- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended October 31, 2003April 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22378
MOVADO GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 13-2595932
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
650 From Road, Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(201) 267-8000
(Registrant's telephone number, including area code)
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 that past 90 days. Yes [X] No [ ]
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 number of shares outstanding of the registrant's common stock and class
A common stock as of December 8, 2003May 31, 2004 were 8,709,8588,869,898 and 3,400,906, respectively.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MOVADO GROUP, INC.
Index to Quarterly Report on FormINDEX TO QUARTERLY REPORT ON FORM 10-Q
October 31, 2003APRIL 30, 2004
Page
----
Part I Financial Information (Unaudited)
Item 1. Consolidated Balance Sheets at October 31, 2003,April 30, 2004, January 31, 20032004 and October 31, 2002April
30, 2003 3
Consolidated Statements of Income for the three months ended April 30,
2004 and nine months ended October 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the ninethree months ended October 31,April 30,
2004 and 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1112
Item 3. Quantitative and Qualitative Disclosure about Market Risks 1716
Item 4. Controls and Procedures 1817
Part II Other Information
Item 1. Legal Proceedings 1918
Item 4. Submission of Matters to a Vote of Security Holders 1918
Item 6. Exhibits and Reports on Form 8-K 1918
Signature 2019
2
PART I - FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
October 31,April 30, January 31, October 31,April 30,
2004 2004 2003
2003 2002
---------- ---------- ------------------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 60,95735,948 $ 38,36582,083 $ 36,93034,548
Trade receivables, net 120,706 94,438 124,29599,546 88,800 97,362
Inventories, net 123,074 111,736 113,215176,001 121,678 119,445
Other 21,957 36,646 24,47731,217 27,932 34,440
--------- --------- ---------
Total current assets 326,694 281,185 298,917342,712 320,493 285,795
Property, plant and equipment, net 40,744 39,939 39,74945,713 42,112 39,579
Other 27,436 24,030 24,01136,149 28,362 25,055
--------- --------- ---------
Total assets $ 394,874424,574 $ 345,154390,967 $ 362,677350,429
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 22,00027,450 $ -- $ 31,00018,750
Mortgage payable 5,089 -- --
Current portion of long-term debt 5,000 --10,000 5,000
Accounts payable 22,115 22,712 25,95326,281 23,631 14,436
Accrued liabilities 31,084 22,735 25,47338,698 25,781 18,790
Current taxes payable 12,680 11,467 11,0489,474 12,150 8,324
Deferred taxes payable 5,188 4,851 4,3365,798 5,961 4,878
--------- --------- ---------
Total current liabilities 98,067 61,765 102,810117,790 77,523 70,178
Long-term debt 25,000 25,000 30,000 35,000 35,000
Deferred and non-current income taxes 2,406 4,229 2,890961 2,282 3,823
Other liabilities 10,518 7,948 7,59814,795 11,449 8,657
--------- --------- ---------
Total liabilities 140,991 108,942 148,298158,546 116,254 112,658
--------- --------- ---------
Shareholders' equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no shares issued -- -- --
Common Stock, $0.01 par value,
20,000,000 shares authorized; 10,428,308, 10,057,36710,909,920, 10,861,631 and
10,027,36610,080,164 shares issued and outstanding, respectively 104110 109 101 100
Class A Common Stock, $0.01 par value,
10,000,000 shares authorized; 3,400,906, 3,401,8203,400,906 and 3,428,27734 34 34
3,400,906 shares issued and outstanding, respectively 34 34 34
Capital in excess of par value 77,638 72,145 71,54390,195 89,491 72,547
Retained earnings 187,164 172,287 170,471192,356 192,601 172,785
Accumulated other comprehensive income (loss) 21,113 19,386 (163)25,697 34,473 20,347
Treasury Stock, 1,726,631, 1,547,1562,043,362, 2,040,591 and 1,539,7611,553,198
shares, respectively, at cost (32,170) (27,741) (27,606)(42,364) (41,995) (28,043)
--------- --------- ---------
Total shareholders' equity 253,883 236,212 214,379266,028 274,713 237,771
--------- --------- ---------
Total liabilities and shareholders' equity $ 394,874424,574 $ 345,154390,967 $ 362,677350,429
========= ========= =========
See Notes to Consolidated Financial StatementsSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------April 30,
----------------------------
2004 2003
2002 2003 2002
-------- -------- -------- --------------------- -------------
Net sales $100,767 $ 91,023 $237,482 $220,538$74,187 $60,170
Cost of sales 39,428 35,248 92,464 85,211
-------- -------- -------- --------30,802 23,730
------- -------
Gross profit 61,339 55,775 145,018 135,32743,385 36,440
Selling, general and administrative 46,584 42,510 119,478 112,126
-------- -------- -------- --------41,678 34,468
------- -------
Operating income 14,755 13,265 25,540 23,2011,707 1,972
Net interest expense 764 1,031 2,372 3,045
-------- -------- -------- --------725 783
------- -------
Income before income taxes 13,991 12,234 23,168 20,156982 1,189
Provision for income taxes 3,917 3,426 6,487 5,644
-------- -------- -------- --------246 333
------- -------
Net income $ 10,074736 $ 8,808 $ 16,681 $ 14,512
======== ======== ======== ========856
======= =======
Earnings per share:
Basic $ 0.830.06 $ 0.74 $ 1.39 $ 1.23
======== ======== ======== ========0.07
======= =======
Diluted $ 0.800.06 $ 0.73 $ 1.33 $ 1.19
======== ======== ======== ========0.07
======= =======
Weighted average shares outstanding:
Basic 12,097 11,874 12,015 11,821
======== ======== ======== ========12,268 11,948
======= =======
Diluted 12,629 12,127 12,504 12,167
======== ======== ======== ========12,754 12,348
======= =======
See Notes to Consolidated Financial StatementsSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NineThree Months Ended October 31,April 30,
----------------------------
2004 2003
2002
-------- --------------------- ------------
Cash flows from operating activities:
Net income $ 16,681736 $ 14,512856
Adjustments to reconcile net income to net cash provided by/ (used in)used in operating
activities:
Depreciation and amortization 7,074 6,3192,905 2,199
Deferred income taxes 175 (365)(1,237) --
Provision for losses on accounts receivable 1,129 1,287(182) 335
Provision for losses on inventory 500 680393 200
Changes in assets and liabilities:
Trade receivables (26,509) (32,187)4,917 (2,939)
Inventories (10,490) (9,576)(18,312) (7,424)
Other current assets 11,712 14,803(1,432) 2,732
Accounts payable (817) 6491,255 (8,328)
Accrued liabilities 8,551 (494)(7,480) (4,000)
Current taxes payable 1,224 2,108(2,624) (3,102)
Other non-current assets (3,710) 535(674) (2,627)
Other non-current liabilities 2,576 (986)731 286
-------- --------
Net cash provided by/ (used in)used in operating activities 8,096 (2,715)(21,004) (21,812)
-------- --------
Cash flows from investing activities:
Capital expenditures (7,295) (5,321)(3,916) (1,591)
Acquisition of Ebel, net of cash acquired (38,985) --
Trademarks (536) (393)(19) --
-------- --------
Net cash used in investing activities (7,831) (5,714)(42,920) (1,591)
-------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 22,000 24,50022,410 18,750
Stock options exercised &and other 1,791 2,215charges 336 100
Dividends paid (1,804) (1,066)
Purchase of treasury stock (727) --(981) (358)
-------- --------
Net cash provided by financing activities 21,260 25,64921,765 18,492
-------- --------
Effect of exchange rate changes on cash and cash equivalents 1,067 2,739(3,976) 1,094
-------- --------
Net increasedecrease in cash and cash equivalents 22,592 19,959(46,135) (3,817)
Cash and cash equivalents at beginning of period 82,083 38,365 16,971
-------- --------
Cash and cash equivalents at end of period $ 60,95735,948 $ 36,93034,548
======== ========
SUPPLEMENTAL DISCLOSURE
Business acquired in purchase transaction
FV of assets acquired $ 70,435
Less: liabilities assumed (24,823)
Less: payable for Germany (5,507)
--------
Cash paid for the transaction $ 40,105
--------
Less: cash acquired (1,340)
Less: accrued deal costs (2,100)
Add: preliminary purchase price adjustment 2,320
--------
Net cash paid for transaction $ 38,985
========
See Notes to Consolidated Financial StatementsSEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
MOVADO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Movado Group, Inc. (the "Company") in a manner consistent with that used in
the preparation of the consolidated financial statements included in the
Company's fiscal 20032004 Annual Report filed on Form 10-K. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. These consolidated financial statements should be read in
conjunction with the aforementioned annual report. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the full year.
NOTE 1 - RECLASSIFICATION
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 20042005 presentation.
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 is expected to be completed June 2004,
at which time the Company is obligated to pay 7.0 million Swiss francs, less the
amount of the purchase price adjustment. 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:
- 47.9 million Swiss francs in cash less an estimated purchase price
adjustment of 2.9 million Swiss francs;
- the assumption of a short-term mortgage payable of 6.6 million Swiss
francs; and
- an obligation to pay an additional 7.0 million Swiss francs at the
Germany closing.
Under the purchase method of accounting, the Company recorded an aggregate
purchase price of approximately $45.6 million, which consisted of approximately
$37.7 million in cash, an obligation to pay $5.5 million at the Germany closing
and $4.7 million in deal costs and other incurred liabilities, which primarily
consisted of legal, accounting, investment banking and financial advisory
services fees, less $2.3 million in purchase price adjustments.
In accordance with Statement of Financial Accounting Standards 141, "Business
Combinations," ("SFAS 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
6
to all of the acquired assets except for certain specific types of assets as set
forth in SFAS 141. The pro forma adjustments were based upon a preliminary
assessment of appraised values. Certain of these assessments are not complete at
this time, such as worldwide inventory valuations, restructuring costs, and
total deal costs, but will be finalized by the Company within one year of the
date of the acquisition. The final purchase price allocation may include an
adjustment of the total consideration as well as an adjustment to the estimate
of the fair value of acquired assets and assumed liabilities. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 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 is comprised of approximately $2.2
million for employee severance, $0.1 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. Additionally, the Company recorded an
estimated incremental contractual liability to engage a third party to service
the acquired backlog of warranty claims. There was no change in these
liabilities in the quarter ended April 30, 2004. Payments are expected to
commence during the quarter ending July 31, 2004.
As part of the acquisition, the Company recorded deferred tax assets resulting
from Ebel's net operating loss carry forwards amounting to approximately 164.9
million Swiss francs. The Company established a full valuation allowance on the
deferred tax assets, however, if the deferred tax assets are subsequently
recognized, the recognition of the tax benefit will be applied to reduce the
carrying value of acquired intangible assets to zero, prior to being recognized
as a reduction of income tax expense. The total purchase price has initially
been allocated as follows (in thousands):
Cash $ 1,340
Accounts receivable 15,926
Property, plant and equipment 3,873
Inventories 38,592
Intangible assets 7,376
Other assets 3,328
-------
Total assets acquired 70,435
Current liabilities 14,528
Short-term commitments and contingencies 5,110
Mortgage payable 5,185
-------
Total purchase price $45,612
=======
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 of
approximately $1.4 million, which are expected to be disposed of within the next
12 months.
7
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 and trademarks. 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. At April 30, 2004, identifiable
intangible assets purchased in the Ebel acquisition consisted of the following
(in thousands):
Identifiable Intangible Assets Gross
Value Useful Life
------- -----------
Trade names and trademarks $ 6,735 Indefinite
Customer List 641 5 years
-------
Total $ 7,376
=======
Amortization expense for the next four years and thereafter for intangibles with
finite lives is as follows:
Estimated
Amortization
For The Year Ended Expense
-------------
January 31, 2005 117
January 31, 2006 128
January 31, 2007 128
January 31, 2008 and thereafter 268
-------------
$ 641
=============
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
three month period presented. The unaudited pro forma condensed combined
statement of income for the three months ended April 30, 2004 combines the
historical results for the Company for the three months ended April 30, 2004 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
statement of income for the three months ended April 30, 2003 combines the
historical results for the Company for the three months ended April 30, 2003,
and the historical results for Ebel for the three months ended April 30, 2003.
The following amounts are in thousands, except per share amounts:
Three Months Ended
April 30
--------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
---------- ----------
Revenues $ 75,556 $ 72,351
Net income $ (1,339) $ (2,129)
Basic income per share $ (0.11) $ (0.18)
Diluted income per share $ (0.11) $ (0.18)
8
NOTE 3 - STOCK OPTION PLAN
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans.plan. No compensation cost
has been recognized for any stock options granted under the Company's stock
option plansplan because the quoted market price of the Common Stock at the grant
date was not in excess of the amount an employee must pay to acquire the Common
Stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") issued by the Financial Accounting
Standards Board ("FASB"), prescribes a method to record compensation cost for
stock-based employee compensation plans at fair value. The Company utilizes the
Black-Scholes option-pricing model for determining the fair value of the
stock-based compensation. Pro forma disclosures as if the Company had adopted
the recognition requirements under SFAS No. 123 for the three months ended April 30,
2004 and nine
months ended October 31, 2003, and 2002, respectively, are presented below.
6
Three Months Ended
Nine Months Ended
October 31, October 31,
--------------------------April 30,
--------------------------
(In thousands, except per share data) 2004 2003 2002 2003 2002
---------- ----------
---------- ----------
Net income as reported:reported $ 10,074736 $ 8,808 $ 16,681 $ 14,512856
Fair value based compensation
expense, net of taxes 1,167 914 2,706 2,679
---------- ----------1,554 687
---------- ----------
Pro forma net (loss) income ($ 818) $ 8,907 $ 7,894 $ 13,975 $ 11,833
========== ==========169
========== ==========
Basic earnings per share:
As reported $ 0.830.06 $ 0.74 $ 1.39 $ 1.230.07
Pro forma under SFAS No. 123 ($ 0.07) $ 0.74 $ 0.66 $ 1.16 $ 1.000.01
Diluted earnings per share:
As reported $ 0.800.06 $ 0.73 $ 1.33 $ 1.190.07
Pro forma under SFAS No. 123 ($ 0.07) $ 0.71 $ 0.65 $ 1.12 $ 0.970.01
NOTE 34 - COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income for the three months ended April
30, 2004 and nine months
ended October 31, 2003 and 2002 are as follows (in thousands):
Three Months Ended
Nine Months Ended
October 31, October 31,April 30,
--------------------------
2004 2003
2002 2003 2002
-------- -------- -------- ------------------ ----------
Net income $ 10,074736 $ 8,808 $ 16,681 $ 14,512856
Net unrealized gain (loss) on investments, net of tax 56 (20) 202 (91)
Effective28 42
Net change in effective portion of unrealized (loss)
income on hedging
contracts, net of tax (821) (3,732) (2,954) 2,6921,937 (660)
Foreign currency translation adjustment 4,912 1,631 4,479 20,522
-------- -------- -------- --------(10,741) 1,579
---------- ----------
Total comprehensive (loss) income ($ 8,040) $ 14,221 $ 6,687 $ 18,408 $ 37,635
======== ======== ======== ========1,817
========== ==========
9
NOTE 45 - SEGMENT INFORMATION
The Company conducts its business primarily in threetwo operating segments: Wholesale
Retail and Other.Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches. The 7
Retail segment includes
the Movado Boutiques and outlet stores. The Other
segment includes the Company's service center operations and shipping revenue.
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 the Company's operations in all other Company operations.parts of the world. 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.
Operating Segment Data for theFor The Three Months Ended October 31,April 30, 2004 And 2003 and 2002 (in
thousands)(In
Thousands):
Net Sales Operating Income (Loss)
------------------------------------------ -----------------------
2004 2003 20022004 2003
2002
-------- -------- -------- ---------------------------- -----------------------
Wholesale $61,008 $49,350 $ 85,7173,415 $ 76,229 $ 16,788 $ 14,5033,703
Retail 12,890 12,575 (1,433) (272)
Other 2,160 2,219 (600) (966)
-------- -------- -------- --------13,179 10,820 (1,708) (1,731)
-------------------- -----------------------
Consolidated total $100,767$74,187 $60,170 $ 91,0231,707 $ 14,755 $ 13,265
======== ======== ======== ========1,972
==================== =====================
OperatingGeographic Segment Data for the NineFor The Three Months Ended October 31,April 30, 2004 And 2003 and 2002 (in
thousands)(In
Thousands):
Net Sales Operating Income (Loss)
------------------------------------------ -----------------------
2004 2003 20022004 2003
2002
-------- -------- -------- --------
Wholesale $193,855 $179,390 $ 31,319 $ 27,516
Retail 37,456 34,990 (3,643) (1,458)
Other 6,171 6,158 (2,136) (2,857)
-------- -------- -------- --------
Consolidated total $237,482 $220,538 $ 25,540 $ 23,201
======== ======== ======== ========
Geographic Segment Data for the Three Months Ended October 31, 2003 and 2002 (in
thousands):
Net Sales Operating Income
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- ---------------------------- -----------------------
Domestic (1)$59,219 $51,553 $ 87,558 $ 79,589 $ 5,703 $ 5,946124 ($2,026)
International (1) 13,209 11,434 9,052 7,319
-------- -------- -------- --------14,968 8,617 1,583 3,998
-------------------- -----------------------
Consolidated total $100,767$74,187 $60,170 $ 91,0231,707 $ 14,755 $ 13,265
======== ======== ======== ========1,972
==================== =====================
8
Geographic Segment Data for the Nine Months Ended October 31, 2003Domestic and 2002 (in
thousands):
Net Sales Operating Income
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Domestic (2) $206,657 $191,183 $ 7,150 $ 7,284
International (2) 30,825 29,355 18,390 15,917
-------- -------- -------- --------
Consolidated total $237,482 $220,538 $ 25,540 $ 23,201
======== ======== ======== ========
(1) The domestic and international net sales are net of intercompany sales of $61.2$59.7
million and $55.0$41.1 million for the three months ended October 31,April 30, 2004 and 2003,
and
October 31, 2002, respectively.
(2) The domestic and international net sales are net of intercompany sales of
$156.0 million and $136.3 million for the nine months ended October 31,Total Assets
--------------------
2004 2003
and
October 31, 2002, respectively.--------------------
Domestic 127,542 117,517
International 297,032 232,912
--------------------
Consolidated total 424,574 350,429
====================
10
NOTE 56 - EXECUTIVE RETIREMENT PLAN
The Company has a number of employee benefit plans covering substantially all
employees. Certain eligible executives of the Company have elected to defer a
portion of their compensation on a pre-tax basis under a defined contribution,
supplemental executive retirement plan (SERP) sponsored by the Company. The SERP
was adopted effective June 1, 1995, and provides eligible executives with
supplemental pension benefits in addition to amounts received under the
Company's other retirement plans. The Company makes a matching contribution
which vests equally over five years. The obligations underFor the quarter ended April 30, 2004 and
2003, the Company recorded an expense related to the SERP are included
in other liabilities and amounted toof approximately $7.8$0.1
million $5.4 million
and $5.1 million at October 31, 2003, January 31, 2003 and October 31, 2002,
respectively. The underlying SERP assets amounted to $8.4 million, $5.8 million
and $5.5 million at October 31, 2003, January 31, 2003 and October 31, 2002,
respectively and are included in other long-term assets.for each period.
NOTE 67 - INVENTORIES
Inventories consist of the following (in thousands):
October 31,April 30, January 31, October 31,April 30,
2004 2004 2003
2003 2002
----------- ----------- -------------------- --------- ---------
Finished goods $ 81,660122,939 $ 73,14878,490 $ 73,87678,396
Component parts 40,476 40,649 41,399101,890 43,335 42,016
Work-in-process 4,628 2,262 3,1335,158 2,261 2,445
--------- --------- ---------
126,764 116,059 118,408229,987 124,086 122,857
Less: inventories reserve (3,690) (4,323) (5,193)(53,986) (2,408) (3,412)
--------- --------- ---------
$ 123,074176,001 $ 111,736121,678 $ 113,215119,445
========= ========= =========
9
The increase in all inventory categories, including the inventory reserve, is
primarily the result of the acquired net assets of Ebel. Gross inventory
acquired was $90.4 million with reserves of $50.8 million.
NOTE 78 - EARNINGS PER SHARE
The Company presents net income per share on a basic and diluted basis. Basic
earnings per share is computed using weighted-average shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of shares outstanding adjusted for dilutive common stock equivalents.
The weighted-average number of shares outstanding for basic earnings per share
were 12,097,00012,268,000 and 11,874,00011,948,000 for the three months ended October 31,April 30, 2004 and
2003, and
2002, respectively. For diluted earnings per share, these amounts were increased
by 532,000486,000 and 253,000400,000 for the three months ended October 31,April 30, 2004 and 2003, and 2002,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
The weighted-average number of shares outstanding for basic earnings per share
were 12,015,000 and 11,821,000 for the nine months ended October 31, 2003 and
2002, respectively. For diluted earnings per share, these amounts were increased
by 489,000 and 346,000 for the nine months ended October 31, 2003 and 2002,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
NOTE 89 - RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003,SUBSEQUENT EVENTS
On March 10, 2004, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accountingBoard approved a 2 for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic1 stock split to be effected by
means of a derivative
and when a derivative contains a financing component that warrants special
reportingstock dividend distributable on June 25, 2004 to shareholders of
record as of June 11, 2004, subject to shareholder approval of an increase in
the statementnumber of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003. The adoptionauthorized shares of SFAS
No. 149 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both LiabilitiesCommon Stock and Equity." SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effectiveClass A Common Stock at the
beginning of the first interim period beginning after June
15, 2003. SFAS No. 150 is not applicable to the Company and therefore does not
have an impact on the Company's consolidated financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation of variable interest entities ("VIE's"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary if the
entity does not effectively disperse risks among the parties involved. The
provisions of FIN 46 are effective for the first interim period ending after
December 15, 2003 for those variable interests held prior to February 1, 2003.
The adoption of FIN 46 is not expected to have an impact on the Company's
consolidated financial position, results of operations or cash flows.
10annual shareholders meeting.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-lookingFORWARD-LOOKING STATEMENTS
Statements
Statements included in this quarterly report on Form 10-Q, including, without limitation,
statements under this Item 2, "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,""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.
The Company doesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill and purchased
intangibles with indefinite lives are not intend, and undertakes no obligation, to
updateamortized 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.
Aside from the forward-looking statements in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Thereabove, there has been no other material change in the Company's
Critical Accounting Policies and Estimates, as disclosed in its Annual Report on
Form 10-K for the fiscal year ended January 31, 2003.
112004.
12
Results of operations for the three months ended October 31, 2003April 30, 2004 as compared to
the three months ended October 31, 2002.April 30, 2003.
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
October 31,
---------------------------April 30,
-------------------
2004 2003
2002
-------- --------------- -------
Wholesale:
Domestic $ 72,880 $ 65,052$46,040 $40,733
International 12,837 11,17714,968 8,617
Retail 12,890 12,575
Other 2,160 2,219
-------- --------13,179 10,820
------- -------
Net Sales $100,767 $ 91,023
======== ========$74,187 $60,170
======= =======
Net sales increased by $9.7$14.0 million or 10.7%23.3% for the three months ended October
31, 2003April
30, 2004 as compared to the three months ended October 31, 2002.April 30, 2003. Sales in the
wholesale segment increased 12.4%23.6% to $85.7$61.0 million versus $76.2$49.4 million in the
prior year. Sales of all brands were above prior year in double digits except
ESQ which was slightly below last year. Sales include $3.4 million for Ebel.
The domestic wholesale business was $7.8$5.3 million or 12.0%13.0% above prior year sales
of $65.1$40.7 million. IncreasesTommy Hilfiger posted sales up 63.2% over prior year were recordeddue to
positive sell through at retail in all brands. Tommy Hilfigerexisting doors plus added distribution.
Concord and Coach were up double digits, Movado and Concord
were up high single digits and ESQ showed modest growth. Positive retailer
response to new model introductions was a key contributor to brand growth.digits.
Sales in the international wholesale business were $1.7$6.4 million or 14.9%73.7% above
prior year. SalesAll brands recorded double digit increases, were recorded inwith Tommy Hilfiger
due to retail growth
in existing markets as well as expansions into new markets in Europe and Asia.
In Coach, strong sales in Japan and in the duty free business contributed to a
40%more than doubling year over year improvement. Concord salesreflecting the strength of the Tommy
Hilfiger brand name and the appeal of the watch designs in the international
marketplace. Sales were aboveparticularly strong in Asia up almost 90% from the prior
year salesyear's first quarter, which was significantly impacted by low
single digits while Movado sales declined due to a continued general sluggish
economy in Europe and South America and a general decline in European tourism.the outbreak of SARS.
Sales in the retail segment rose 2.5%21.8% to $12.9$13.2 million. The increase was driven
by a 19.2%an overall 68.9% increase in Movado Boutique sales. This was the result of an
18.2% comparable store sales increase, inalong with the Movado Boutiques. In addition sales increases were recorded in the Movado Boutiques as a result of thenine new stores opened in Dadeland and Aventura in South Florida, Chestnut Hill in
Massachusetts and Woodfield in Illinois.doors
year over year. The outlet business was 5.6% below last
year for the quarter due to reduced level of traffic.
Sales in the other segment, which represents service and shipping revenue, were
relatively flat at $2.2 million.when compared to the
prior year.
Gross Profit. The gross profit for the three months ended October 31, 2003April 30, 2004 was
$61.3$43.4 million or 60.9%58.5% of net sales as compared to $55.8$36.4 million or 61.3%60.6% of net
sales for the three months ended October 31, 2002.April 30, 2003. The increase in gross profit of
$5.6$6.9 million iswas the result of the higher sales volume. The decrease in the
gross profit as a percentage of sales iswas the result of brand and product mix,
particularly the effect of the Ebel business which generated lower margins and
the weaker U.S. dollar.proportionately higher sales growth of Tommy Hilfiger. In addition, the mix
of product within the Movado Boutiques also contributed to the margin decrease
due to higher jewelry sales relative to watch sales in the current year. Jewelry
has a lower gross margin than watches for the Company.
13
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended October 31, 2003April 30, 2004 were $46.6$41.7 million or 46.2%56.2%
of net sales as compared to $42.5$34.5 million or 46.7%57.3% of net sales
12
for the three
months ended October 31, 2002.April 30, 2003. The increase reflects planned
investmentsspending to operate the Ebel
business for two months and increases in spending relating to the base business.
The spending increase in the base business included higher marketing expenses
due to the increase in sales, added spending in support and advertising to driveof the customer and marketing
initiatives, increased costs in the retail segment, primarily the result of
opening fournine new Movado
Boutiques, higher payroll and commissions and increased spending in Asia to
support the unfavorable impactdevelopment of the weak U.S.
dollar on translating SwissMovado brand in China and Canadian costs and planned higher compensation
costs.the global expansion of
Tommy Hilfiger.
Interest Expense. Net interest expense for the three months ended October 31,
2003April 30, 2004
declined by 25.9%7.4% to $0.8$0.7 million as compared to $1.0$0.8 million for the three
months ended October 31, 2002.April 30, 2003. The decrease is due to significantlythe reduction of the average
borrowing rate to 5.2% as of April 30, 2004 from 5.8% as of April 30, 2003. This
reduced averagerate is the result of the mix of the borrowings forwith a greater portion
classified as short-term bank loans due to the quarter.continued paydown of the
Company's long-term debt. The average debt for the quarter decreased
34.9%increased 2.5% from
prior year to $48.7 million, reflecting the favorable results of cash
flow and working capital management.$45.5 million.
Income Taxes. The Company recorded a tax expense of $3.9$0.2 million for the three
months ended October 31, 2003April 30, 2004 as compared to a tax expense of $3.4$0.3 million for the
three months ended October 31, 2002.April 30, 2003. Taxes were recorded at a 25.0% and 28.0% rate
for both of the fiscalperiod ended April 30, 2004 and fiscal 2003, periods.
Results of operations for the nine months ended October 31, 2003 as compared to
the nine months ended October 31, 2002.
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Nine Months Ended
October 31,
---------------------------
2003 2002
-------- --------
Wholesale:
Domestic $164,000 $150,884
International 29,855 28,506
Retail 37,456 34,990
Other 6,171 6,158
-------- --------
Net Sales $237,482 $220,538
======== ========
Net sales increased by $16.9 million or 7.7% for the nine months ended October
31, 2003 as compared to the nine months ended October 31, 2002. Salesrespectively. The decrease in the
wholesale segment increased 8.1% to $193.9 million versus $179.4 million in the
prior year. With sales of $164.0 million, the domestic wholesale business was
$13.1 million or 8.7 % above prior year sales of $150.9 million. The increase
was driven by higher sales in Movado as a result of continued development in the
chain and department store distribution channel and strong new product
introductions, in addition to higher sales in Coach, reflecting the strength of
the Coach brand and improved product offerings.
Sales in the international wholesale business were $1.3 million or 4.7% above
prior year. Sales increases were recorded in Coach with strong sales in Asia and
in Tommy Hilfiger due to the new market expansions in Europe and Asia. These
increases were somewhat offset by sales reductions in Concord and Movado
primarily due to the adverse economic conditions in Europe and Latin America.
13
For the nine months ended October 31, 2003, sales in the retail segment rose
7.0% to $37.5 million. The increase was driven by a 23.6% comparable store sales
increase in the Movado Boutiques. In addition, sales increases were recorded in
the Movado Boutiques as a result of the new stores opened in Dadeland and
Aventura in South Florida, Chestnut Hill in Massachusetts and Woodfield in
Illinois. The outlet business was 1.9% below last year for the nine months.
Sales in the other segment, which represents service and shipping revenue, were
flat year on year.
Gross Profit. The gross profit for the nine months ended October 31, 2003 was
$145.0 million or 61.1% of net sales as compared to $135.3 million or 61.4% of
net sales for the nine months ended October 31, 2002. The increase in gross
profit of $9.7 millioneffective tax rate is the result of the higher sales volume. The decrease in
the gross profit as a percentage of sales is the result of productCompany's projected profits and earnings
mix and the
weaker U.S. dollar.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine monthsyear.
Net Income. For the quarter ended October 31, 2003 were $119.5 million or 50.3%
of net sales as compared to $112.1 million or 50.8% of net sales forApril 30, 2004, the nine
months ended October 31, 2002. Increased expenses were a result of planned
investments in sales support and advertising to drive customer and marketing
initiatives, increased costs in the retail segment primarily the result of
opening four new Movado Boutiques, the weak U.S. dollar and the translation
effect of the Swiss and Canadian costs and planned higher compensation costs.
Interest Expense. Net interest expense for the nine months ended October 31,
2003 declined by 22.1% to $2.4 million as compared to $3.0 million for the nine
months ended October 31, 2002. The decrease is due to significantly reduced
average borrowings. The average debt decreased 28.6% from prior year to $49.7
million, reflecting the favorable results of cash flow and working capital
management.
Income Taxes. The Company recorded net
income of $0.7 million. This reflects the consolidated net income from the
Company's base business, prior to the Ebel acquisition, of $2.5 million
partially offset by a tax expenseloss from Ebel of $6.5 million for the nine
months ended October 31, 2003 as compared to a tax expense of $5.6 million for
the nine months ended October 31, 2002. Taxes were recorded at a 28.0% rate for
both of the fiscal 2004 and fiscal 2003 periods.$1.8 million.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities amounted to $8.1 million for the nine
months ended October 31, 2003 and cash used in operating activities amounted to $2.7$21.0 million for the ninethree months
ended October 31, 2002.April 30, 2004 and $21.8 million for the three months ended April 30,
2003. The increasedecrease in cash provided byused in operating activities for the comparative ninethree months
ended October
31,April 30, 2004 as compared to the three months ended April 30, 2003 and 2002 iswas
primarily due to an improvement in the increaseaccounts receivable days outstanding due
to the mix of sales growth in net income,the Movado Boutiques and Tommy Hilfiger watches
where shorter payment terms are the norm. Additionally, the base business
experienced improved receivablecash collections as of April 30, 2004. Cash was also
favorably impacted by higher accounts payable. This was partially offset by
increased inventory to stock the nine new Movado Boutiques and increasesa normal cyclical
build of new products for introduction at the annual International Watch and
Jewelry Fair held in accrued advertising and accrued
compensation costs.Basel, Switzerland.
Cash used in investing activities amounted to $7.8$44.9 million and $5.7$1.6 million for
the ninethree months ended October 31,April 30, 2004 and 2003, and 2002, respectively, andrespectively. The cash used
during the period ended April 30, 2004 was primarily for capital expenditures. For the nine months ended October 31, 2003,acquisition of
Ebel. In addition, cash was used for capital expenditures were mainly forprimarily related to
the build out of the new Movado Boutiques maintenance and enhancements torenovations of existing retail
stores and normal ongoing
systems hardware and software investments. Expendituresoperations. The cash used during the period ended April 30, 2003 was mainly for
the nine months
ended October 31, 2002 relate primarily to normal ongoing systems hardware and
software investments and constructionbuild out of the trade show booth used at the Basel
WatchMovado Boutiques and Jewelry Fair.various information systems projects.
Cash provided by financing activities amounted to $21.3$21.8 million and $25.6$18.5
million for the ninethree months ended October 31,April 30, 2004 and 2003, and 2002, respectively, andwhich
was the result of seasonal short-term bank borrowings.
In fiscalAt April 30, 2004, the
Company's seasonal borrowings decreased due to improved cash flows from
operations.
14
At October 31, 2003, the Company had two series of Senior Notes outstanding.
Senior Notes due January 31, 2005, with a remaining principal amount due of $10.0$5.0
million, were originally issued in a private placement completed in fiscal 1994.
These notes have required annual principal payments of $5.0 million since
January 1998 and bear interest at a rate of 6.56% per annum.
14
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 at a rate of 6.90% per annum, mature on October 30, 2010 and
are subject to annual repayments of $5.0 million commencing October 31, 2006.
OnAs of March 21, 2001,2004, the Company entered into a newamended its Note Purchase and Private Shelf
Agreement, whichoriginally 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. As
of October 31,April 30, 2004 and 2003, there were no such notes were issued.amounts outstanding under the
agreement.
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.credit and $15.0 million of uncommitted working
capital lines. The line of credit expires on June 17, 2006. The credit facility allows for certain Swiss subsidiaries to borrow in local
currency under the line. In addition, the Company has $16.5 million in
uncommitted working capital lines with its bank group which includes a $1.5
million sub-limit for letters of credit. At October 31, 2003,April 30, 2004,
the Company had $22.0$27.5 million of outstanding borrowings under its bank lines as
compared to $31.0$18.8 million at October 31, 2002.April 30, 2003. 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 June
30, 2004.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of timeterm with a Swiss bank. Available credit under these lines totaled
8.88.0 million Swiss francs, with dollar equivalents of approximately $6.6$6.2 million
and $6.0$5.9 million at October 31,April 30, 2004 and 2003, and 2002, 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 October 31, 2003,April 30, 2004, the Swiss bank has guaranteed the
Company's Swiss subsidiary's obligations to certain Swiss third parties in the
amount of approximately 0.9 million Swiss francs. As of October
31, 2003,April 30, 2004, there
are no borrowings against these lines.
During the acquisition, the Company assumed the existing mortgage of 6.6 million
Swiss francs. The Company has classified this debt as current liabilities to
reflect the Company's intent to settle this liability within the next 12 months.
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary share buy-back program.
There were no purchases during fiscal 2003 under the repurchase program and
there have been no repurchases for the ninethree months ended
October 31, 2003.April 30, 2004 and 2003, respectively.
During the ninethree months ended October 31, 2003,April 30, 2004, treasury shares increased by 179,4752,771
as the result of cashless exercises of stock options for 248,02318,183 shares of stock.
The Company paid dividends per share of $0.03 for the first quarter and $0.06
for the second and third quarters,$0.08 or approximately $1.8$1.0 million, for
the ninethree months ended October 31, 2003, and $0.03 per share per quarter, or approximately
$1.1 million for the nine months ended October 31, 2002.April 30, 2004.
Cash and cash equivalents at October 31, 2003April 30, 2004 amounted to $61.0$35.9 million compared
to $36.9$34.5 million at October 31, 2002.April 30, 2003. The increase in cash and cash equivalents
relates to the Company's continued profitability, management of working capital,
translation of Swiss entities' cash balances and the favorable impact of the
Company's hedging program.
15
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is generally effective
for contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a significant impact on the Company's consolidated
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. SFAS No. 150 is not applicable to the Company and therefore does not
have an impact on the Company's consolidated financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation of variable interest entities ("VIE's"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary if the
entity does not effectively disperse risks among the parties involved. The
provisions of FIN 46 are effective for the first interim period ending after
December 15, 2003 for those variable interests held prior to February 1, 2003.
The adoption of FIN 46 is not expected to have an impact on the Company's
consolidated financial position, results of operations or cash flows.
16
Item 3. Quantitative and Qualitative Disclosure about Market Risks
Foreign Currency and Commodity Price RisksFOREIGN CURRENCY AND COMMODITY PRICE RISKS
The majority of the Company's purchases are denominated in Swiss francs. The
Company reduces its exposure to the Swiss franc exchange rate risk through a
hedging program. Under the hedging program, the Company purchases various
derivatives, predominantly forward and option contracts. Changes in derivative
fair values will either be recognized in earnings as offsets to the changes in
fair value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
shareholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. If the Company did not engage in a
hedging program, any change in the Swiss franc currency rate would have an equal
effect on the entities' cost of sales. The Company purchases gold for the
production of certain watches. The Company purchases gold derivatives under its
hedging program and treats the changes in fair value on these derivatives in the
same manner as the changes in fair value in its Swiss franc derivatives.
The Company also hedges its 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. Under SFAS No. 133, the change in fair value of these instruments is
recognized in accumulated other comprehensive income to offset the change in the
value of the net investment being hedged.
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of October 31, 2003April 30, 2004 (in millions):
October 31, 2003April 30, 2004
Fair Value Maturities
------------------------ ----------
Forward exchange contracts $0.3 2003$ 0.3 2004 - 20042005
Purchased foreign currency options 2.0 20054.2 2004 - 2006
----
$2.3
====-----------
$ 4.5
===========
The Company's international business accounts for 13.0%20.2% of the Company's sales.
The international operations are denominated in local currency and fluctuations
in these currency rates may have an impact on the Company's sales, cost of
sales, operating expenses and net income. During the ninethree months ended October
31,April
30, 2004 and 2003, and 2002, there was no material effect to the results of operations due
to foreign currency rate fluctuations. There can be no assurance that this trend
will continue.
Interest Rate RiskINTEREST RATE RISK
As of October 31, 2003,April 30, 2004, the Company had $22.0$27.5 million in short-term bank debt
obligations with variable interest rates based on LIBOR plus an applicable loan
spread. The Company does not hedge these interest rate risks. The Company also
has $35.0$30.0 million Senior Note debt bearing fixed interest rates per annum. The
difference between the market based interest rates at October 31, 2003April 30, 2004 and the
fixed rates were unfavorable.
1716
Item 4. Controls and Procedures
The Company's management,Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation
ofevaluated
the effectiveness of the design and operation of the Company's disclosure"disclosure
controls and proceduresprocedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act Rules 13a-15(e) and 15d-15(e)).Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures wereare effective as ofin
making known to them, in a timely manner, material information relating to the
end ofCompany and the period covered by this report.Company's consolidated subsidiaries required to be disclosed in
the Company's reports filed or submitted under the Exchange Act.
There havehas been no significant changeschange in the Company's internal control over financial
reporting that occurred during the quarter ended October 31, 2003April 30, 2004, that havehas materially affected,
or areis reasonably likely to materially affect, the Company's internal control
over financial reporting.
It should be noted that anywhile 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, of controls, howeverno
matter how well designed andconceived or operated, can provide only reasonable, and not
absolute, assurance that the objectives of the systemscontrol system are met.
In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there is
only reasonable assurance that the Company's controls will succeed in achieving
these stated goals under all future conditions.
1817
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Third Amendment to License Agreement dated June 3, 1999
between Tommy Hilfiger Licensing, Inc. and the
Registrant entered into as of May 7, 2004.*
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal 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 Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company furnished a report on Form 8-K (Item 12) on September 5, 2003June 2, 2004 for a press
release, dated September 4,
2003,June 2, 2004, announcing financial results for the first quarter
ended July
31, 2003.
19April 30, 2004.
On May 17, 2004, the Company amended a report on Form 8-K (Item 7) that was
furnished on March 15, 2004 announcing the Ebel acquisition.
*Confidential Portions of Exhibit 10.1 have been omitted and filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
18
SIGNATURE
Pursuant to the requirements of the Securities and 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: December 15, 2003June 9, 2004 By: /s/ Eugene J. Karpovich
------------------------------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer and
Principal Accounting Officer)
(Duly Authorized Officer)
2019