital
or analog-digital movements, with stainless steel, titanium, aluminum,
silver-tone, two-tone or gold-tone cases and bracelets, and leather, fabric,
plastic or rubber straps. The line includes fashion and sport models with the
majority of Tommy Hilfiger watches having suggested retail prices ranging from
$65 to $95.
RETAIL OPERATIONS
The Company operates in two retail sectors, the luxury boutique market and the
outlet market. At January 31, 2005, the Company's retail operations consisted of
24 Movado Boutiques and 27 outlet stores. Three additional Movado Boutiques and
one outlet are scheduled to open in the first half of fiscal year 2006. The
Movado Boutiques, the first of which opened in 1998, sell selected models of
Movado watches as well as proprietary jewelry, tabletop and accessory products.
The outlet stores serve as an effective vehicle to sell discontinued models and
factory seconds of all of the Company's watches, jewelry, tabletop and accessory
products.
WARRANTY AND REPAIR
The Company has service facilities around the world including five Company-owned
service facilities and 266 authorized independent service centers worldwide. In
addition, as part of the acquisition of the Ebel business on March 1, 2004, the
Company acquired the after-sale service operations of Ebel S.A. located in La
Chaux-de-Fonds, Switzerland, those of its French subsidiary and contracts with
approximately 70 independent Ebel service centers worldwide. The Company
conducts training sessions for and distributes technical information and updates
to repair personnel in order to maintain consistency and quality at its service
facilities and authorized independent service centers. The Company's products
are covered by limited warranties against defects in materials and workmanship
for periods ranging from two to three years from the date of purchase for
movements and up to five years for the gold plating on Movado watch casings and
bracelets. Products that are returned under warranty to the Company are
generally serviced by the Company's employees at its service facilities.
The Company retains adequate levels of component parts to facilitate after-sales
service of its watches for an extended period of time after the discontinuance
of such watches.
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 16.2%, 16.1% and 16.8% of net sales in fiscal 2005, 2004 and 2003,
respectively. Advertising is developed individually for each of the Company's
watch brands as well as Movado Boutique jewelry products, and is directed
primarily to the end consumer rather than to trade customers. In addition,
advertising is developed by targeting consumers with particular demographic
characteristics appropriate to the image and price range of the brand.
Advertisements are placed predominantly in magazines and other print media, but
are also created for radio and television campaigns, catalogs, outdoor and
promotional materials.
5
BACKLOG
At March 31, 2005, the Company had unfilled orders of approximately $21.4
million compared to $20.2 million and $15.0 million at March 31, 2004 and 2003,
respectively. 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
Movado, Ebel and Concord watches are generally assembled in Switzerland by
independent third party subcontract assemblers with some in-house assembly in
Bienne, Switzerland and in La Chaux-de-Fonds, Switzerland. Movado, Ebel and
Concord watches are assembled using Swiss movements and other components
obtained from third party suppliers. Additionally, the Company manufactures some
movements for the Ebel brand. The majority of Coach watches are assembled in
Switzerland by independent assemblers using Swiss movements and other components
obtained from third party suppliers in Switzerland and elsewhere. ESQ and Tommy
Hilfiger watches are assembled by independent contractors in Asia. ESQ watches
are manufactured using Swiss 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, Ebel,
Concord and ESQ watches are purchased from two suppliers. The Company obtains
other watch components for all of its manufactured brands, including movements,
cases, hands, dials, bracelets and straps from a number of other suppliers.
Precious stones used in the Company's watches are purchased from various
suppliers and are set in Switzerland. The Company does not have long-term supply
contract commitments with any of its component parts suppliers.
COMPETITION
The markets for each of the Company's watch brands are highly competitive. With
the exception of the Swatch Group, Ltd., a large Swiss-based competitor, no
single company competes with the Company across all of its brands. Certain
companies, however, compete with Movado Group, Inc. with respect to one or more
of its watch brands. Certain of these companies have, and other companies that
may enter the Company's markets in the future may have, substantially greater
financial, distribution, marketing and advertising resources than the Company.
The Company's future success will depend, to a significant degree, upon its
continued ability to compete effectively with regard to, among other things, the
style, quality, price, advertising, marketing, distribution and availability of
supply of the Company's watches and other products.
TRADEMARKS, PATENTS AND LICENSE AGREEMENTS
The Company owns the trademarks MOVADO(R), EBEL(R) and CONCORD(R), as well as
trademarks for the Movado Museum dial design, and related trademarks for watches
and jewelry in the United States and in numerous other countries.
The Company licenses ESQUIRE(R), ESQ(R) and related trademarks on an exclusive
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.
6
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 the Western
Hemisphere, Europe, Pan Pacific, Latin America and Korea. The initial term of
the license agreement with THLI expires December 31, 2006, but can be extended
at the request of the Company through December 31, 2011, if the Company is in
compliance with all material terms of the agreement.
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), EBEL(R),
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, Ebel and Concord watches because the Company
is the manufacturer of such watches. All of the Company's exclusion orders are
renewable.
On December 15, 2004, the Company entered into a License Agreement with Hugo
Boss Trademark Management GmbH & Co ("Hugo Boss"). The Company received a
worldwide exclusive license to use the trademark "HUGO BOSS" and any other
trademarks of Hugo Boss containing the names HUGO or BOSS, in connection with
the production, promotion and sale of watches. The Company is permitted to
assign its rights and sublicense the trademarks to its affiliates (although the
Company will remain liable after such assignment or sublicense under the License
Agreement). The term of the license is March 21, 2005 through December 31, 2013,
with an optional five-year renewal period.
EMPLOYEES
As of January 31, 2005, the Company had 1,219 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.
7
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS AND SEASONALITY
Overview
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches, in addition to revenue
generated from after-sales service activities and shipping. The Retail segment
includes the Company's Movado Boutiques and its outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's International operations
are principally conducted in Europe, the Middle East and Asia. The Company's
International assets are substantially located in Europe.
For operating segment data and geographic segment data for the years ended
January 31, 2005, 2004 and 2003, see Note 14 of the Form 10-K on Segment
Information.
Domestic Wholesale
The Company sells all of its brands in the domestic market primarily through
major jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc. and
Zales Corporation; department stores, such as Macy's, Neiman-Marcus, Saks Fifth
Avenue and in other department stores through Finlay Fine Jewelry; and
independent jewelers. Sales to trade customers in the United States, Canada and
the Caribbean are made directly by the Company's sales organization of
approximately 130 employees. Of these employees, sales representatives are
responsible for a defined geographic territory, specialize in a particular brand
and sell to and service the independent jewelers within their territory. Their
compensation is based on salary plus commission. The sales force also consists
of account executives and account representatives who, respectively, sell to and
service the chain and department store accounts. The latter typically handle
more than one of the Company's brands and are compensated based on salary and
incentives. In South America, the Company primarily sells Tommy Hilfiger watches
through independent distributors.
The Company's domestic sales are traditionally greater during the Christmas and
holiday season. Consequently, the Company's net sales historically have been
higher during the second half of the fiscal year. The second half of each year
accounted for approximately 58.7%, 58.6% and 56.8% of the Company's net sales
for the fiscal years ended January 31, 2005, 2004 and 2003, respectively. The
amount of net sales and operating income generated during the second half of
each fiscal year depends upon the general level of retail sales during the
Christmas and holiday season, as well as economic conditions and other factors
beyond the Company's control. The Company does not expect any significant change
in the seasonality of its domestic business in the foreseeable future.
International Wholesale
The Company sells Movado, Concord and Coach watches and, as of March 1, 2004,
Ebel watches, internationally through its own sales force of approximately 100
employees operating from the Company's sales and distribution offices in China,
France, Germany, Hong Kong, Japan, Singapore, Switzerland, the UK and the United
Arab Emirates. In addition, the Company sells Movado, Ebel, Concord, Coach and
Tommy Hilfiger watches through a network of independent distributors operating
in numerous countries around the world. A majority of the Company's arrangements
with its international distributors are long-term, generally require certain
minimum purchases and restrict the distributor from selling competitive
products. Major selling seasons in certain international markets center on
significant local holidays that occur in late winter or early spring.
8
Retail
The Company operates in two retail markets, the luxury boutique market and the
outlet market. The Company operates 24 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 27 outlet stores, which sell the Company's discontinued models and
factory seconds, and provide the Company with an organized and efficient method
of reducing inventory without competing directly with trade customers.
AVAILABLE INFORMATION
The Company's Internet address is www.movadogroupinc.com and it makes available
through that website its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after the same are
electronically filed with, or furnished to, the Securities and Exchange
Commission. The public may read any materials filed by the Company with the SEC
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that contains reports, proxy and information statements, and other information
regarding the Company at www.sec.gov.
The Company has adopted and posted on its website at www.movadogroupinc.com a
Code of Business Conduct and Ethics that applies to all directors, officers and
employees, including the Company's Chief Executive Officer, Chief Financial
Officer and principal accounting and financial officers. The Company will post
any amendments to the Code of Business Conduct and Ethics and any waivers that
are required to be disclosed by SEC regulations on the Company's website. In
addition, the Company's audit committee charter, compensation committee charter,
nominating/corporate governance committee charter and corporate governance
guidelines have been posted on the Company's website.
9
Item 2. Properties
The Company leases various facilities in the North America, Europe, the Middle
East and Asia for its corporate, manufacturing, distribution and sales
operations. As of January 31, 2005, the Company's leased facilities were 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 80,400 June 2013
Bienne, Switzerland Corporate functions, watch sales, 53,600 January 2007
distribution, assembly and repair
Villers le Lac, France European service and watch 12,800 January 2006
distribution
Markham, Canada Office, distribution and repair 11,200 June 2007
Kowloon, Hong Kong Watch sales, distribution and repair 9,200 June 2007
ChangAn Dongguan, China Quality control and engineering 7,800 March 2009
Hackensack, New Jersey Warehouse 6,600 July 2007
Munich, Germany Watch sales 3,300 August 2008
Grenchen, Switzerland Watch sales 2,800 December 2005
New York, New York Public relations office 2,700 April 2008
Coral Gables, Florida Caribbean office and watch sales 1,500 November 2006
Shanghai, China Market research 1,100 July 2006
Singapore Watch sales, distribution and repair 1,100 August 2006
Dubai, United Arab Emirates Watch sales 730 July 2007
Richmond-Upon-Thames, England Watch sales 500 June 2005
Tokyo, Japan Watch sales 240 July 2007
The Company also leases retail space averaging 1,600 square feet per store with
leases expiring from July 2005 to January 2015 for the operation of the
Company's 27 outlet stores. In addition, the Company leases retail space for the
operation of its Movado Boutiques, each of which averages 2,200 square feet
(with the exception of the Company's Soho Boutique in New York City which is
4,700 square feet) under leases expiring from March 2006 to January 2016.
With the acquisition of the Ebel worldwide business on March 1, 2004, the
Company acquired two properties totaling 16,000 square feet located in La
Chaux-de-Fonds, Switzerland used for manufacturing, storage and public
relations. In addition, the Company acquired an architecturally significant
building in La Chaux-de-Fonds.
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.
The Company believes that its existing facilities are suitable and adequate for
its current operations.
10
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 2005.
11
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
As of March 31, 2005, there were 50 holders of record of Class A Common Stock
and, the Company estimates 3,682 beneficial owners of the Common Stock
represented by 409 holders of record. The Common Stock is traded on the New York
Stock Exchange under the symbol "MOV" and on March 31, 2005, the closing price
of the Common Stock was $18.50. The quarterly high and low split-adjusted
closing prices for the fiscal years ended January 31, 2005 and 2004 were as
follows:
Fiscal Year Ended Fiscal Year Ended
January 31, 2005 January 31, 2004
----------------- -----------------
Quarter Ended Low High Low High
------ ------ ------ ------
April 30 $12.63 $15.31 $ 8.55 $ 9.98
July 31 $14.30 $17.24 $ 9.68 $11.91
October 31 $13.02 $17.81 $10.11 $11.87
January 31 $17.16 $18.95 $12.36 $15.49
In connection with the October 7, 1993 public offering, each share of the then
currently existing Class A Common Stock was converted into 10.46 shares of new
Class A Common Stock, par value of $.01 per share (the "Class A Common Stock").
Each share of Common Stock is entitled to one vote per share and each share of
Class A Common Stock is entitled to 10 votes per share on all matters submitted
to a vote of the shareholders. Each holder of Class A Common Stock is entitled
to convert, at any time, any and all such shares into the same number of shares
of Common Stock. Each share of Class A Common Stock is converted automatically
into Common Stock in the event that the beneficial or record ownership of such
shares of Class A Common Stock is transferred to any person, except to certain
family members or affiliated persons deemed "permitted transferees" pursuant to
the Company's Amended Restated Certificate of Incorporation. The Class A Common
Stock is not publicly traded and consequently, there is currently no established
public trading market for these shares.
During the fiscal year ended January 31, 2004, the Board of Directors approved a
$0.03 per share dividend in the first quarter and a $0.06 per share dividend in
the second, third and fourth quarters on the Common Stock and Class A Common
Stock. On March 10, 2004, the Board approved an increase in the quarterly cash
dividend rate from $0.06 to $0.08 per share and approved a 2 for 1 stock split
to be effected by means of a stock dividend distributable on June 25, 2004, to
shareholders of record as of June 11, 2004, with shareholder approval of an
increase in the number of authorized shares of Common Stock and Class A Common
Stock at the annual shareholders meeting. During the fiscal year ended January
31, 2005, the Board of Directors approved four $0.04 per share quarterly cash
dividends, which reflects the effect of the fiscal 2005 2 for 1 stock split. On
March 23, 2005, the Board approved an increase in the quarterly cash dividend
rate from $0.04 to $0.05 per share. The declaration and payment of future
dividends, if any, will be at the sole discretion of the Board of Directors and
will depend upon the Company's profitability, financial condition, capital and
surplus requirements, future prospects, terms of indebtedness and other factors
deemed relevant by the Board of Directors. See Notes 5 and 6 to the Consolidated
Financial Statements regarding contractual restrictions on the Company's ability
to pay dividends.
12
Item 6. Selected Financial Data
The selected financial data presented below has been derived from the
Consolidated Financial Statements. This information should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of this report. Amounts
are in thousands except per share amounts:
Fiscal Year Ended January 31,
------------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
Statement of Income Data:
Net sales $ 418,966 $ 330,214 $ 300,077 $ 299,725 $ 320,841
Cost of sales 168,818 129,908 115,907 115,653 123,392
--------- --------- --------- --------- ---------
Gross profit 250,148 200,306 184,170 184,072 197,449
Selling, general and administrative (1) (2) 215,072 165,525 152,394 157,799 163,317
--------- --------- --------- --------- ---------
Operating income 35,076 34,781 31,776 26,273 34,132
Income from litigation settlement, net 1,444 - - - -
Interest expense, net 3,430 3,044 3,916 5,415 6,443
--------- --------- --------- --------- ---------
Income before taxes and cumulative
effect of a change in accounting
principle 33,090 31,737 27,860 20,858 27,689
Provision for income taxes (3) (4) 6,783 8,886 7,801 3,735 6,922
--------- --------- --------- --------- ---------
Income before cumulative effect of a
change in accounting principle 26,307 22,851 20,059 17,123 20,767
Cumulative effect of a change in
accounting principle - - - (109) -
--------- --------- --------- --------- ---------
Net income $ 26,307 $ 22,851 $ 20,059 $ 17,014 $ 20,767
========= ========= ========= ========= =========
Net income per share-Basic (5) $ 1.06 $ 0.95 $ 0.84 $ 0.73 $ 0.89
Net income per share-Diluted (5) $ 1.03 $ 0.92 $ 0.82 $ 0.71 $ 0.88
Basic shares outstanding (5) 24,708 24,101 23,739 23,366 23,302
Diluted shares outstanding (5) 25,583 24,877 24,381 24,014 23,733
Cash dividends declared per share (5) $ 0.16 $ 0.105 $ 0.06 $ 0.06 $ 0.0525
Balance Sheet Data (End of Period):
Working capital (6) $ 303,696 $ 252,883 $ 219,420 $ 153,932 $ 154,637
Total assets $ 476,950 $ 390,967 $ 345,154 $ 290,676 $ 290,405
Total long-term debt $ 45,000 $ 35,000 $ 35,000 $ 40,000 $ 45,000
Shareholders' equity $ 316,558 $ 274,713 $ 236,212 $ 172,470 $ 159,470
(1) Fiscal 2005 includes a non-cash impairment charge of $2.0 million recorded
in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144").
(2) Fiscal 2002 includes a one-time severance and early retirement charge of
$2.7 million.
(3) The effective tax rate for fiscal 2005 was reduced to 20.5% principally as
the result of adjustments in the fourth quarter relating to refunds from a
retroactive Swiss tax ruling, a favorable U.S. tax accrual adjustment, and
the recording of the tax benefit from an asset impairment in the U.S.
(4) The fiscal 2002 effective tax rate of 17.9% reflects a decrease in the
Company's U.S. source earnings as a percentage of the overall earnings mix
as compared to a fiscal 2001 effective rate of 25.0%.
(5) For all periods presented, basic and diluted shares outstanding, and the
related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
(6) The Company defines working capital as current assets less current
liabilities.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Wholesale Sales. The primary factors that influence annual sales are general
economic conditions in the Company's domestic and international markets, new
product introductions, the level and effectiveness of advertising and marketing
expenditures and product pricing decisions.
Approximately 21.2% of the Company's total sales are from international markets
and therefore reported sales made in those markets are affected by foreign
exchange rates. Significant portions of the Company's international sales are
billed in Swiss francs and translated to U.S. dollars at average exchange rates
for financial reporting purposes. With the acquisition of Ebel in March of 2004
and the introduction of Hugo Boss watches, the Company expects that a
slightly higher percentage of its total sales will be derived from international
markets in the future.
The Company's business is seasonal. There are two major selling seasons in the
Company's markets: the spring season, which includes school graduations and
several holidays and, most importantly, the Christmas and holiday season. Major
selling seasons in certain international markets center on significant local
holidays that occur in late winter or early spring. The Company's net sales
historically have been higher during the second half of the fiscal year. The
second half of the fiscal year accounted for approximately 58.7%.
Retail Sales. The Company's retail operations consist of 24 Movado Boutiques and
27 outlet stores located throughout the United States. The Company does not have
any retail operations outside of the United States.
The significant factors that influence annual sales volumes in the Company's
retail operations are similar to those that influence domestic wholesale sales.
In addition, many of the Company's outlet stores are located near vacation
destinations and, therefore, the seasonality of these stores is driven by the
peak tourist seasons associated with these locations.
Gross Margins. The Company's overall gross margins are primarily affected by
four major factors: brand and product sales mix, product pricing strategy,
manufacturing costs and the U.S. dollar/Swiss franc exchange rate. Gross margins
for the Company may not be comparable to those of other entities, since some
entities include all the costs related to its distribution network in cost of
sales whereas the Company does not include the costs associated with the U.S.
warehousing and distribution facility nor the occupancy costs for the retail
segment in the cost of sales line item.
Gross margins vary among the brands included in the Company's portfolio and also
among watch models within each brand. Watches in the luxury and premium price
point categories generally earn lower gross margin percentages than moderate
price models. Gross margins in the Company's outlet business are lower than
those of the wholesale business since the outlets primarily sell seconds and
discontinued models that generally command lower selling prices. Gross margins
from the sale of watches in the Movado Boutiques exceed those of the wholesale
business since the Company earns margins from manufacture to point of sale to
the consumer.
All of the Company's brands compete with a number of other brands on the basis
of not only styling but also wholesale and retail price. The Company's ability
to improve margins through price increases is therefore, to some extent,
constrained by competitors' actions.
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
14
sourcing in Switzerland and Asia and assembly in Switzerland. Through
productivity improvement efforts, the Company has controlled the level of
overhead costs and maintained flexibility in its cost structure by outsourcing a
significant portion of its component and assembly requirements and expects to
extend this strategy over the near term.
Since a substantial amount of the Company's product costs are incurred in Swiss
francs, fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company's 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 had the
effect of minimizing the exchange rate impact on product costs and gross
margins.
Selling, General and Administrative ("SG&A") Expenses. The Company's SG&A
expenses consist primarily of advertising, selling, distribution and general and
administrative expenses. Annual advertising expenditures are based principally
on overall strategic considerations relative to maintaining or increasing market
share in markets that management considers to be crucial to the Company's
continued success as well as on general economic conditions in the various
markets around the world in which the Company sells its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, 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 selling 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to the Company's
consolidated financial statements. The preparation of these financial statements
and the application of certain critical accounting policies require management
to make judgments based on estimates and assumptions that affect the information
reported. On an on-going basis, management evaluates its estimates and
judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, financing operations, warranty
obligations, and contingencies and litigation. Management bases its estimates
and judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources on historical experience, contractual
commitments and on various other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Management believes the following are the
critical accounting policies requiring significant judgments and estimates used
in the preparation of its consolidated financial statements.
15
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances as a
reduction of revenue in the same period that the sales are recorded. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
Allowance for Doubtful Accounts
Accounts receivable are reduced by an allowance for amounts that may be
uncollectible in the future. Estimates are used in determining the allowance for
doubtful accounts and are based on 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, 2005, the Company
knew of no situations with any of the Company's major customers which would
indicate the customer's inability to make their required payments.
Inventories
The Company values its inventory at the lower of cost or market using the
first-in, first-out (FIFO) method. The cost of finished goods and component
inventories, held by overseas subsidiaries, are determined using average cost.
The Company's management regularly reviews its sales to customers and customers'
sell through at retail to evaluate the adequacy of inventory reserves. Inventory
with less than acceptable turn rates is classified as discontinued and, together
with the related component parts which can be assembled into saleable finished
goods, is sold through the Company's outlet stores. When management determines
that finished product and components are unsaleable in the Company's outlet
stores, a reserve is established for the cost of those products and components.
These estimates could vary significantly, either favorably or unfavorably, from
actual requirements depending on future economic conditions, customer inventory
levels or competitive conditions which may differ from the Company's
expectations.
Long-Lived Assets
The Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable in accordance with Statement of Financial
Accounting Standards No. 144. "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). When such a determination has been made,
management compares the carrying value of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the present value
of estimated future cash flows or comparable market values, giving consideration
to recent operating performance and pricing trends.
16
During the fourth quarter of fiscal 2005, the Company determined that the
carrying value of its long-lived assets in the Movado Boutique located in the
Soho section of New York City, might not be recoverable. The impairment review
was performed pursuant to SFAS No. 144 because of an economic downturn affecting
the Soho Boutique operations and revenue forecasts. As a result, the Company
recorded a non-cash pretax impairment charge of $2.0 million consisting of
property, plant and equipment of $0.8 million and other assets of $1.2 million.
The entire impairment charge is included in the selling, general and
administrative expenses in the fiscal 2005 Consolidated Statements of Income.
The Company will continue to operate this boutique. There were no impairment
losses related to long-lived assets in fiscal 2004 or 2003.
Warranty
All watches sold by the Company are covered by limited warranties against
defects in material and workmanship for periods ranging from two to three 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.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for fiscal 2005
compared to fiscal 2004 and fiscal 2004 compared to fiscal 2003 along with a
discussion of the changes in financial condition during fiscal 2005.
The following are net sales by business segment (in thousands):
Fiscal Year Ended January 31,
---------------------------------------------
2005 2004 2003
--------- --------- ---------
Wholesale:
Domestic $ 256,331 $ 224,866 $ 207,819
International 88,697 44,475 38,376
Retail 73,938 60,873 53,882
--------- --------- ---------
Net Sales $ 418,966 $ 330,214 $ 300,077
========= ========= =========
17
The following table presents the Company's results of operations expressed as a
percentage of net sales for the fiscal years indicated:
Fiscal Year Ended January 31,
----------------------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
% of net sales % of net sales % of net sales
-------------- -------------- --------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 40.3% 39.3% 38.6%
Selling, general and administrative expenses 51.3% 50.1% 50.8%
Interest expense, net 0.8% 0.9% 1.3%
Net income 6.3% 6.9% 6.7%
Fiscal 2005 Compared to Fiscal 2004
Net Sales
Net sales in fiscal 2005 were $419.0 million, or 26.9% above fiscal 2004 sales
of $330.2 million. For the year, sales increases were recorded in all brands and
business segments.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 14.0%, or $31.5 million, to $256.3
million, including Ebel sales of $15.7 million. A sales increase of $7.2 million
was recorded in the Movado brand. The increase is attributed to new product
introductions at more affordable price points as well as increased sell through
at certain retailers in key customer chain stores. The Coach brand increased by
$2.3 million as a result of the introduction of fashion products in tandem with
new product offerings by Coach, Inc. The Tommy Hilfiger watch business increased
by $4.4 million. This reflects the expansion into new doors in the North
American marketplace as well as the continued strength of the Tommy Hilfiger
watch business.
International Wholesale Net Sales
The international wholesale business was $88.7 million and was above prior year
by $44.2 million or 99.4%, including Ebel sales of $28.5 million. An increase of
$6.3 million was recorded in Tommy Hilfiger as a result of international market
expansion. Coach, Concord and Movado increased by $2.0 million, $5.0 million and
$2.3 million, respectively, due to growth primarily recorded in Asia.
Retail Net Sales
Sales in the Company's retail segment increased by $13.1 million, or 21.5%, to
$73.9 million. Comparable store sales increases of 11.2% were achieved in the
Movado Boutiques. In addition, new store sales grew by $10.4 million over the
prior year. Comparable store sales in the Company outlet stores were flat year
over year. At January 31, 2005, the Company operated 24 Movado Boutiques and 27
outlet stores as compared to 17 Movado Boutiques and 26 outlet stores at January
31, 2004.
18
Gross Margin
Gross margin for the year was $250.1 million, an increase of $49.8 million over
prior year gross margin of $200.3 million. The increase of $49.8 million was due
to increased sales of $88.8 million. As a percent of sales, gross margin was
59.7% versus 60.7% in the prior year. The lower gross margin percentage was
primarily attributed to a sales mix change due to the addition of Ebel and the
increased sales of Tommy Hilfiger, where the gross margins are lower than the
Company's historical average.
Selling, General and Administrative Expenses
SG&A expenses of $215.1 million increased by $49.5 million, or 29.9%, from
$165.5 million in fiscal 2004. The primary reasons for the increases were the
addition of Ebel, which recorded $28.3 million of incremental expenses, $6.6
million of increased spending in support of the Movado Boutique expansion,
higher payroll and related costs of $6.4 million, additional marketing programs
of $1.3 million and other corporate initiatives of $2.2 million, which included
higher legal costs, costs incurred in connection with Sarbanes-Oxley
implementation and costs associated with the acquisition of Ebel which could not
be capitalized. In addition, in accordance with SFAS No. 144, the Company
recorded a non-cash impairment charge of $2.0 million which is included in SG&A.
Wholesale Operating Income
Operating income in the wholesale segment decreased by $1.5 million to $33.4
million. The effect of the addition of Ebel was an operating loss for the year
of $3.8 million. Excluding the loss of Ebel, operating income in the wholesale
segment was $37.2 million or an increase over prior year of $2.3 million. The
increase excluding the effect of Ebel is the net result of higher gross margin
of $14.9 million, partially offset by the increase in SG&A expenses of $12.6
million.
The higher gross margin of $14.9 million was the result of an increase in net
sales of $30.3 million. The increase in the SG&A expenses of $12.6 million is
primarily due to $1.7 million in the wholesale segment as a result of the
translation impact of the weak U.S. dollar, an increase of $1.3 million in
marketing spending, which includes support for the Movado expansion in China and
support for the international market expansion of Tommy Hilfiger, higher payroll
and related costs of $6.4 million and $2.2 million in other corporate
initiatives including higher legal costs, costs incurred in connection with
Sarbanes-Oxley implementation and costs associated with the acquisition of Ebel
which could not be capitalized.
Retail Operating Income (Loss)
Operating income in the retail segment increased by $1.8 million. The increase
is the net result of higher gross margin of $10.5 million partially offset by
increased SG&A expenses of $8.7 million.
The retail segment higher gross margin was due to a net sales increase of $13.1
million. This was primarily due to comparable store sales increases in the
Movado Boutiques of 11.2% and the opening of seven new Movado Boutiques and one
new outlet store. The comparable store sales in the outlet stores were flat year
over year.
The increase in SG&A expenses of $8.7 million was primarily attributed to the
costs associated with the opening of the seven new Movado Boutiques and one new
outlet store of $6.6 million and the effect of the impairment charge related to
the Soho Boutique of $2.0 million.
19
Income from Litigation Settlement
The Company recognized income for the year ended January 31, 2005 from a
litigation settlement with Swiss Army Brands, Inc. in the net amount of $1.4
million. This consisted of a gross settlement of $1.9 million partially offset
by direct costs related to the litigation of $0.5 million. After accounting for
fees and taxes associated with the settlement, net income increased by $0.8
million, or $0.03 per diluted share.
Interest Expense
Interest expense for fiscal 2005 was $3.4 million, reflecting a 12.7% increase
over fiscal 2004 interest of $3.0 million. The increase was primarily the result
of higher average borrowings, which were $58.0 million or 14.9% above the prior
year. The increased borrowings were initiated to take advantage of low long-term
rates and to improve the Company's capital structure.
Income Taxes
The Company's income tax provision amounted to $6.8 million and $8.9 million in
fiscal 2005 and 2004 respectively. This represents an effective tax rate of
20.5% in fiscal 2005 compared to 28% for fiscal 2004. The lower effective tax
rate for fiscal 2005 is primarily due to adjustments in the fourth quarter
relating to refunds from a retroactive Swiss tax ruling, a favorable U.S. tax
accrual adjustment and the recording of the tax benefit from an asset impairment
in the U.S.
Fiscal 2004 Compared to Fiscal 2003
Net Sales
Net sales in fiscal 2004 were $330.2 million, or 10.0% above fiscal 2003 sales
of $300.1 million. For the year, sales increases were recorded in all brands and
business segments.
Domestic Wholesale Net Sales
The domestic wholesale business increased by 8.2%, or $17.0 million, to $224.9
million. A sales increase of $7.2 million was recorded in the Movado brand with
the opening of new doors in the chain and department store business. The Coach
brand increased by $3.4 million and was attributed to the introduction of
fashion products in tandem with Coach, Inc. new product offerings. The Company
intends to continue to provide products viewed as accessories to the Coach
leather goods customer. The Concord brand increased by $2.9 million and was
fueled by the introduction of new, more accessibly priced steel products. The
Tommy Hilfiger brand increased by $2.0 million, which reflects the expansion
into new doors in the North American marketplace.
International Wholesale Net Sales
The international wholesale business was $44.5 million and was above prior year
by 15.9%, or $6.1 million. The effect of translating the weaker U.S. dollar
resulted in an increase in net sales of $3.9 million. Increases of $5.2 million
were recorded in Tommy Hilfiger as a result of international market expansion.
The Movado business was below prior year by $3.2 million as a result of
difficult economic conditions in Europe and South America.
20
Retail Net Sales
Sales in the Company's retail segment increased by $7.0 million, or 13.0%, to
$60.9 million. Comparable store sales increases of 20.1% were recorded in the
Movado Boutiques. In addition, sales increases of $3.8 million were recorded as
a result of the expansion into seven new Movado Boutiques opened in fiscal 2004.
At January 31, 2004, the Company operated 17 Movado Boutiques and 26 outlet
stores as compared to 10 Movado Boutiques and 26 outlet stores at January 31,
2003.
Gross Margin
Gross margin for the year was $200.3 million, an increase of $16.1 million over
prior year gross margin of $184.2 million. The increase of $16.1 million was
largely due to increased sales of $30.1 million. Included in these incremental
margins were the effects of foreign currency translation which resulted in an
increase in gross margin of $3.2 million. As a percent of sales, gross margin
was 60.7% versus 61.4% in the prior year. The lower gross margin percentage was
primarily attributed to the effect of the increased sales mix of Tommy Hilfiger,
where the gross margin for this business is lower than the Company's historical
average.
Selling, General and Administrative Expenses
SG&A expenses of $165.5 million reflect an increase of $13.1 million from $152.4
million in fiscal 2003. Included in the $13.1 million increase in SG&A expenses
is approximately $2.7 million in higher costs as a result of the translation
impact of the weak U.S. dollar. In addition, there was increased marketing
spending of $2.6 million, which included the new Movado television campaign,
increased operating costs of approximately $4.0 million to support the seven new
Movado Boutiques, and $4.1 million of higher payroll and related costs.
Wholesale Operating Income
Operating income in the wholesale segment increased by $5.4 million to $34.9
million. The increase is the net result of higher gross margin of $12.6 million,
partially offset by the increase in SG&A expenses of $7.2 million.
The higher gross margin was the result of an increase in net sales of $23.1
million. The principal reasons for the increase in the SG&A expenses of $7.2
million were approximately $2.7 million in the wholesale segment as a result of
the translation impact of the weak U.S. dollar, an increase of $1.8 million in
marketing spending, which included the production and airing of the new Movado
brand television campaign, and higher payroll and related costs of $4.1 million.
Retail Operating Income (Loss)
Operating income in the retail segment decreased by $2.4 million. The decrease
was the net result of higher SG&A expenses of $6.0 million partially offset by
higher gross margin of $3.6 million.
The retail segment higher gross margin was due to a net sales increase of $7.0
million, primarily the result of opening seven new Movado Boutiques which
accounted for $3.8 million and comparable store sales increases in the Movado
Boutiques of $2.6 million. The increase in SG&A expenses of $6.0 million was
primarily due to costs associated with the opening of the new Movado Boutiques
of approximately $4.0 million, as well as increased spending in existing Movado
Boutiques of $1.2 million primarily to support the related back office
infrastructure.
21
Interest Expense
Interest expense in fiscal 2004 declined by $0.9 million from $3.9 million in
fiscal 2003 to $3.0 million in fiscal 2004. The decrease was due to
significantly lower weighted-average bank borrowings. The average borrowings
for fiscal 2004 were $50.5 million or 25.7% lower than fiscal 2003 borrowings of
$68.0 million. This was due to favorable cash flow and working capital
management.
Income Taxes
The Company's income tax provision amounted to $8.9 and $7.8 million in fiscal
2004 and 2003, respectively. This represents a 28.0% effective tax rate in both
fiscal years. Management believes that with the acquisition of Ebel, a slightly
higher percentage of its total sales will be derived from lower tax rate
international markets; thereby slightly reducing the Company's overall effective
rate in fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2005, the Company had $63.8 million of cash and cash equivalents
as compared to $82.1 million in the comparable prior year period. The $18.3
million decrease is primarily due to the use of $43.5 million to fund the Ebel
acquisition and capital expenditures of $14.9 million, primarily to support the
build out of the new retail stores, remodeling of existing stores and the
expansion of office space in the corporate headquarters in Paramus, New Jersey.
These investing activities were offset by $30.2 million of cash provided by
operating activities.
Cash generated by operating activities continues to be the Company's primary
source to fund its growth initiatives and to pay dividends. In fiscal 2005, 2004
and 2003, the Company generated cash from operations of $30.2 million, $51.6
million and $33.3 million, respectively.
Accounts receivable at January 31, 2005 was $102.6 million as compared to $88.8
million in the comparable prior year period. The $13.8 million increase in
accounts receivable reflects the addition of Ebel receivables of $13.4 million
and the negative effect of currency translation of $0.9 million. Excluding these
two factors, accounts receivable was $0.5 million below the comparable prior
year period. This decrease is the result of a shift in the mix of sales growth
as well as improved global cash collections.
Inventories at January 31, 2005 were $187.9 million as compared to $121.7
million in the comparable prior year period. The $66.2 million increase is
primarily due to the addition of $41.4 million of Ebel inventory. The remaining
$24.8 million increase in inventory resulted from the addition of $5.7 million
to support the retail growth strategy, an increase of $3.2 million due to the
effect of foreign currency translation and an increase of $15.9 million in other
brand inventory to support the expansion of the domestic and international
wholesale business, including new products for introduction at the international
trade fair held in Basel, Switzerland.
Cash provided by / (used) in financing activities amounted to $3.6 million,
($1.9) million and ($11.1) million in fiscal 2005, 2004 and 2003, respectively.
Cash provided by financing activities during fiscal 2005 was primarily the
result of a net increase in long-term debt of $10.0 million partially offset by
the payment of a $5.2 million mortgage assumed as part of the Ebel acquisition.
At January 31, 2005, the Company paid off its Senior Notes due January 31, 2005,
which were originally issued in a private placement completed in fiscal 1994.
These notes had required annual principal payments of $5.0 million since January
1998 and bore interest of 6.56% per annum. The Company repaid $10.0 million of
the final principal due in fiscal 2005. The Company did not repay any principal
in fiscal 2004 due to the timing of when principal payment was due. At January
31, 2005, no principal of these notes remained outstanding.
22
During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes
under a Note Purchase and Private Shelf Agreement dated November 30, 1998. These
notes bear interest of 6.90% per annum, mature on October 30, 2010 and are
subject to annual repayments of $5.0 million commencing October 31, 2006. At
January 31, 2005, $25.0 million was issued and outstanding.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Notes"), in an aggregate
principal amount of $20.0 million, which will mature on October 8, 2011 and are
subject to annual repayments of $5.0 million commencing on October 8, 2008.
Proceeds of the Senior Notes will be used by the Company for capital
expenditures, repayment of certain of its debt obligations and general corporate
purposes. As of January 31, 2005, $20.0 million was issued and outstanding.
On June 17, 2003, the Company completed the renewal of its revolving credit line
with its bank group. The agreement provides for a three year $75.0 million
unsecured revolving line of credit and $15.0 million of uncommitted working
capital lines. The line of credit expires on June 17, 2006. The Company had no
outstanding borrowings under its bank lines at January 31, 2005 and January 31,
2004. In addition, 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 expiration dates through May 15, 2006.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million and 8.8 million Swiss francs, with dollar equivalents of
approximately $6.7 million and $7.0 million at January 31, 2005 and 2004,
respectively, of which a maximum of $5.0 million may be drawn under the terms of
the Company's revolving credit line with its bank group. As of January 31, 2005,
the Swiss bank has guaranteed the Company's Swiss subsidiary's obligations to
certain Swiss third parties in the amount of approximately $2.8 million in
various foreign currencies. As of January 31, 2005, there are no borrowings
against these lines.
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 2005 or
fiscal 2004. As of January 31, 2005, the Company had authorization to repurchase
shares up to $4.5 million against an aggregate authorization of $30.0 million.
For fiscal 2005, treasury shares increased by 336,854 as the result of cashless
exercises of stock options for 821,957 shares of stock.
Cash dividends in fiscal 2005 amounted to $4.0 million compared to $2.5 million
in fiscal 2004 and $1.6 million in fiscal 2003.
At January 31, 2005, the Company had working capital of $303.7 million as
compared to $252.9 million in the prior year. The Company defines working
capital as the difference between current assets and current liabilities. The
Company expects that annual capital expenditures in the near term will
approximate the fiscal 2005 levels. Management believes that the cash on hand in
addition to the expected cash flow from operations and the Company's short-term
borrowing capacity will be sufficient to meet its working capital needs for at
least the next 12 months.
23
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments due by period (in thousands):
Less than 1 2-3 4-5 More than 5
Total year years years years
---------- ----------- ------------- ------------- ------------
Contractual Obligations:
Long-Term Debt Obligations (1) $ 45,000 - $ 10,000 $ 20,000 $ 15,000
Interest Payments on Long-Term Debt (1) 10,789 1,820 6,497 2,060 412
Operating Lease Obligations (2) 80,597 12,186 21,444 17,610 29,357
Purchase Obligations (3) 34,663 34,663 - - -
---------- ----------- ------------- ------------- ------------
Total Contractual Obligations $ 171,049 $ 48,669 $ 37,941 $ 39,670 $ 44,769
========== =========== ============= ============= ============
(1) The Company has long-term debt obligations and related interest payments of
$55.8 million related to Series A-2004 Senior Notes and Series A Senior Notes
further discussed in "Liquidity and Capital Resources".
(2) Includes store operating leases, which generally provide for payment of
direct operating costs in addition to rent. These obligation amounts include
future minimum lease payments and exclude such direct operating costs.
(3) The Company had outstanding purchase obligations with suppliers at the end
of fiscal 2005 for raw materials, finished watches and packaging in the normal
course of business. These purchase obligation amounts do not represent total
anticipated purchases but represent only amounts to be paid for items required
to be purchased under agreements that are enforceable, legally binding and
specify minimum quantity, price and term.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 will improve financial reporting by clarifying that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges by requiring the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, and is not expected to have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment", which is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123(R)"). SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash
Flows". Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continued to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes formula to estimate the
value of stock options granted to employees. SFAS No. 123(R) requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company is currently assessing the impact of this pronouncement on its
consolidated statement of operations and its consolidated statement of cash
flows.
24
Also in December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's current financial position or results of operations.
25
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency Exchange Rate Risk
The Company's primary market risk exposure relates to foreign currency exchange
risk (see Note 7 to the Consolidated Financial Statements). The majority of the
Company's purchases are denominated in Swiss francs. The Company reduces its
exposure to the Swiss franc exchange rate risk through a hedging program. Under
the hedging program, the Company manages most of its foreign currency exposures
on a consolidated basis, which allows it to net certain exposures and take
advantage of natural offsets. The Company uses various derivative financial
instruments to further reduce the net exposures to currency fluctuations,
predominantly forward and option contracts. These derivatives either (a) are
used to hedge the Company's Swiss franc liabilities and are recorded at fair
value with the changes in fair value reflected in earnings or (b) are documented
as SFAS No. 133 cash flow hedges with the gains and losses on this latter
hedging activity first reflected in other comprehensive income, and then later
classified into earnings. In both cases, the earnings impact is partially offset
by the effects of currency movements on the underlying hedged transactions. If
the Company did not engage in a hedging program, any change in the Swiss franc
to local currency would have an equal effect on the Company's cost of sales. In
addition, the Company hedges its Swiss franc payable exposure with forward
contracts. As of January 31, 2005, the Company's entire net forward contracts
hedging portfolio consisted of 239.0 million Swiss francs equivalent for various
expiry dates ranging through January 27, 2006. The Company also has 30.0 million
Swiss franc option contracts related to cash flow hedges for various expiry
dates ranging through October 31, 2005.
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, 2005, the Company's
purchased option hedge portfolio related to net investment hedging amounted to
50.0 million Swiss francs with various expiry dates ranging through September
27, 2006.
Commodity Risk
Additionally, the Company has a hedging program related to gold used in the
manufacturing of the Company's watches. Under this hedging program, the Company
purchases various commodity derivative instruments, primarily future contracts.
These derivatives are documented as SFAS No. 133 cash flow hedges, and gains and
losses on these derivative instruments are first reflected in other
comprehensive income, and later reclassified into earnings, partially offset by
the effects of gold market price changes on the underlying actual gold
purchases. If the Company did not engage in a gold hedging program, any changes
in the gold price would have an equal effect on the Company's cost of sales. The
Company did not hold any futures contracts in its gold hedge portfolio related
to cash flow hedges as of January 31, 2005.
Debt and Interest Rate Risk
In addition, the Company has certain debt obligations with variable interest
rates, which are based on LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The differences between the market
based interest rates at January 31, 2005, and the fixed rates were unfavorable.
The Company believes that a 1% change in interest rates would affect the
Company's net income by approximately $0.2 million, which is not material.
26
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule Page
Number Number
-------- -----------
Management's Annual Report on Internal Control Over Financial Reporting F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Income for the fiscal years ended January 31, 2005,
2004 and 2003 F-4
Consolidated Balance Sheets at January 31, 2005 and 2004 F-5
Consolidated Statements of Cash Flows for the fiscal years ended January
31, 2005, 2004 and 2003 F-6
Consolidated Statements of Changes in Shareholders' Equity for the fiscal years
ended January 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8 to F-30
Valuation and Qualifying Accounts and Reserves II S-1
27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as
amended (the "Exchange Act"). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of the end of the period covered by
this report.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There has been no change in the Company's internal control over financial
reporting during the quarter ended January 31, 2005, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
It should be noted that while the Company's Chief Executive Officer and Chief
Financial Officer believe that the Company's disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that the Company's disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
See Financial Statements and Supplementary Data for Management's Annual
Report on Internal Control Over Financial Reporting and Report of Independent
Registered Public Accounting Firm containing an attestation thereto.
28
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 2005 annual meeting of shareholders under the captions
"Election of Directors" and "Management" and is incorporated herein by
reference.
Information on the beneficial ownership reporting for the Company's directors
and executive officers is contained in the Company's Proxy Statement for the
2005 annual meeting of shareholders under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
Information on the Company's Audit Committee and Audit Committee Financial
Expert is contained in the Company's Proxy Statement for the 2005 annual meeting
of shareholders under the caption "Information Regarding the Board of Directors
and Its Committees" and is incorporated herein by reference.
The Company has adopted and posted on its website at www.movadogroupinc.com a
Code of Business Conduct and Ethics that applies to all directors, officers and
employees, including the Company's Chief Executive Officer, Chief Financial
Officer and principal financial and accounting officers. The Company will post
any amendments to the Code of Business Conduct and Ethics, and any waivers that
are required to be disclosed by SEC regulations, on the Company's website.
Item 11. Executive Compensation
The information required by this item is included in the Company's Proxy
Statement for the 2005 annual meeting of shareholders under the captions
"Executive Compensation" and "Compensation of Directors" and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included in the Company's Proxy
Statement for the 2005 annual meeting of shareholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included in the Company's Proxy
Statement for the 2005 annual meeting of shareholders under the caption "Certain
Relationships and Related Transactions" and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is included in the Company's Proxy
Statement for the 2005 annual meeting of shareholders under the caption "Fees
Paid to PricewaterhouseCoopers LLP" and is incorporated herein by reference.
29
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
--------------------------------------
1. Financial Statements:
See Financial Statements Index on page 27 included in Item 8 of Part
II of this annual report.
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying
Accounts and Reserves
All other schedules are omitted because they are not applicable, or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits:
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index on pages 33 through 40 of this annual report.
30
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 18, 2005 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 18, 2005 /s/ Gedalio Grinberg
--------------------------------------
Gedalio Grinberg
Chairman of the Board of Directors
Dated: April 18, 2005 /s/ Efraim Grinberg
--------------------------------------
Efraim Grinberg
President and Chief Executive Officer
Dated: April 18, 2005 /s/ Richard J. Cote
--------------------------------------
Richard J. Cote
Executive Vice President and
Chief Operating Officer
Dated: April 18, 2005 /s/ Eugene J. Karpovich
--------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
Dated: April 18, 2005 /s/ Margaret Hayes Adame
--------------------------------------
Margaret Hayes Adame
Director
Dated: April 18, 2005 /s/ Donald Oresman
--------------------------------------
Donald Oresman
Director
31
Dated: April 18, 2005 /s/ Leonard L. Silverstein
--------------------------------------
Leonard L. Silverstein
Director
Dated: April 18, 2005 /s/ Alan H. Howard
--------------------------------------
Alan H. Howard
Director
Dated: April 18, 2005 /s/ Nathan Leventhal
--------------------------------------
Nathan Leventhal
Director
Dated: April 18, 2005 /s/ Michael J. Hand
--------------------------------------
Michael J. Hand
Vice President,
Corporate Controller and
Principal Accounting Officer
32
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
3.1 Restated By-Laws of the Registrant.
Incorporated by reference to Exhibit 3.1
filed with the Company's Registration
Statement on Form S-1 (Registration No.
33-666000).
3.2 Restated Certificate of Incorporation of the
Registrant as amended. Incorporated herein by
reference to Exhibit 3(i) to the Registrant's
Quarterly Report on Form 10-Q filed for the
quarter ended July 31, 1999.
4.1 Specimen Common Stock Certificate.
Incorporated herein by reference to Exhibit
4.1 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 1998.
4.2 Note Purchase and Private Shelf Agreement
dated as of November 30, 1998 between the
Registrant and The Prudential Insurance
Company of America. Incorporated herein by
reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for
the year ended January 31, 1999.
4.3 Note Purchase and Private Shelf Agreement
dated as of March 21, 2001 between the
Registrant and The Prudential Insurance
Company of America. Incorporated herein by
reference to Exhibit 4.4 to the Registrant's
Annual Report on Form 10-K for the year ended
January 31, 2001.
4.4 Amendment dated as of March 21, 2004 to Note
Purchase and Private Shelf Agreement dated as
of March 21, 2001 between the Registrant and
The Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit
4.5 to the Registrant's Annual Report on Form
10-K for the year ended January 31, 2004.
10.1 Amendment Number 1 to License Agreement dated
December 9, 1996 between the Registrant as
Licensee and Coach, a division of Sara Lee
Corporation as Licensor, dated as of February
1, 1998. Incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
October 31, 1998.
33
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.2 Agreement, dated January 1, 1992, between The
Hearst Corporation and the Registrant, as
amended on January 17, 1992. Incorporated
herein by reference to Exhibit 10.8 filed
with the Company's Registration Statement on
Form S-1 (Registration No. 33-666000).
10.3 Letter Agreement between the Registrant and
The Hearst Corporation dated October 24, 1994
executed October 25, 1995 amending License
Agreement dated as of January 1, 1992, as
amended. Incorporated herein by reference to
Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended October
31, 1995.
10.4 Registrant's 1996 Stock Incentive Plan
amending and restating the 1993 Employee
Stock Option Plan. Incorporated herein by
reference to Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended October 31, 1996. *
10.5 Lease dated August 10, 1994 between
Rockefeller Center Properties, as landlord
and SwissAm, Inc., as tenant for space at 630
Fifth Avenue, New York, New York.
Incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31,
1994.
10.6 Death and Disability Benefit Plan Agreement
dated September 23, 1994 between the
Registrant and Gedalio Grinberg. Incorporated
herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended October 31, 1994. *
10.7 Registrant's amended and restated Deferred
Compensation Plan for Executives effective
June 17, 2004. *
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.
34
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.9 First Amendment to Lease dated April 8, 1998
between RCPI Trust, successor in interest to
Rockefeller Center Properties ("Landlord")
and Movado Retail Group, Inc., successor in
interest to SwissAm, Inc. ("Tenant") amending
lease dated August 10, 1994 between Landlord
and Tenant for space at 630 Fifth Avenue, New
York, New York. Incorporated herein by
reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for
the year ended January 31, 1998.
10.10 Second Amendment dated as of September 1,
1999 to the December 1, 1996 License
Agreement between Sara Lee Corporation and
Registrant. Incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
October 31, 1999.
10.11 License Agreement entered into as of June 3,
1999 between Tommy Hilfiger Licensing, Inc.
and Registrant. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended October 31, 1999.
10.12 Severance Agreement dated December 15, 1999,
and entered into December 16, 1999 between
the Registrant and Richard J. Cote.
Incorporated herein by reference to Exhibit
10.35 to the Registrant's Annual Report on
Form 10-K for the year ended January 31,
2000. *
10.13 Lease made December 21, 2000 between the
Registrant and Mack-Cali Realty, L.P. for
premises in Paramus, New Jersey together with
First Amendment thereto made December 21,
2000. Incorporated herein by reference to
Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended
January 31, 2000.
35
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.14 Lease Agreement dated May 22, 2000 between
Forsgate Industrial Complex and the
Registrant for premises located at 105 State
Street, Moonachie, New Jersey. Incorporated
herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q
filed for the quarter ended April 30, 2000.
10.15 Second Amendment of Lease dated July 26, 2001
between Mack-Cali Realty, L.P., as landlord,
and Movado Group, Inc., as tenant, further
amending lease dated as of December 21, 2000.
Incorporated herein by reference to Exhibit
10.2 to the Registrant's Quarterly Report on
Form 10-Q filed for the quarter ended October
31, 2001.
10.16 Third Amendment of Lease dated November 6,
2001 between Mack-Cali Realty, L.P., as
lessor and Movado Group, Inc., as lessee, for
additional space at Mack-Cali II, One Mack
Drive, Paramus, New Jersey. Incorporated herein by
reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q filed for the
quarter ended October 31, 2001.
10.17 Amendment Number 2 to Registrant's 1996 Stock
Incentive Plan dated March 16, 2001.
Incorporated herein by reference to Exhibit
10.27 to the Registrant's Annual Report on
Form 10-K for the year ended January 31,
2002.*
10.18 Amendment Number 3 to Registrant's 1996 Stock
Incentive Plan approved June 19, 2001.
Incorporated herein by reference to Exhibit
10.28 to the Registrant's Annual Report on
Form 10-K for the year ended January 31,
2002.*
10.19 Amendment Number 3 to License Agreement dated
December 9, 1996, as previously amended,
between the Registrant, Movado Watch Company
S.A. and Coach, Inc. dated as of January 30,
2003. Incorporated herein by reference to
Exhibit 10.29 to the Registrant's Annual
Report on Form 10-K for the year ended
January 31, 2002.
36
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.20 Amended and Restated Master Promissory Note
Agreement dated June 21, 2001 between the
Registrant and Fleet National Bank.
Incorporated herein by reference to Exhibit
10.30 to the Registrant's Annual Report on
Form 10-K for the year ended January 31,
2002.
10.21 Line of Credit Letter Agreement dated August
20, 2001 between the Registrant and The Bank
of New York. Incorporated herein by reference
to Exhibit 10.31 to the Registrant's Annual
Report on Form 10-K for the year ended
January 31, 2002.
10.22 First Amendment to the License Agreement
dated June 3, 1999 between Tommy Hilfiger
Licensing, Inc., Registrant and Movado Watch
Company S.A. entered into January 16, 2002.
Incorporated herein by reference to Exhibit
10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31,
2002.
10.23 Second Amendment to the License Agreement
dated June 3, 1999 between Tommy Hilfiger
Licensing, Inc., Registrant and Movado Watch
Company S.A. entered into August 1, 2002.
Incorporated herein by reference to Exhibit
10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31,
2002.
10.24 Amendment dated August 5, 2004 to Line of
Credit Agreement between the Registrant and
The Bank of New York dated August 20, 2001.
Incorporated herein by reference to Exhibit
10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31,
2004.
10.25 Line of Credit Letter Agreement dated June
20, 2004 between the Registrant and Fleet
National Bank and Second Amended and Restated
Promissory Note as of June 20, 2004.
Incorporated herein by reference to Exhibit
10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 31,
2004.
37
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.26 Endorsement Agreement dated as of April 4,
2003 between the Registrant and The Grinberg
Family Trust. Incorporated herein by
reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for
the year ended January 31, 2003.
10.27 Revolving Credit Agreement dated June 17,
2003 between the Registrant, Concord Watch
Company S.A., Movado Watch Company S.A., the
Lenders signatory thereto and JP Morgan Chase
Bank as Administrative Agent, Swingline Bank
and Issuing Bank. Incorporated herein by
reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended July 30, 2003.
10.28 Third Amendment to License Agreement dated
June 3, 1999 between Tommy Hilfiger
Licensing, Inc. and the Registrant entered
into as of May 7, 2004. Incorporated herein
by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 2004.
10.29 Amendment dated October 29, 2004 to the
Credit Agreement dated as of June 17, 2003
between the Registrant, MGI Luxury Group
S.A., Movado Watch Company S.A., each of the
lenders signatory to such Credit Agreement
and JP Morgan Chase Bank. Incorporated herein
by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended October 31, 2004.
10.30 Employment Agreement dated August 27, 2004
between the Registrant and Mr. Eugene J.
Karpovich. Incorporated herein by reference
to Exhibit 10.2 the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
October 31, 2004. *
10.31 Employment Agreement dated August 27, 2004
between the Registrant and Mr. Frank Kimick.
Incorporated herein by reference to Exhibit
10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31,
2004. *
38
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.32 Employment Agreement dated August 27, 2004
between the Registrant and Mr. Timothy F.
Michno. Incorporated herein by reference to
Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
October 31, 2004. *
10.33 Master Credit Agreement dated August 17, 2004
and August 20, 2004 between MGI Luxury Group
S.A. and UBS AG. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended July 31, 2004.
10.34 Fourth Amendment to License Agreement dated
June 3, 1999 between Tommy Hilfiger
Licensing, Inc. and the Registrant entered
into as of June 25, 2004. Incorporated herein
by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 31, 2004.
10.35 Waiver and Amendment dated as of February 27,
2004 among the Registrant, Concord Watch
Company S.A., Movado Watch Company S.A., each
of the Lenders signatory to the Credit
Agreement and JP Morgan Chase Bank as
Administrative Agent, Swingline Bank and
Issuing Bank. Incorporated herein by
reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for
the year ended January 31, 2004.
10.36 Fifth Amendment of Lease dated October 20,
2003 between Mack-Cali Realty, L.P. as
landlord and the Registrant as tenant further
amending the lease dated as of December 21,
2000. Incorporated herein by reference to
Exhibit 10.29 to the Registrant's Annual
Report on Form 10-K for the year ended
January 31, 2004.
10.37 Registrant's 1996 Stock Incentive Plan,
amended and restated as of April 8, 2004.*
10.38 License Agreement entered into December 15,
2004 between MGI Luxury Group S.A. and Hugo
Boss Trade Mark Management GmbH & Co.**
21.1 Subsidiaries of the Registrant.
23.2 Consent of PricewaterhouseCoopers LLP.
39
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Constitutes a compensatory plan or arrangement.
** Confidential portions of Exhibit 10.38 have been omitted and filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.
40
Management's Annual Report on Internal Control Over Financial Reporting
- -----------------------------------------------------------------------
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such terms is defined in
Rule 13a-15(f) under the Exchange Act, for the Company. With the participation
of the Chief Executive Officer and the Chief Financial Officer, the Company's
management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the framework and criteria
established in Internal Control - Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, the Company's management has concluded that the Company's internal
control over financial reporting was effective as of January 31, 2005.
Management's assessment of the effectiveness of our internal control over
financial reporting as of January 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Movado Group Inc.:
We have completed an integrated audit of Movado Group, Inc.'s 2005 consolidated
financial statements and of its internal control over financial reporting as of
January 31, 2005 and audits of its 2004 and 2003 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Movado Group, Inc. and its subsidiaries at January 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in "Management's Annual
Report on Internal Control Over Financial Reporting", that the Company
maintained effective internal control over financial reporting as of January
31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of January
31, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the COSO. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
F-2
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 18, 2005
F-3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended January 31,
------------------------------
2005 2004 2003
-------- -------- --------
Net sales $418,966 $330,214 $300,077
Cost of sales 168,818 129,908 115,907
-------- -------- --------
Gross profit 250,148 200,306 184,170
Selling, general and administrative 215,072 165,525 152,394
-------- -------- --------
Operating income 35,076 34,781 31,776
Income from litigation settlement, net 1,444 - -
Interest expense, net 3,430 3,044 3,916
-------- -------- --------
Income before income taxes 33,090 31,737 27,860
Provision for income taxes 6,783 8,886 7,801
-------- -------- --------
Net income $ 26,307 $ 22,851 $ 20,059
======== ======== ========
Basic income per share:
Net income per share $1.06 $0.95 $0.84
Weighted basic average shares outstanding 24,708 24,101 23,739
Diluted income per share:
Net income per share $1.03 $0.92 $0.82
Weighted diluted average shares outstanding 25,583 24,877 24,381
See Notes to Consolidated Financial Statements
F-4
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
January 31,
----------------------
2005 2004
--------- ---------
ASSETS
- ------
Current assets:
Cash $ 63,782 $ 82,083
Trade receivables, net 102,622 88,800
Inventories, net 187,890 121,678
Other 32,758 27,932
--------- ---------
Total current assets 387,052 320,493
Property, plant and equipment, net 50,283 42,112
Other assets 39,615 28,362
--------- ---------
Total assets $ 476,950 $ 390,967
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt - $ 10,000
Accounts payable 38,488 23,631
Accrued payroll and benefits 10,747 8,033
Accrued liabilities 28,871 17,748
Current taxes payable - 2,237
Deferred income taxes 5,250 5,961
--------- ---------
Total current liabilities 83,356 67,610
Long-term debt 45,000 25,000
Deferred and noncurrent income taxes 14,827 12,195
Other liabilities 17,209 11,449
--------- ---------
Total liabilities 160,392 116,254
--------- ---------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued - -
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 22,580,459 and 21,754,600 shares issued, respectively 226 218
Class A Common Stock, $0.01 par value, 30,000,000 shares
authorized; 6,801,812 and 6,801,812 shares issued and
outstanding, respectively 68 68
Capital in excess of par value 100,289 89,348
Retained earnings 214,953 192,601
Accumulated other comprehensive income 48,707 34,473
Treasury Stock, 4,433,553 and 4,112,520 shares at cost, respectively (47,685) (41,995)
--------- ---------
Total shareholders' equity 316,558 274,713
--------- ---------
Total liabilities and shareholders' equity $ 476,950 $ 390,967
========= =========
See Notes to Consolidated Financial Statements
F-5
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended January 31,
--------------------------------
2005 2004 2003
-------- -------- --------
Cash flows from operating activities:
Net income $ 26,307 $ 22,851 $ 20,059
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,603 9,973 8,369
Impairment of long-lived assets 2,025 - -
Deferred and noncurrent income taxes 8,132 10,101 (294)
Provision for losses on accounts receivable 2,072 2,290 1,987
Provision for inventories 3,221 993 830
(Gain) loss on disposition of property, plant and equipment (253) 109 -
Tax benefit from stock options exercised 2,554 2,511 489
Changes in current assets and liabilities:
Trade receivables 1,422 4,583 (2,602)
Inventories (29,587) (6,248) (4,815)
Other current assets 5,716 12,179 14,236
Accounts payable 11,248 160 (2,989)
Accrued liabilities (6,615) 987 (2,734)
Accrued payroll and benefits 2,714 2,023 (811)
Deferred and current taxes payable (9,474) (9,370) 2,465
Other noncurrent assets (6,253) (4,997) (248)
Other noncurrent liabilities 4,358 3,502 (636)
-------- -------- --------
Net cash provided by operating activities 30,190 51,647 33,306
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (14,947) (10,830) (6,525)
Investment in Ebel (1) (43,525) - -
Trademarks (1,000) (653) (514)
-------- -------- --------
Net cash used in investing activities (59,472) (11,483) (7,039)
-------- -------- --------
Cash flows from financing activities:
Repayment of Senior Notes (10,000) - (5,000)
Repayment of current bank borrowings - - (6,500)
Payment of Ebel mortgage (5,187) - -
Proceeds of Senior Notes 20,000 - -
Stock options exercised and other changes 3,830 2,568 2,172
Dividends paid (3,955) (2,537) (1,602)
Repurchase of treasury stock (1,127) (1,979) (135)
-------- -------- --------
Net cash provided by (used in) financing activities 3,561 (1,948) (11,065)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 7,420 5,502 6,192
Net (decrease) increase in cash and cash equivalents (18,301) 43,718 21,394
Cash and cash equivalents at beginning of year 82,083 38,365 16,971
-------- -------- --------
Cash and cash equivalents at end of year $ 63,782 $ 82,083 $ 38,365
======== ======== ========
(1) Supplemental Disclosure:
Fair value of assets acquired $ 71,629
Less: liabilities assumed (26,603)
--------
Cash paid for the transaction 45,026
Less: cash acquired (1,340)
Less: accrued deal costs (161)
--------
Net cash paid for transaction $ 43,525
========
See Notes to Consolidated Financial Statements
F-6
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumulated
Class A Capital in Other
Preferred Common Common Excess of Retained Comprehensive Treasury
Stock Stock Stock Par Value Earnings Income (Loss) Stock
--------- ------ ------- ---------- -------- ------------- --------
Balance, January 31, 2002 $ - $ 98 $ 35 $ 69,484 $153,830 ($ 23,286) ($27,691)
Net income 20,059
Dividends ($0.06 per share) (1,602)
Stock options exercised, net of tax of $489 2 2,631 (135)
Employee stock bonus plan 85
Supplemental executive retirement plan 30
Net unrealized loss on investments, net of tax
of $25 (82)
Net change in effective portion of hedging
contracts, net of tax of $2,709 4,584
Foreign currency translation adjustment 38,170
Conversion of Class A Common Stock to
Common Stock 1 (1)
----- ------ ------- ---------- -------- --------- --------
Balance, January 31, 2003 $ - $ 101 $ 34 $ 72,145 $172,287 $ 19,386 ($27,741)
Net income 22,851
Dividends ($0.105 per share) (2,537)
Stock options exercised, net of tax of $2,511 8 16,861 (14,254)
Supplemental executive retirement plan 170
Restricted stock amortization less cancellations 315
Net unrealized gain on investments, net of tax
of $89 139
Net change in effective portion of hedging
contracts, net of tax of $2,212 (3,434)
Foreign currency translation adjustment 18,382
----- ------ ------- ---------- -------- --------- --------
Balance, January 31, 2004 $ - $ 109 $ 34 $ 89,491 $192,601 $ 34,473 ($41,995)
Net income 26,307
Stock split adjustment 109 34 (143)
Dividends ($0.16 per share) (3,955)
Stock options exercised, net of tax of $2,554 8 10,010 (5,690)
Supplemental executive retirement plan 107
Restricted stock amortization less cancellations 824
Net unrealized gain on investments, net of tax
of $18 39
Net change in effective portion of hedging
contracts, net of tax of $134 366
Foreign currency translation adjustment 13,829
----- ------ ------- ---------- -------- --------- --------
Balance, January 31, 2005 $ - $ 226 $ 68 $ 100,289 $214,953 $ 48,707 ($47,685)
===== ====== ======= ========== ======== ========= ========
Note: Balances prior to fiscal 2004 within the Consolidated Statements of Changes in Shareholders' Equity have not been
split-adjusted.
(Shares information in thousands) Common Stock Class A Common Treasury Stock
------------ -------------- --------------
Beginning balance, January 31, 2002 19,596 6,966 (3,088)
Stock issued to employees exercising stock options 356 - (14)
Conversion of Class A Common Stock 164 (164) -
Restricted stock and other stock plans, less cancellations - - 8
------- -------- -------
Balance at January 31, 2003 20,116 6,802 (3,094)
------- -------- -------
Stock issued to employees exercising stock options 1,639 - (1,033)
Conversion of Class A Common Stock - - 14
Restricted stock and other stock plans, less cancellations - - -
------- -------- -------
Balance January 31, 2004 21,755 6,802 (4,113)
------- -------- -------
Stock issued to employees exercising stock options 825 - (337)
Conversion of Class A Common Stock - - -
Restricted stock and other stock plans, less cancellations - - 16
------- -------- -------
Balance January 31, 2005 22,580 6,802 (4,434)
======= ======== =======
Note: Shares information provided has been adjusted to reflect the effect of the fiscal 2005 two-for-one stock split.
See Notes to Consolidated Financial Statements
F-7
NOTES TO MOVADO GROUP, INC.'S CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Movado Group, Inc. (the "Company") is a designer, manufacturer and distributor
of quality watches with prominent brands in almost every price category
comprising the watch industry. In fiscal 2005, the Company marketed six
distinctive brands of watches: Movado, Ebel, Concord, ESQ, Coach and Tommy
Hilfiger, which compete in most segments of the watch market.
The Company designs, manufactures and contracts for the assembly of Movado, Ebel
and Concord watches primarily in Switzerland for sale throughout the world. ESQ
and Tommy Hilfiger watches are manufactured to the Company's specifications by
independent contractors located in Asia. ESQ watches are presently sold
primarily in North America and the Caribbean. Tommy Hilfiger watches are
presently sold throughout the world. Coach watches are assembled in Switzerland
by independent contractors and sold primarily in North America and Asia.
In addition to its sales to trade customers and independent distributors,
through a wholly-owned domestic subsidiary, the Company sells Movado watches, as
well as proprietary Movado jewelry, tabletop and accessories directly to
consumers in its Movado Boutiques. Additionally, the Company operates 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.
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.
Reclassification
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2005 presentation.
Translation of Foreign Currency Financial Statements and Foreign Currency
Transactions
The financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at 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).
F-8
Cash and Cash Equivalents
Cash equivalents are considered all highly liquid investments with original
maturities at date of purchase of three months or less.
Trade Receivables
The Company's trade customers include department stores, jewelry store chains
and independent jewelers. Movado, Ebel, Concord, Coach and Tommy Hilfiger
watches are also marketed outside the U.S. through a network of independent
distributors. Accounts receivable are stated net of allowances for doubtful
accounts of $6.8 million, $6.7 million and $5.2 million and net of estimated
sales returns and allowances of $23.3 million, $19.3 million and $17.0 million
at January 31, 2005, 2004 and 2003, respectively.
The Company's concentrations of credit risk arise primarily from accounts
receivable related to trade customers during the peak selling seasons. The
Company has significant accounts receivable balances due from major department
store chains. The Company's results of operations could be materially adversely
affected in the event any of these customers or a group of these customers
defaulted on all or a significant portion of their obligations to the Company as
a result of financial difficulties. As of January 31, 2005, there were no known
situations with any of the Company's major customers which indicate the
customer's inability to make the required payments.
The following is a rollforward of sales returns and allowances for the fiscal
years ended January 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
-------- -------- --------
Balance, beginning of year $ 19,345 $ 16,974 $ 15,539
Acquired Ebel reserves 7,354 - -
Provision charged to operations 27,074 28,446 38,563
Write-offs (30,461) (26,075) (37,128)
-------- -------- --------
Balance, end of year $ 23,312 $ 19,345 $ 16,974
======== ======== ========
Inventories
The Company values its inventory at the lower of cost or market using the
first-in, first-out (FIFO) method. The cost of finished goods and component
inventories, held by overseas subsidiaries, are determined using average cost.
The Company's management regularly reviews its sales to customers and customers'
sell through at retail to determine excess or obsolete inventory reserves.
Inventory with less than acceptable turn rates is classified as discontinued
and, together with the related component parts which can be assembled into
saleable finished goods, is sold through the Company's outlet stores. When
management determines that finished product and components are unsaleable in the
Company's outlet stores, a reserve is established for the cost of those products
and components. These estimates could vary significantly, either favorably or
unfavorably, from actual requirements depending on future economic conditions,
customer inventory levels or competitive conditions which may differ from
expectations.
F-9
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of buildings are amortized using the straight-line method based on
the useful life of ten years. Depreciation of furniture and equipment is
provided using the straight-line method based on the estimated useful lives of
assets, which range from four to ten years. Computer software is amortized using
the straight-line method over five years. Leasehold improvements are amortized
using the straight-line method over the lesser of the term of the lease or the
estimated useful life of the leasehold improvement. Upon the disposition of
property, plant and equipment, the accumulated depreciation is deducted from the
original cost and any gain or loss is reflected in current earnings.
Long-Lived Assets
The Company establishes the estimated useful lives of its depreciable assets
based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company's maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. When such a determination has been made,
management compares the carrying value of the assets with their estimated future
undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the present value
of estimated net cash flows or comparable market values, giving consideration to
recent operating performance and pricing trends.
During the fourth quarter of fiscal 2005, the Company determined that the
carrying value of its long-lived assets in the Movado Boutique located in the
Soho section of New York City, may not be recoverable and performed an
impairment review. The impairment review was performed pursuant to SFAS No. 144
because of an economic downturn affecting the Boutique operations and revenue
forecasts. As a result, the Company recorded a non-cash impairment charge of
$2.0 million consisting of property, plant and equipment of $0.8 million and
other assets of $1.2 million. The entire impairment charge is included in the
selling, general and administrative expenses in the fiscal 2005 Consolidated
Statement of Income. There were no impairment losses related to long-lived
assets in fiscal 2004 or 2003.
Capitalized Software Costs
The Company capitalizes certain computer software costs after technological
feasibility has been established. The costs are amortized utilizing the
straight-line method over the economic lives of the related products ranging
from three to seven years.
Intangibles
Intangible assets consist primarily of trade names and trademarks and are
recorded at cost. Trade names are not amortized. 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, 2005 and 2004, intangible assets at cost were $13.5 million and $7.5
million,
F-10
respectively, and related accumulated amortization of intangibles was $4.5
million and $3.5 million, respectively. Amortization expense for fiscal 2005,
2004 and 2003 was $1.0 million, $0.7 million and $0.6 million, respectively.
Derivative Financial Instruments
The Company utilizes derivative financial instruments to reduce foreign currency
fluctuation risks. The Company accounts for its derivative financial instruments
in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS No. 133")
as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged.
The Company's risk management policy is to enter into forward exchange contracts
and purchase foreign currency options, under certain limitations, to reduce
exposure to adverse fluctuations in foreign exchange rates and, to a lesser
extent, in commodity prices related to its purchases of watches. When entered
into, the Company designates and documents these derivative instruments as a
cash flow hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
cash flow hedge and is highly effective, are recorded in other comprehensive
income until the underlying transaction effects earnings, and then are later
reclassified into earnings in the same account as the hedged transaction. The
Company formally assesses, both at the inception and at each financial quarter
thereafter, the effectiveness of the derivative instrument hedging the
underlying forecasted cash flow transaction which is being hedged. Any
ineffectiveness related to the derivative financial instruments' change in fair
value will be recognized in the period in which the ineffectiveness was
calculated.
The Company uses forward exchange contracts to offset its exposure to certain
foreign currency liabilities. These forward contracts are not designated as SFAS
No. 133 hedges and, therefore, changes in the fair value of these derivatives
are recognized into earnings, thereby offsetting the current earnings effect of
the related foreign currency liabilities.
During fiscal 2003, the Company's risk management policy was modified to include
net investment hedging of the Company's Swiss franc-denominated investment in
its wholly-owned subsidiaries located in Switzerland using purchase foreign
currency options under certain limitations. When entered into for this purpose,
the Company designates and documents the derivative instrument as a net
investment hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions.
Changes in the fair value of a derivative that is designated and documented as a
net investment hedge are recorded in other comprehensive income in the same
manner as the cumulative translation adjustment of the Company's Swiss
franc-denominated investment. The Company formally assesses, both at the
inception and at each financial quarter thereafter, the effectiveness of the
derivative instrument hedging the net investment.
F-11
All of the Company's derivative instruments have liquid markets to assess fair
value. The Company does not enter into any derivative instruments for trading
purposes.
Revenue Recognition
In the wholesale segment, the Company recognizes its revenues upon transfer of
title and risk of loss in accordance with its FOB shipping point terms of sale
and after the sales price is fixed and determinable and collectibility is
reasonably assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates for sales
returns, volume-based programs and sales and cash discount allowances in the
same period that the sales are recorded as a reduction of revenue. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business.
Cost of Sales
Costs of sales of the Company's products consist primarily of component costs,
internal assembly costs and unit overhead costs associated with the Company's
supply chain operations in Switzerland and Asia. The Company's supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and minor assembly in Switzerland.
Selling, General and Administrative Expenses
The Company's SG&A expenses consist primarily of advertising, selling,
distribution and general and administrative expenses. Annual advertising
expenditures are based principally on overall strategic considerations relative
to maintaining or increasing market share in markets that management considers
to be crucial to the Company's continued success as well as on general economic
conditions in the various markets around the world in which the Company sells
its products.
Selling expenses consist primarily of salaries, sales commissions, sales force
travel and related expenses, 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 selling 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.
Warranty Costs
The Company has warranty obligations in connection with the sale of its watches.
The Company's products are covered by limited warranties against defects in
materials and workmanship for periods ranging from two to three years from the
date of purchase for movements and up to five years for the gold plating on
Movado watch casings and bracelets. As a practice, warranty costs are expensed
as incurred and recorded in the quarterly consolidated statement of income. The
warranty obligations are evaluated quarterly and reviewed in detail on an annual
basis to determine if any material changes occurred. When material changes in
warranty costs are experienced, the Company will adjust the warranty accrual as
required. As of January 31, 2005, 2004 and 2003,
F-12
the reserve balances for warranty costs were $4.0 million, $0.9 million and $0.9
million, respectively. The following is a rollforward of the warranty liability
for the fiscal years ended January 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
------- ------ ------
Balance, beginning of year $ 900 $ 900 $ 600
Acquired Ebel reserves 3,127 - -
Provision charged to operations 1,450 789 961
Settlements made (1,498) (789) (661)
------- ------ ------
Balance, end of year $ 3,979 $ 900 $ 900
======= ====== ======
Preopening Costs
Costs associated with the opening of new boutique and outlet stores, including
pre-opening rent, 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. Included in advertising expenses
are costs associated with cooperative advertising programs. These costs are
recorded as SG&A expenses. Advertising expense for fiscal 2005, 2004 and 2003
amounted to $67.8 million, $53.1 million and $50.5 million, respectively.
Included in the other current assets in the consolidated balance sheets as of
January 31, 2005 and 2004 are prepaid advertising costs of $2.5 million and $0.6
million, respectively. These prepaid costs represent advertising costs paid to
licensors in advance, pursuant to the Company's licensing agreements.
Shipping and Handling Costs
Amounts charged to customers and costs incurred by the Company related to
shipping and handling are included in net sales and cost of goods sold,
respectively.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax laws and tax rates, in each jurisdiction the Company operates, and
applies to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, the amounts of any future tax
benefits are reduced by a valuation allowance to the extent such benefits are
not expected to be realized on a more-likely-than-not basis. The Company
calculates estimated income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense along with
assessing temporary differences resulting from differing treatment of items for
both book and tax purposes.
F-13
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 24,708,000, 24,101,000 and 23,739,000 for fiscal 2005, 2004 and 2003,
respectively. For diluted earnings per share, these amounts were increased by
875,000, 776,000 and 642,000 in fiscal 2005, 2004 and 2003, respectively, due to
potentially dilutive common stock equivalents issuable under the Company's stock
option plans. For all periods presented, basic and diluted shares outstanding,
and the related "per share" amounts reflect the effect of the fiscal 2005
two-for-one stock split.
Stock-Based Compensation
Employee stock options are accounted for under the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of
the stock at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense has not been recognized for stock
options granted at or above fair value. Had compensation expense been determined
and recorded based upon the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", net income (in thousands) and net
income per share would have been reduced to pro forma amounts as follows:
2005 2004 2003
---- ---- ----
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------- -------- ------- -------- -------
Net Income $ 26,307 $22,546 $ 22,851 $18,768 $ 20,059 $16,439
Net Income per share-Basic $ 1.06 $ 0.91 $ 0.95 $ 0.78 $ 0.84 $ 0.69
Net Income per share-Diluted $ 1.03 $ 0.88 $ 0.92 $ 0.75 $ 0.82 $ 0.67
The weighted-average fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model is $7.10, $5.89 and $4.86 per
share in fiscal 2005, 2004 and 2003, respectively. The following
weighted-average assumptions were used for grants in 2005, 2004 and 2003:
dividend yield of 0.99% for fiscal 2005, 0.87% for fiscal 2004 and 0.62% for
fiscal 2003; expected volatility of 48% for fiscal 2005, 52% for fiscal 2004 and
46% for fiscal 2003; risk-free interest rates of 4.26% for fiscal 2005, 3.04%
for fiscal 2004 and 5.23% for fiscal 2003 and expected lives of three to seven
years for fiscal 2005, four to seven years for fiscal 2004, and seven years for
fiscal 2003.
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 2005. There were no shares repurchased under the repurchase
program during fiscal 2005 and fiscal 2004. As of January 31, 2005, the Company
had authorization to repurchase shares up to $4.5 million against an aggregate
authorization of $30.0 million.
F-14
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 will improve financial reporting by clarifying that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, and is not expected to have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment", which is a revision of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123(R)"). SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash
Flows". Generally, the approach in SFAS No. 123(R) is similar to the approach
described in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continued to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes formula to estimate the
value of stock options granted to employees. SFAS No. 123(R) requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company is currently assessing the impact of this pronouncement on its
consolidated statement of operations and its consolidated statement of cash
flows.
Also in December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Nonmonetary Assets -- An Amendment of APB
Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS
No. 153 eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's current financial position or results of operations.
F-15
NOTE 2 - ACQUISITION
On December 22, 2003, the Company entered into an agreement to acquire Ebel S.A.
and the worldwide business related to the Ebel brand (collectively "Ebel") from
LVMH Moet Hennessy Louis Vuitton ("LVMH"). On March 1, 2004, the Company
completed the acquisition of Ebel with the exception of the payment for the
acquired Ebel business in Germany, which was completed July 30, 2004. The Ebel
brand, one of the world's premier luxury watch brands, was established in La
Chaux-de-Fonds, Switzerland in 1911. The Company acquired Ebel to revitalize and
re-build the brand and to expand its global market share.
Under the terms of the agreement, the Company acquired all of the outstanding
common stock of Ebel S.A. and the related worldwide businesses in exchange for:
- 51.6 million Swiss francs in cash; and
- the assumption of a short-term mortgage payable of 6.6 million Swiss
francs.
Under the purchase method of accounting, the Company recorded an aggregate
purchase price of approximately $45.0 million, which consisted of approximately
$40.6 million in cash and $4.4 million in deal costs and other incurred
liabilities, which primarily consisted of legal, accounting, investment banking
and financial advisory services fees.
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations", ("SFAS No. 141"), the Company allocated the purchase
price to the tangible assets, intangible assets, and liabilities acquired based
on their estimated fair values. The fair value assigned to tangible and
intangible assets acquired was based on an independent appraisal. The fair value
of assets acquired and liabilities assumed exceeds the purchase price. That
excess has been allocated as a pro rata reduction of the amounts that otherwise
would have been assigned to all of the acquired assets except for certain
specific types of assets as set forth in SFAS No. 141. The pro forma adjustments
were based upon an independent assessment of appraised values. The assessment is
complete. In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and
purchased intangibles with indefinite lives are not amortized but will be
reviewed annually for impairment. Purchased intangibles with finite lives are
amortized on a straight-line basis over their respective estimated useful lives.
In accordance with Emerging Issues Task Force No. 95-3 ("EITF 95-3"),
"Recognition of Liabilities in Connection with a Purchase Business Combination",
the Company recognized costs associated with exiting an activity of an acquired
company and involuntary termination of employees of an acquired company as
liabilities assumed in a purchase business combination and included the
liabilities in the allocation of the acquisition cost. The liability recognized
in connection with the acquisition of Ebel was comprised of approximately $2.4
million for employee severance, $0.2 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. For the year ended January 31, 2005, payments
against employee severance, lease terminations, exit costs and other liabilities
amounted to $1.2 million, $0.2 million, $1.1 million and $0.4 million,
respectively. There were no further adjustments related to the abovementioned
accruals during the fiscal year ended January 31, 2005.
F-16
As part of the acquisition, the Company recorded deferred tax assets resulting
from Ebel's net operating loss carryforwards amounting to approximately 165.0
million Swiss francs. The Company established a full valuation allowance on the
deferred tax assets. The total purchase price has been allocated as follows (in
thousands):
Cash $ 1,340
Accounts receivable 16,369
Property, plant and equipment 4,556
Inventories 35,834
Intangible assets 9,129
Other current assets 4,401
--------
Total assets acquired 71,629
Current liabilities 16,149
Short-term commitments and contingencies 5,269
Mortgage payable 5,185
--------
Total purchase price $ 45,026
========
In allocating the purchase price, the Company considered, among other factors,
its intention for future use of the acquired assets, analyses of historical
financial performance and estimates of future performance of Ebel's products.
Included in the other current assets are certain assets held for sale which
currently approximate $1.5 million and are expected to be disposed of within the
next 12 months.
The fair value of intangible assets was primarily based on the income approach
and cost approach. The discount rates used were 16% for customer lists and 21%
for trade names. These discount rates were determined after consideration of the
industry's cost of capital which is equal to the weighted-average, after-tax
cost of equity and debt. The identifiable intangible assets purchased in the
Ebel acquisition consisted of the following (in thousands):
Gross Useful
Identifiable Intangible Assets - Acquired Value Life
-------- ----------
Trade names $ 8,343 Indefinite
Customer list 786 5 years
--------
Total $ 9,129
========
Subsequent to the acquisition, the Company utilized a portion of the deferred
tax assets relative to the net operating losses, and also reassessed the full
valuation allowance initially set up on the deferred tax assets. As required by
SFAS No. 109, the recognition of any tax benefits were applied to reduce the
carrying value of acquired intangible assets. The trade name and customer list
have thus been reduced by $2.6 million and $0.2 million, respectively, due to
current year utilization of net operating losses, and the trade name and
customer list have also been reduced an additional $1.9 million and $0.1
million, respectively, due to the reassessment of the valuation allowances
initially set up on the deferred tax assets.
F-17
The carrying amounts of the acquired intangible assets, at January 31, 2005,
were as follows (in thousands):
Gross
Identifiable Intangible Assets - Carrying Value Value
----------
Trade names $ 4,215
Customer list 334
----------
Total $ 4,549
==========
Amortization expense for the next four years for the acquired intangibles with
finite lives is expected to be as follows (in thousands):
Estimated
Amortization
For the Fiscal Year Ended January 31, Expense
------------
2006 $ 84
2007 84
2008 84
2009 82
------------
$ 334
============
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined
results of operations of the Company and Ebel, on a pro forma basis, as though
the acquisition had been completed as of the beginning of each period presented.
This pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the results of operations that would
have been achieved had the acquisition taken place at the beginning of each
period presented. The unaudited pro forma condensed combined statements of
income for the year ended January 31, 2005 combines the historical results for
the Company for the year ended January 31, 2005 and the historical results for
Ebel for the period preceding the acquisition of February 1 through February 29,
2004. The unaudited pro forma condensed combined statements of income for the
year ended January 31, 2004 combines the historical results for the Company for
the year ended January 31, 2004, and the historical results for Ebel for the
year ended January 31, 2004. The following amounts are in thousands, except per
share amounts:
Fiscal Year Ended January 31,
-----------------------------
2005 2004
---------- ----------
Revenues $ 420,335 $ 398,826
Net income $ 24,302 $ 10,828
Basic income per share $ 0.98 $ 0.45
Diluted income per share $ 0.95 $ 0.44
F-18
NOTE 3 - INVENTORIES
Inventories at January 31, consisted of the following (in thousands):
2005 2004
-------- --------
Finished goods $123,519 $ 78,490
Component parts 114,157 43,335
Work-in-process 4,661 2,261
-------- --------
242,337 124,086
Less: inventories reserve (54,447) (2,408)
-------- --------
$187,890 $121,678
======== ========
The increase in all inventory categories, including the inventory reserve,
includes the acquired net assets of Ebel. As of January 31, 2005, the Ebel
inventory was $93.8 million with reserves of $52.4 million.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 31, at cost, consisted of the following
(in thousands):
2005 2004
-------- --------
Land and buildings $ 6,543 $ 2,464
Furniture and equipment 44,036 34,770
Computer software 29,169 26,333
Leasehold improvements 32,288 25,405
-------- --------
112,036 88,972
Less: accumulated depreciation (61,753) (46,860)
-------- --------
$ 50,283 $ 42,112
======== ========
Depreciation and amortization expense for fiscal 2005, 2004 and 2003 was $12.6
million, $10.0 million and $8.4 million, respectively, which includes computer
software amortization expense for fiscal 2005, 2004 and 2003 of $4.0 million,
$2.9 million and $3.0 million, respectively.
NOTE 5 - BANK CREDIT ARRANGEMENTS AND LINES OF CREDIT
The Company's revolving credit facility with its domestic bank group was amended
in June 2003 to provide for a three year $75.0 million unsecured revolving line
of credit. The line of credit expires on June 17, 2006. In addition, certain
members within the bank group provided for $15.0 million of uncommitted working
capital lines of credit at January 31, 2005 and 2004, respectively. As of
January 31, 2004, one bank in the domestic bank group issued five irrevocable
standby letters of credit for retail and operating facility leases to various
landlords and Canadian payroll to the Royal Bank of Canada totaling $0.6 million
with expiry dates through May 15, 2006. 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, 2005 and 2004. The domestic unused line of credit was $90.0 million at
January 31, 2005 and 2004.
F-19
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.0 million and 8.8 million Swiss francs at January 31, 2005 and 2004,
respectively, with dollar equivalents of approximately $6.7 million and $7.0
million, respectively, of which a maximum of $5.0 million can be drawn. As of
January 31, 2005, the Swiss bank has guaranteed the Company's Swiss subsidiary's
obligations to certain Swiss third parties in the amount of approximately $2.8
million in various foreign currencies. 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, 2005 and January 31, 2004, respectively.
Aggregate maximum and average monthly outstanding borrowings against the
Company's lines of credit and related weighted-average interest rates during
fiscal 2005 and 2004 were as follows (dollars in thousands):
Fiscal Year Ended January 31,
-----------------------------
2005 2004
----------- -------------
Maximum borrowings $ 37,925 $ 31,000
Average monthly borrowings $ 21,711 $ 15,532
Weighted-average interest rate 2.3% 2.1%
Weighted-average interest rates were computed based on average month-end
outstanding borrowings and applicable average month-end interest rates.
NOTE 6 - LONG-TERM DEBT
The components of long-term debt as of January 31, were as follows (in
thousands):
2005 2004
------- -------
Senior Notes $ - $10,000
Series A Senior Notes 25,000 25,000
Series A-2004 Senior Notes 20,000 -
------- -------
45,000 35,000
Less: current portion - 10,000
------- -------
Long-term debt $45,000 $25,000
======= =======
At January 31, 2005, the Company paid off its Senior Notes due January 31, 2005,
which were originally issued in a private placement completed in fiscal 1994.
These notes had required annual principal payments of $5.0 million since January
1998 and bore interest of 6.56% per annum. The Company repaid $10.0 million of
the final principal due in fiscal 2005. The Company did not repay any principal
in fiscal 2004 due to the timing of when principal payment was due. At January
31, 2005, no principal of these notes remained outstanding.
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. At January 31, 2005, $25.0 million
was issued and outstanding.
F-20
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement allows for the issuance, for up to three years after the date thereof,
of senior promissory notes in the aggregate principal amount of up to $40.0
million with maturities up to 12 years from their original date of issuance. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Notes"), in an aggregate
principal amount of $20.0 million, which will mature on October 8, 2011 and are
subject to annual repayments of $5.0 million commencing on October 8, 2008.
Proceeds of the Senior Notes will be used by the Company for capital
expenditures, repayment of certain of its debt obligations and general corporate
purposes. As of January 31, 2005, $20.0 million was issued and outstanding.
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, 2005 and 2004.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company follows the provisions of SFAS No. 133 requiring that all derivative
financial instruments be recorded on the balance sheet at fair value.
As of January 31, 2005, the balance of deferred net gains on derivative
financial instruments documented as cash flow hedges included in accumulated
other comprehensive income ("AOCI") was $2.0 million, net of tax of $1.2
million, compared to $1.6 million in net gains at January 31, 2004, net of tax
of $1.0 million and $4.5 million in net gains at January 31, 2003, net of tax of
$2.9 million. The Company estimates that a substantial portion of the deferred
net gains at January 31, 2005 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, 2005, 2004 and 2003, the Company
reclassified net gains from AOCI to earnings of approximately $1.4 million, net
of tax of $0.9 million, $3.2 million, net of tax of $2.0 million, and $1.7
million, net of tax of $1.0 million, respectively.
During fiscal 2005, 2004 and 2003, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio. The hedge
relationship is perfectly effective and therefore no hedge ineffectiveness was
recorded. Changes in the contracts' fair value due to spot-forward differences
are excluded from the designated hedge relationship. These amounts were not
significant for the years ended January 31, 2005, 2004 and 2003. The Company
records these transactions in the cost of sales of the consolidated statements
of income.
The balance of the net loss included in the cumulative foreign currency
translation adjustment associated with derivatives documented as net investment
hedges was $1.5 million, net of a tax benefit of $0.9 million as of January 31,
2005, a net loss of $1.0 million, net of a tax benefit of $0.6 million, as of
January 31, 2004 and a net loss of $0.3 million, net of a tax benefit of $0.2
million as of January 31, 2003. Under SFAS No. 133, changes in fair value of
these instruments are recognized in currency translation adjustment, a component
of AOCI, to offset the change in the value of the net investment being hedged.
F-21
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of January 31, 2005 (in millions):
Fair Value Maturities
---------- ----------
Forward exchange
contracts $0.8 2005-2006
Purchased foreign currency
options 1.9 2005-2006
----
$2.7
====
The Company estimates the fair value of its foreign currency derivatives based
on quoted market prices or pricing models using current market rates. These
derivative financial instruments are currently reflected in other assets or
current liabilities.
NOTE 8 - FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The fair value of the Company's 4.79% Senior Notes and 6.90% Series A Senior
Notes approximate 99% and 107% of the carrying value of the notes, respectively,
as of January 31, 2005. The fair value was calculated based upon the present
value of future cash flows discounted at estimated borrowing rates for similar
debt instruments or upon estimated prices based on current yields for debt
issues of similar quality and terms.
NOTE 9 - INCOME TAXES
The provision for income taxes for the fiscal years ended January 31, 2005, 2004
and 2003 consists of the following components (in thousands):
2005 2004 2003
-------- -------- --------
Current:
U.S. Federal $ 3,980 $ 4,346 $ 3,454
U.S. State and Local 810 (126) 134
Non-U.S. 5,254 1,282 445
-------- -------- --------
10,044 5,502 4,033
-------- -------- --------
Noncurrent:
U.S. Federal - - -
U.S. State and Local - - -
Non-U.S. - 2,186 3,165
-------- -------- --------
- 2,186 3,165
-------- -------- --------
Deferred:
U.S. Federal (2,533) (351) 775
U.S. State and Local (242) 60 (65)
Non-U.S. (486) 1,489 (107)
-------- -------- --------
(3,261) 1,198 603
-------- -------- --------
Provision for income taxes $ 6,783 $ 8,886 $ 7,801
======== ======== ========
F-22
Significant components of the Company's deferred income tax assets and
liabilities for the fiscal year ended January 31, 2005 and 2004 consist of the
following (in thousands):
2005 Deferred Taxes 2004 Deferred Taxes
------------------------ ----------------------
Assets Liabilities Assets Liabilities
---------- ----------- ------- -----------
Operating loss carryforwards $ 32,120 $ - $ 896 $ -
Inventory reserve 3,103 4,762 1,633 4,843
Receivable allowance 2,960 1,559 2,840 900
Deferred compensation 4,627 - 3,941 -
FAS 133 - 323 - 471
Depreciation/amortization 2,247 267 - 544
Other 3,134 367 1,913 1,218
---------- ----------- ------- -----------
48,191 7,278 11,223 7,976
Valuation allowance (33,393) - (795) -
---------- ----------- ------- -----------
Total $ 14,798 $ 7,278 $10,428 $ 7,976
========== =========== ======= ===========
As of January 31, 2005, the Company had foreign net operating loss carryforwards
of approximately $140.5 million, which are available to offset taxable income in
future years. The majority of the carryforward tax losses ($132.1 million) were
incurred in Switzerland in the Ebel business prior to the Company's acquisition
of the Ebel business on March 1, 2004. Effective March 1, 2004, Ebel S.A. was
merged into another wholly-owned Swiss subsidiary, and a Swiss tax ruling was
obtained that allows the Ebel tax losses to offset taxable income in the
surviving entity. As part of purchase accounting, the Company recorded net
deferred tax assets for the Swiss tax losses and for the temporary differences
between the Swiss tax basis and the assigned values of the net Ebel assets. The
Company has established a partial valuation allowance on the deferred tax assets
as a result of an evaluation of expected utilization of such tax benefits within
the expiry of the tax losses. The recognition of the tax benefit has been
applied to reduce the carrying value of acquired intangible assets to $4.6
million; subsequent recognition of deferred tax assets, if any, will be applied
to reduce the carrying value of the intangible assets to zero prior to being
recognized as a reduction of income tax expense. The Company recognized cash tax
savings of $2.8 million on the utilization of the Swiss tax losses during the
year. The remaining tax losses ($8.4 million) are related to the Company's
former operations in Germany, and its current operations in Germany, Japan, and
the United Kingdom. A full valuation allowance has been established on the
deferred tax assets resulting from these losses due to the Company's assessment
that the deferred tax assets will not likely be utilized.
Management will continue to evaluate the appropriate level of allowance on all
deferred tax assets, considering such factors as prior earnings history,
expected future earnings, carryback and carryforward periods, and tax strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset.
The Company estimates its effective income tax rate periodically, considering
all known factors and the estimated effects of future events or tax planning
strategies that can cause the rate to vary from the statutory rate. Estimating
the outcome of future events is inherently uncertain and final resolution of
those events can cause the effective rate to vary significantly. During the
year, the effective tax rate was reduced to 20.5% principally as a result of
adjustments in the fourth quarter relating to refunds from a retroactive Swiss
tax ruling, a favorable U.S. tax accrual adjustment, and the recording of the
tax benefit of an asset impairment in the U.S.
F-23
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,
---------------------------------
2005 2004 2003
-------- -------- -------
Provision for income taxes at the U.S. statutory rate $ 11,582 $ 11,108 $ 9,751
Lower effective foreign income tax rate (5,137) (5,487) (4,110)
Change in valuation allowance 101 (13) (12)
Tax provided on repatriated earnings of foreign
subsidiaries - 3,133 1,856
State and local taxes, net of federal benefit 250 (43) 44
Other, net (13) 188 272
-------- -------- -------
Total $ 6,783 $ 8,886 $ 7,801
======== ======== =======
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 $224.3 million at January 31, 2005, 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.
The Company has not changed its position with respect to the indefinite
reinvestment of foreign earnings to take into account the possible election of
the repatriation provisions contained in the American Jobs Creation Act of 2004.
The American Jobs Creation Act of 2004 (the "Act"), as enacted on October 22,
2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated during a one-year period. The deduction would
result in an approximate 5.25% U.S. federal tax rate on any repatriated
earnings. To qualify for the deduction, the earnings must be reinvested in the
United States pursuant to a domestic reinvestment plan established by the
Company's Chief Executive Officer and approved by the Company's Board of
Directors. Certain other criteria in the Act must be satisfied as well. The
maximum amount of the Company's foreign earnings that may qualify for the
temporary deduction under the Act is approximately $183.0 million.
The Company is in the process of evaluating whether foreign earnings will be
repatriated under the repatriation provisions of the Act, and if so, the amount
that will be repatriated. The Company will be considering repatriating any
amount up to the maximum. The Company is awaiting the issuance of further
regulatory guidance and passage of statutory technical corrections with respect
to certain provisions in the Act prior to determining the amounts that may be
repatriated. As a result, the Company expects to determine the amounts and
sources of foreign earnings to be repatriated, if any, prior to the close of the
fiscal year ending January 31, 2006. At this time, the income tax expense impact
of a qualifying repatriation, if the Company should choose to make one, cannot
be reasonably estimated.
NOTE 10 - OTHER ASSETS
In fiscal 1996, the Company entered into an agreement with a trust which owned
an insurance policy issued on the lives of the Company's Chairman and his
spouse. Under this agreement, the trust assigned the insurance policy to the
Company as collateral to secure repayment by the trust of interest-free loans
made by the
F-24
Company to the trust in amounts equal to the premiums on said insurance policy
(approximately $0.7 million per annum). The agreement required the trust to
repay the loans from the proceeds of the policy. At January 31, 2003, the
Company had outstanding loans from the trust of $5.2 million. On April 4, 2003,
the agreement was amended and restated to transfer the policy from the trust to
the Company in partial repayment of the loan balance. The Company is the
beneficiary of the policy insofar as upon the death of the Company's Chairman
and his spouse, the proceeds of the policy would first be distributed to the
Company to repay the premiums paid by the Company with the remaining proceeds
distributed to the trust. As of January 31, 2005, the total premiums paid
amounted to $6.8 million and the cash surrender value of the policy was $6.7
million.
NOTE 11 - LEASES, COMMITMENTS AND CONTINGENCIES
The Company leases office, distribution, retail and manufacturing facilities,
and office equipment under operating leases, which expire at various dates
through January 2015. Certain leases include renewal options and the payment of
real estate taxes and other occupancy costs. Some leases also contain rent
escalation clauses (step rents) that require additional rent amounts in the
later years of the term. Rent expense for leases with step rents is recognized
on a straight-line basis over the minimum lease term. Likewise, capital funding
and other lease concessions that are occasionally provided to the Company, are
recorded as deferred rent and amortized on a straight-line basis over the
minimum lease term as adjustments to rent expense. Rent expense for equipment
and distribution, factory and office facilities under operating leases was
approximately $12.6 million, $9.7 million and $8.9 million in fiscal 2005, 2004
and 2003, respectively. Minimum annual rentals at January 31, 2005 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 (in
thousands):
Fiscal Year Ended January 31,
- ----------------------------
2006 $12,186
2007 11,613
2008 9,831
2009 8,944
2010 8,666
Thereafter 29,357
-------
$80,597
=======
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 12 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Savings Plan under Section 401(k) of the
Internal Revenue Code. Company contributions and expenses of administering the
Employee Savings Plan amounted to $0.6 million, $0.6 million and $0.7 million in
fiscal 2005, 2004 and 2003, 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 2005, 2004 and 2003, the Company
recorded an expense related to the SERP of approximately $0.6 million, $0.5
million and $0.5 million, respectively.
F-25
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 2005, 2004 and 2003, the Company recorded an
expense of $0.3 million, $0.3 million and $0.2 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 $0.3 million to his spouse for the
lesser of ten years or her remaining lifetime. Neither the agreement nor the
benefits payable thereunder are assignable and no benefits are payable to the
estates or heirs of the Chairman or his spouse. Results of operations include an
actuarially determined charge related to this plan of approximately $0.2
million, $0.2 million and $0.1 million in fiscal years 2005, 2004 and 2003,
respectively.
Effective concurrently with the consummation of the Company's public offering in
the fourth quarter of fiscal 1994, the Board of Directors and the shareholders
of the Company approved the adoption of the Movado Group, Inc. 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, as amended and restated as of
April 8, 2004, the Compensation Committee of the Board of Directors, which is
comprised of the Company's five outside directors, has the authority to grant
incentive stock options and nonqualified stock options, to purchase, as well as
stock appreciation rights and stock awards, up to 9,000,000 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 2002 are summarized as
follows:
Weighted-
Outstanding Average
Options Exercise Price
----------- --------------
January 31, 2002 4,353,344 $ 8.24
Options granted 648,900 $10.05
Options exercised (355,496) $ 4.54
Options forfeited (107,228) $ 9.39
----------- ------
January 31, 2003 4,539,520 $ 8.76
Options granted 978,144 $12.03
Options exercised (1,639,710) $ 8.74
Options forfeited (153,976) $ 5.86
----------- ------
January 31, 2004 3,723,978 $ 8.71
Options granted 784,203 $16.44
Options exercised (821,957) $ 9.04
Options forfeited (65,190) $ 9.33
----------- ------
January 31, 2005 3,621,034 $11.66
=========== ======
Options exercisable at January 31, 2005, 2004 and 2003 were 2,888,888, 2,445,912
and 2,191,594, respectively.
F-26
The following table summarizes outstanding and exercisable stock options as of
January 31, 2005:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ---------
$ 3.12 - $ 6.23 536,616 2.2 $ 4.67 475,596 $ 4.73
$ 6.23 - $ 9.35 417,038 4.0 $ 6.99 387,806 $ 6.96
$ 9.35 - $12.46 877,490 5.1 $ 10.69 768,795 $ 10.82
$12.46 - $15.58 1,335,643 6.2 $ 14.40 944,944 $ 14.61
$15.58 - $18.69 454,247 7.1 $ 18.01 311,747 $ 18.39
3,621,034 5.1 $ 11.66 2,888,888 $ 11.35
NOTE 13 - TOTAL COMPREHENSIVE INCOME
The components of comprehensive income for the twelve months ended January 31,
2005, 2004 and 2003 are as follows (in thousands):
2005 2004 2003
--------- -------- --------
Net income $ 26,307 $ 22,851 $ 20,059
Net unrealized gain (loss) on
investments, net of tax 39 139 (82)
Net change in effective portion of
hedging contracts, net tax 366 (3,434) 4,584
Foreign currency translation adjustment 13,829 18,382 38,170
--------- -------- --------
Total comprehensive income $ 40,541 $ 37,938 $ 62,731
========= ======== ========
NOTE 14 - SEGMENT INFORMATION
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches, in addition to revenue
generated from after sales service activities and shipping. The Retail segment
includes the Movado Boutiques and outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of all other Company operations. The Company's International operations
are principally conducted in Europe, the Middle East and Asia. The Company's
International assets are substantially located in Switzerland.
F-27
Operating Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales Operating Income (1)
------------------------------- --------------------------------
2005 2004 2003 2005 2004 2003
-------- -------- -------- -------- -------- --------
Wholesale $345,028 $269,341 $246,195 $ 33,445 $ 34,930 $ 29,544
Retail 73,938 60,873 53,882 1,631 (149) 2,232
-------- -------- -------- -------- -------- --------
Consolidated total $418,966 $330,214 $300,077 $ 35,076 $ 34,781 $ 31,776
======== ======== ======== ======== ======== ========
Total Assets Capital Expenditures
------------------------------- --------------------------------
2005 2004 2003 2005 2004 2003
-------- -------- -------- -------- -------- --------
Wholesale $415,739 $340,257 $306,841 $ 6,785 $ 2,958 $ 4,383
Retail 61,211 50,710 38,313 8,162 7,872 2,142
-------- -------- -------- -------- -------- --------
Consolidated total $476,950 $390,967 $345,154 $ 14,947 $ 10,830 $ 6,525
======== ======== ======== ======== ======== ========
Depreciation and Amortization
-------------------------------
2005 2004 2003
-------- -------- --------
Wholesale $ 8,909 $ 7,500 $ 6,517
Retail 3,694 2,473 1,852
-------- -------- --------
Consolidated total $ 12,603 $ 9,973 $ 8,369
======== ======== ========
(1) Fiscal 2005 Retail Operating Income includes a non-cash impairment charge of
$2.0 million recorded in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144").
Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
Net Sales (2) Long-Lived Assets
------------------------------- --------------------------------
2005 2004 2003 2005 2004 2003
-------- -------- -------- -------- -------- --------
Domestic $330,269 $285,739 $261,701 $ 35,010 $ 30,216 $ 26,530
International 88,697 44,475 38,376 15,273 11,896 13,409
-------- -------- -------- -------- -------- --------
Consolidated total $418,966 $330,214 $300,077 $ 50,283 $ 42,112 $ 39,939
======== ======== ======== ======== ======== ========
Operating Income
-------------------------------
2005 2004 2003
-------- -------- --------
Domestic $ 9,357 $ 6,622 $ 8,458
International 25,719 28,159 23,318
-------- -------- --------
Consolidated total $ 35,076 $ 34,781 $ 31,776
======== ======== ========
(2) The domestic and international net sales are net of intercompany sales of
$272.1 million, $209.7 million and $182.5 million for the twelve months
ended January 31, 2005, January 31, 2004 and January 31, 2003,
respectively.
F-28
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited selected interim operating results of the
Company for fiscal 2005 and 2004 (in thousands, except per share amounts):
Quarter Ended
------------------------------------------
1st 2nd 3rd 4th
------- ------- -------- --------
Fiscal 2005
Net sales $74,187 $97,788 $127,023 $119,968
Gross profit $43,385 $57,978 $ 77,141 $ 71,644
Net income $ 736 $ 7,057 $ 11,334 $ 7,180
Net income per share:
Basic $ 0.03 $ 0.29 $ 0.46 $ 0.29
Diluted $ 0.03 $ 0.28 $ 0.44 $ 0.28
Fiscal 2004
Net sales $60,170 $76,545 $100,767 $ 92,732
Gross profit $36,440 $47,239 $ 61,339 $ 55,288
Net income $ 856 $ 5,751 $ 10,074 $ 6,170
Net income per share:
Basic $ 0.04 $ 0.24 $ 0.42 $ 0.25
Diluted $ 0.03 $ 0.23 $ 0.40 $ 0.24
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,
2005 2004 2003
------- ------- -------
Cash paid during the year for:
Interest $ 2,950 $ 2,369 $ 3,559
Income taxes $ 7,434 $ 5,864 $ 6,583
F-29
NOTE 17 - STOCK DIVIDEND
On June 17, 2004, the Company's shareholders approved an amendment to its
articles of incorporation providing for an increase in the authorized shares of
common stock and Class A common stock to 100 million shares and 30 million
shares, respectively. Subsequently, on June 25, 2004, the Company distributed a
stock dividend of one newly issued share of common stock and one newly issued
share of Class A common stock for each then outstanding share of common stock
and of Class A common stock, respectively, to shareholders of record as of June
11, 2004.
NOTE 18 - LITIGATION SETTLEMENT
On July 28, 2004, a settlement was reached in a lawsuit the Company filed
against Swiss Army Brands, Inc. and two individuals in November 2001. In the
lawsuit, the Company alleged that Swiss Army Brands and the other defendants
tortiously interfered with its business by soliciting a number of the Company's
sales employees. As a result of the settlement, the Company recorded a pre-tax
gain of $1.4 million. This consisted of a gross settlement of $1.9 million
partially offset by direct costs related to the litigation of $0.5 million.
NOTE 19 - HUGO BOSS LICENSE AGREEMENT
On December 15, 2004, the Company entered into a License Agreement with Hugo
Boss Trademark Management GmbH & Co ("Hugo Boss"). The Company received a
worldwide exclusive license to use the trademark "HUGO BOSS" and any other
trademarks of Hugo Boss containing the names HUGO or BOSS, in connection with
the production, promotion and sale of watches. The Company is permitted to
assign its rights and sublicense the trademarks to its affiliates (although the
Company will remain liable after such assignment or sublicense under the License
Agreement). The term of the license is March 21, 2005 through December 31, 2013,
with an optional five-year renewal period.
F-30
Schedule II
MOVADO GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Acquired Provision
Beginning Ebel Charged to Currency Net Balance at
Description of Year Balance Operations Revaluation Write-Offs End of Year
----------- ---------- -------- ---------- ----------- ---------- -----------
Year ended January 31, 2005:
Allowance for doubtful accounts $ 6,659 $ 2,192 $ 2,072 $ 68 ($4,161) $ 6,830
Year ended January 31, 2004:
Allowance for doubtful accounts $ 5,235 $ - $ 2,290 $ 106 ($ 972) $ 6,659
Year ended January 31, 2003:
Allowance for doubtful accounts $ 4,070 $ - $ 1,987 $ 93 ($ 915) $ 5,235
Balance at Acquired Provision
Beginning Ebel Charged to Currency Net Balance at
of Year Balance Operations Revaluation Write-Offs End of Year
---------- -------- ---------- ----------- ---------- -----------
Year ended January 31, 2005:
Inventory reserve $ 2,408 $ 50,800 $ 3,221 $3,464 ($ 5,446) $ 54,447
Year ended January 31, 2004:
Inventory reserve $ 4,323 $ - $ 993 ($ 645) ($ 2,263) $ 2,408
Year ended January 31, 2003:
Inventory reserve $ 8,151 $ - $ 1,829 $ 848 ($ 6,505) $ 4,323
Balance at Provision/
Beginning (Benefit) Currency Balance at
of Year to Operation Revaluation Adjustments End of Year
---------- ------------ ----------- ----------- -----------
Year ended January 31, 2005:
Deferred tax assets valuation (1) $795 $101 $ 488 $32,009 $33,393
Year ended January 31, 2004:
Deferred tax assets valuation $950 ($13) ($ 142) $ - $ 795
Year ended January 31, 2003:
Deferred tax assets valuation $1,480 ($12) $ 86 ($ 604) $ 950
(1) The detail of adjustments is as follows:
Ebel purchase accounting - NOL's $26,731
Ebel purchase accounting - other 3,261
Current year losses 1,201
Other 816
-------
$32,009
=======
S-1