<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
[ ] 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)
<TABLE>
<S> <C>
NEW YORK 13-2595932
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
125 CHUBB AVENUE, LYNDHURST, NEW JERSEY 07071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (201) 460-4800
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 the number of shares outstanding of each of the Issuer's classes
of Common Stock, as of the latest practicable date.
As of December 1, 1998 the Registrant had 3,533,529 shares of Class A
Common Stock, par value $0.01 per share, outstanding and 9,389,423 shares of
Common Stock, par value $0.01 per share, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MOVADO GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
OCTOBER 31, 1998
Page
----
Part I Financial Information
Item 1. Consolidated Balance Sheets at October 31, 1998,
January 31, 1998 and October 31, 1997 3
Consolidated Statements of Income for the nine
months ended October 31, 1998 and 1997 and the
three months ended October 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
nine months ended October 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, OCTOBER 31,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $5,469 $10,874 $2,882
Trade receivables, net 138,076 92,386 125,670
Inventories 121,551 98,183 103,574
Other 20,749 18,206 16,184
---------- ---------- ----------
Total current assets 285,845 219,649 248,310
---------- ---------- ----------
Plant, property and equipment, net 23,451 18,909 17,358
Other assets 11,460 10,511 10,331
---------- ---------- ----------
$320,756 $249,069 $275,999
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $53,611 $ - $35,386
Current portion of long-term debt 5,000 10,000 5,000
Accounts payable 15,733 25,286 14,226
Accrued liabilities 26,021 16,920 19,353
Deferred and current taxes payable 9,560 10,340 8,572
---------- ---------- ----------
Total current liabilities 109,925 62,546 82,537
---------- ---------- ----------
Long-term debt 35,000 35,000 40,000
Deferred and non-current foreign income taxes 5,950 3,460 5,311
Other liabilities 1,863 2,530 2,861
Shareholders' equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no shares issued - - -
Common Stock, $0.01 par value,
20,000,000 shares authorized; 9,389,236, 9,317,007 and
9,259,902, shares issued, respectively 94 93 93
Class A Common Stock, $0.01 par value,
10,000,000 shares authorized; 3,533,529, 3,556,793 and
3,572,460, shares issued and outstanding, respectively 35 36 36
Capital in excess of par value 64,872 64,475 64,039
Retained earnings 100,965 86,194 82,011
Accumulated other comprehensive income 4,497 (5,137) (761)
Treasury stock, 137,319, 17,251 and 17,251 shares, at cost (2,445) (128) (128)
---------- ---------- ----------
168,018 145,533 145,290
---------- ---------- ----------
$320,756 $249,069 $275,999
========== ========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $208,039 $176,447 $97,455 $84,536
Costs and expenses:
Cost of sales 86,272 75,223 39,967 35,438
Selling, general and administrative 97,633 82,448 40,460 35,398
-------- -------- -------- --------
Operating income 24,134 18,776 17,028 13,700
-------- -------- -------- --------
Net interest expense 3,951 3,968 1,435 1,685
-------- -------- -------- --------
Income before income taxes 20,183 14,808 15,593 12,015
Provision for income taxes 4,642 3,406 3,586 2,707
-------- -------- -------- --------
Net income $15,541 $11,402 $12,007 $9,308
======== ======== ======== ========
Basic net income per share $1.21 $ 1.00 $0.94 $ 0.81
======== ======== ======== ========
Diluted net income per share $1.17 $0.96 $0.91 $0.77
======== ======== ======== ========
Dividends declared per share $0.06 $0.05 $0.02 $0.02
======== ======== ======== ========
Average shares outstanding 12,860 11,365 12,813 11,490
Dilutive effect of stock options 422 481 337 599
-------- -------- -------- --------
Average shares outstanding assuming dilution 13,282 11,846 13,150 12,089
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $15,541 $11,402
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,929 2,943
Deferred and non-current foreign income taxes 2,018 1,721
Provision for losses on accounts receivable 812 628
Changes in current assets and liabilities:
Trade receivables (45,430) (50,540)
Inventories (21,987) (15,901)
Other current assets 3,221 1,726
Accounts payable (9,661) (11,164)
Accrued liabilities 9,032 6,043
Deferred and current taxes payable (971) 1,779
Increase in other non-current assets (854) (1,298)
Increase(decrease) in other non-current liabilities 55 (54)
-------- --------
Net cash used in operating activities (45,295) (52,715)
-------- --------
Cash flows used for investing activities:
Capital expenditures (7,248) (4,764)
Goodwill, trademarks and other intangibles (862) (978)
-------- --------
Net cash used in investing activities (8,110) (5,742)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of underwriting discounts and offering expenses - 29,499
Sale of subsidiary 2,416 -
Net proceeds from debt facilities 48,611 27,838
Principal payments under capital leases (276) (221)
Exercise of stock options 340 104
Dividends paid (770) (682)
Purchase of treasury stock (2,320) -
-------- --------
Net cash provided by financing activities 48,001 56,538
-------- --------
Effect of exchange rate changes on cash (1) (84)
-------- --------
Net decrease in cash (5,405) (2,003)
Cash at beginning of period 10,874 4,885
-------- --------
Cash at end of period $5,469 $2,882
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
MOVADO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 financial statements included in the Company's fiscal
1998 Annual Report filed on Form 10-K. In the opinion of management, the
accompanying 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.
NOTE 1 - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, OCTOBER 31,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Finished goods $76,923 $61,960 $62,110
Work-in-process and component parts 44,628 36,223 41,464
----------- ----------- -----------
$121,551 $98,183 $103,574
=========== =========== ===========
</TABLE>
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OCTOBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest $4,125 $3,400
Income taxes 3,782 92
</TABLE>
NOTE 3 - COMPREHENSIVE INCOME
As of February 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, (SFAS 130), "Reporting Comprehensive Income". SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. Under SFAS
130, foreign currency translation adjustments, which had been
6
<PAGE> 7
reported separately in shareholders' equity prior to adoption are included in
other comprehensive income. No provision has been made for taxes on foreign
subsidiaries' undistributed earnings, because it is management's intention to
permanently reinvest the earnings of foreign subsidiaries within the business of
those companies. Amounts in prior year financial statements have been
reclassified to conform to SFAS 130.
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income $15,541 $11,402 $12,007 $ 9,308
Foreign currency translation adjustment 9,634 1,095 10,018 6,204
------- ------- ------- -------
Comprehensive income
$25,175 $12,497 $22,025 $15,512
======= ======= ======= =======
</TABLE>
NOTE 4 - SUBSEQUENT EVENT
On November 30, 1998, the Company signed a shelf debt agreement which allows the
Company, over the next two years, to offer up to $50 million of notes with
maturities up to 12 years from the bring down date. On December 1, 1998, the
Company brought down $25 million of 6.90% Series A Notes maturing on October
30, 2010 which are subject to annual payments of $5.0 million commencing October
31, 2006.
NOTE 5 - ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) in June 1998. SFAS 133 requires all derivatives be
recorded on the balance sheet at fair value and establishes new accounting
practices for hedge instruments. SFAS 133 is required for the fiscal years
beginning after June 15, 1999. Management of the Company is currently analyzing
the effect SFAS 133 will have on the Company's statement of position and results
of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included under Management's Discussion and Analysis of Financial
Condition and Results of Operations, 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 Section 21E of
the Securities Exchange Act of 1934. The Company cautions readers that forward
looking statements include, without limitation, those relating to the Company's
future business prospects, revenues, working capital, liquidity, capital
7
<PAGE> 8
needs, plans for future operations, effective tax rates, margins, interest
costs, and income, as well as assumptions relating to the foregoing. Forward
looking statements are subject to certain risks and uncertainties, some of
which cannot be predicted or quantified. Actual results and future events
could differ materially from those indicated in the forward looking statements
due to several important factors herein identified, among others, and other
risks and factors identified from time to time in the Company's reports filed
with the SEC including, without limitation, the following: general economic
and business conditions which may impact disposable income of consumers,
competitive products and pricing, ability to enforce intellectual property
rights, seasonality, availability of alternative sources of supply in the case
of loss of any significant supplier, the Company's dependence on key officers,
continued availability to the Company of financing and credit on favorable
terms, success of hedging strategies in respect of currency exchange rate
fluctuations and the ability of the Company and the ability of the Company's
customers, vendors and other third parties to adequately address issues
related to the Year 2000.
Nine months ended October 31, 1998 compared to nine months ended October 31,
1997.
Net Sales. Net sales increased 17.9% to $208.0 million from $176.4 million for
the nine months ended October 31, 1998 and October 31, 1997, respectively. The
increase in net sales is primarily attributable to a 26.5% increase in the
Company's manufactured brands - Movado, Concord, ESQ and Coach. The increase in
net sales was partially offset by a decrease in the Company's distributed brands
- - Piaget and Corum. Both domestic and international sales increased 17.9%. The
domestic sales increase is predominantly due to a 13.5% increase in the Concord,
Movado and ESQ brands, initial shipments of the Coach watch line and an increase
in retail operations primarily from the opening of two Movado Boutiques and
retail outlets that have been opened for less than one year. The increase in
international sales is predominantly due to an increase in the Movado brand as
well as initial shipments of the Coach watch line. International sales
increases primarily occurred in the Caribbean, Europe and the Far East markets.
Gross Margins. Gross profit for the nine months ended October 31, 1998 was
$121.8 million (58.5% of net sales) as compared to $101.2 million (57.4% of net
sales) for the comparable prior year period. The increase in gross margin as a
percentage of sales relates to the continued increase in sales of the Company's
manufactured brands - Concord, Movado and ESQ as a proportion of total sales as
well as the initial launch of the Coach watch line, which has margins similar
to the Company's other manufactured brands. The Company's margin also
benefited from a decline in the value of the Swiss franc against the U.S.
dollar which reduces the Company's production costs.
Operating Expenses. Operating expenses increased 18.4% for the nine months
ended October 31, 1998 to 46.9% of net sales from 46.7% of net sales for the
comparable prior year period. The increase in operating expenses occurred
primarily in the advertising, selling and general and administrative expense
categories. The increase in advertising expenses primarily relates to the
introduction of the Coach watch line which was launched Spring 1998 and the
opening of two Movado Boutiques in fiscal 1999. The increase in selling
expenses is predominately attributable to the introduction of the Coach watch
line, the opening of two Movado Boutiques and increases in sales volume in the
Concord, Movado and ESQ brands. The increase in general and administrative
expenses primarily relates to higher information systems costs as a result of
improvements in the information systems infrastructure and employee benefit
costs as a result of increased headcount.
8
<PAGE> 9
Interest Expense. Net interest expense, which consisted primarily of interest
on the Company's 6.56% Senior Notes ("Senior Notes") and borrowings against the
working capital and revolving lines of credit, was $4.0 million for the nine
months ended October 31, 1998 and 1997. Interest expense was flat due to
reduced average borrowings under the Senior Notes offset by increases in
interest expense on the working and revolving capital lines. Average interest
rates in fiscal 1999 have been affected by favorable rates under the Company's
revolving line of credit.
Income Taxes. The Company recorded a provision for income taxes of $4.6
million for the nine months ended October 31, 1998 as compared to a provision
of $3.4 million for the comparable prior year period. Taxes were provided at a
23% effective rate which the Company believes will approximate the effective
annual rate for fiscal 1999; however, there can be no assurance of this as it
is dependent on a number of factors including: mix of foreign to domestic
earnings, local statutory tax rates and utilization of net operating losses.
The 23% effective rate differs from the United States statutory rate due to the
mix of earnings between the Company's U.S. and international operations, the
most significant of which are located in Switzerland. The Company's
international operations are generally subject to tax rates that are
significantly lower than U.S. statutory rates.
Three months ended October 31, 1998 compared to three months ended October 31,
1997.
Net Sales. Net sales increased 15.3% to $97.5 million from $84.5 million for
the three months ended October 31, 1998 and October 31, 1997, respectively. The
increase in net sales is primarily attributable to a 25.0% increase in the
Company's manufactured brands - Concord, Movado, ESQ and Coach. The increase in
net sales was partially offset by a decrease in the Company's distributed brands
- - Piaget and Corum. Domestic and international sales increased 14.8% and 17.4%,
respectively. The domestic sales increase is predominantly due to an 11.6%
increase in the Movado, Concord and ESQ brands, initial shipments of the Coach
watch line and an increase in retail operations primarily from the opening of
two Movado Boutiques and retail outlets that have been open for less than one
year. The increase in international sales is predominantly due to an increase
in the Movado brand as well as initial shipments of the Coach watch line.
International sales increases primarily occurred in the Caribbean, Europe and
Far East markets.
Gross Margins. Gross profit for the three months ended October 31, 1998 was
$57.5 million (59.0% of net sales) as compared to $49.1 million (58.1% of net
sales) for the comparable prior year period. The increase in gross margin as a
percentage of sales relates to the continued increase in sales of the Company's
manufactured brands -- Concord, Movado and ESQ, as a proportion of total sales
as well as the initial launch of the Coach watch line, which has margins similar
to the Company's other manufactured brands. The Company's margin also benefited
from a decline in the value of the Swiss franc against the U.S. dollar which
reduces the Company's production costs.
Operating Expenses. Operating expenses increased 14.3% for the three months
ended October 31, 1998 to 41.5% of net sales from 41.9% of net sales for the
comparable prior year period. The increase in operating expenses occurred
primarily in the advertising, selling and general and administrative expense
categories. The increase in advertising expenses primarily relates to the Coach
watch line which was launched Spring 1998, and the opening of two Movado
Boutiques in fiscal 1999. The increase in selling expenses is predominantly
attributable to the introduction of the Coach watch line, the opening of two
Movado Boutiques and increases in sales volume in the Concord,
9
<PAGE> 10
Movado and ESQ brands. The increase in general and administrative expenses
primarily relates to higher information systems costs as a result of
improvements in information systems infrastructure and employee benefit costs as
a result of increased headcount.
Interest Expense. Net interest expense, which consisted primarily of interest
on the Company's Senior Notes and borrowings against its working capital and
revolving lines of credit, was $1.4 million and $1.7 million for the three
months ended October 31, 1998 and 1997, respectively. The lower interest
expense was predominantly due to reduced average borrowings under the Senior
Notes offset by increases in interest expense on the working and revolving
capital lines. Average interest rates in fiscal 1999 have affected by favorable
rates under the Company's revolving line of credit.
Income Taxes. The Company recorded a provision for income taxes of $3.6
million for the three months ended October 31, 1998 as compared to a provision
of $2.7 million for the comparable prior year period. For the current year,
taxes were provided at a 23% annual effective rate which the Company believes
will approximate the effective annual rate for fiscal 1999; however, there can
be no assurance of this as it is dependent on a number of factors including:
mix of foreign to domestic earnings, local statutory tax rates and utilization
of net operating losses. The 23% effective rate differs from the United States
statutory rate due to the mix of earnings between the Company's U.S. and
international operations, the most significant of which are located in
Switzerland. The Company's international operations are generally subject to
tax rates that are significantly lower than U.S. statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been, and are expected to remain, primarily
a function of its seasonal working capital requirements which have increased
due to significant growth in sales over the two previous years. The Company's
business is not capital intensive and liquidity needs for capital investments
have not been significant in relation to the Company's overall financing
requirements.
The Company has met its liquidity needs primarily through funds from operations
and bank borrowings under working capital lines of credit with domestic and
Swiss banks. The Company's future requirements for capital will relate not only
to working capital requirements for the expected continued growth of its
existing brands, but also to fund new lines of business, including the
Company's new Coach watch line which was launched Spring 1998 and the Movado
Boutiques. In addition, the Company is required to make a $5 million sinking
fund payment on February 1, 1999 in connection with its Senior Notes.
The Company's revolving credit and working capital lines with its domestic bank
group provide for a three year $90.0 million unsecured revolving line of
credit, pursuant to an Amended and Restated Credit Agreement, dated as of July
23, 1997, among the Company, the Chase Manhattan Bank, as agent, Fleet Bank
N.A., as co-agent, and other banks signatory thereto ("Restated Bank Credit
Agreement"), and $31.6 million of uncommitted working capital lines of
credit. At October 31, 1998, the Company had $58.6 million in outstanding
balances under the Restated Bank Credit Agreement, $5.0 million of which is
included in Long-term debt.
10
<PAGE> 11
In March 1998, the Company's Board of Directors authorized the repurchase of
400,000 shares of the Company's Common Stock. The Company has repurchased
approximately 120,000 shares to date.
On November 30, 1998, the Company signed a shelf debt agreement which allows
the Company, over the next two years, to offer up to $50 million of notes with
maturities up to 12 years from the bring down date. On December 1, 1998, the
Company brought down $25 million of 6.90% Series A Notes maturing on October
30, 2010 which are subject to annual payments of $5.0 million commencing
October 31, 2006.
The Company's debt to total capitalization ratio was 35.8% at October 31, 1998,
as compared to 23.6% at January 31, 1998 and 35.6% at October 31, 1997. The
increase in the debt to total capitalization from October 31, 1997 is primarily
due to an increase in loans payable to banks to fund the Company's working
capital increase and capital expenditures.
The Company's net working capital, consisting primarily of trade receivables
and inventories, amounted to $175.9 million at October 31, 1998, $157.1 million
at January 31, 1998 and $165.8 million at October 31, 1997. The increase in
working capital from January 31, 1998 was primarily the result of an increase
in accounts receivable due to growth in the Company's business. The increase
in working capital from October 31, 1997 was primarily the result of an
increase in accounts receivable and inventories.
Accounts receivable at October 31, 1998 were $138.1 million as compared to
$92.4 million at January 31, 1998 and $125.7 million at October 31, 1997. The
increase in accounts receivable was primarily the result of growth in the
Company's business.
Inventories at October 31, 1998 were $121.6 million as compared to $98.2 million
at January 31, 1998 and $103.6 million at October 31, 1997. The increase in
inventories from January 31, 1998 and October 31, 1997 primarily relates to the
Company's new Coach watch line and new product lines for the Movado Boutiques.
The Company's fiscal 1999 year-to-date capital expenditures were approximately
$7.2 million compared to $4.8 million through October 31, 1997. Expenditures in
fiscal 1999 primarily relate to increases in information systems costs and
expenditures for two Movado Boutiques. The Company expects that its capital
expenditures in fiscal 1999 will exceed the average levels experienced annually
over the last three fiscal years due to planned continued improvements in
information systems, expansion of retail outlet store network, introduction of
the Movado Boutiques and the new trade expedition facility for the annual Basel
Trade Fair.
Year 2000
General
Many older computer software programs and other equipment with embedded chips
or processors (collectively "systems") refer to years in terms of their last two
digits only. Such systems may incorrectly interpret the year 2000 to mean the
year 1900. If not corrected, those systems could cause date related
transaction failures.
11
<PAGE> 12
Project
The Company initiated a project in 1997 (the "Project") to improve and
standardize data and computer technology. The Project is designed to replace
all obsolete hardware and software with systems that are Year 2000 compliant
and, in addition, to replace most business software systems. The project calls
for the replacement or upgrade of all PC's, servers, network components,
desktop software, core business software which support manufacturing,
distribution, sales, accounting, after sales service, retail point of sale, and
electronic data interchange (EDI). The new global technical network
infrastructure (hardware, software, and communication technology) has been
implemented in all U.S. locations, Switzerland and Canada. Implementation of
the remaining technical infrastructure for the Far East is scheduled for the
first quarter of fiscal year 2000. New retail point of sale and merchandise
systems have been implemented for all store and headquarters locations. Final
system testing is in progress for new client/server core business software
(Business Planning and Control System version 6.0 which is Year 2000 compliant)
supporting manufacturing, distribution, sales, accounting and after sales
service with implementation rollouts planned during the first two quarters of
fiscal year 2000. As a result, the Company is expected to be Year 2000
compliant by the second quarter of fiscal year 2000. Minor program and
procedural changes are currently being implemented and tested to support fiscal
year 2000 processing for the first half of fiscal year 2000. Additionally, a
global inventory has been completed of all hardware and software related to
Year 2000 systems status. Contingency planning, for internal system Year 2000
compliance, has been initiated and is scheduled to be completed by first
quarter of fiscal year 2000. Costs for contingency planning are currently being
developed.
The Company is monitoring Year 2000 system status of customers, vendors or
partners involved with electronic interchange of data with our systems. This
monitoring will continue throughout 1999. Non-electronic data exchange
contingency approaches will be used, if required, with those customers,
vendors, or partners which fail to reach Year 2000 system compliance by January
1, 2000.
Costs
Total costs associated with systems replacement and modification to become Year
2000 compliant are included in the total cost of the Project. The estimated
total cost of the Project is approximately $9.5 million. The total amount
expended on the Project through October 31, 1998 was approximately $6.4 million.
The estimated future cost of completing the Project is estimated to be
approximately $3.1 million. This estimate assumes that the Company will not
incur significant Year 2000 related costs due to the failure of customers,
vendors and other third parties to be Year 2000 compliant.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem, and in particular, about the Year 2000 compliance and readiness of its
material external customers, vendors or partners. The Company believes that,
with the implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1* Amendment Number 1 to License Agreement dated December 9,
1996 between Registrant as Licensee and Coach, a division
of Sara Lee Corporation as Licensor, dated as of February
1, 1998.
10.2 Amendment Number 6 to Franchise Agreement dated February
27, 1969 between Registrant as Distributor and Corum,
Ries Bannwart and Co. as manufacturer, as previously
amended, dated as of October 22, 1997.
27 Financial Data Schedule for the nine months ended
October 31, 1998, submitted to the Securities and Exchange
Commission in electronic format.
(b) Reports on Form 8-K
None
----------
* Confidential portions of Exhibit 10.1 were omitted and filed
separately with the Securities and Exchange Commission
pursuant to rule 24b-2 of the Securities Exchange Act of 1934.
13
<PAGE> 14
SIGNATURES
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, 1998 By: /s/ Kenneth J. Adams
--------------------------
Kenneth J. Adams
Senior Vice President and
Chief Financial Officer
(Chief Financial and
Principal Accounting
Officer)
14
<PAGE> 15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1* Amendment Number 1 to License Agreement dated December 9, 1996
between Registrant as Licensee and Coach, a division of Sara Lee
Corporation as Licensor, dated as of February 1, 1998.
10.2 Amendment Number 6 to Franchise Agreement dated February 27, 1969
between Registrant as Distributor and Corum, Ries Bannwart and Co.
as manufacturer, as previously amended, dated as of October 22,
1997.
27 Financial Data Schedule for the nine months ended October 31,
1998, submitted to the Securities and Exchange Commission in
electronic format.
- ----------
* Confidential portions of Exhibit 10.1 were omitted and filed separately with
the Securities and Exchange Commission pursuant to rule 24b-2 of the
Securities Exchange Act of 1934.
15
<PAGE> 1
EXHIBIT 10.1*
AMENDMENT NUMBER 1
TO LICENSE AGREEMENT
This amendment dated as of February 1, 1998, (the "Amendment") is to
the License Agreement dated December 9, 1996, (the "Original License Agreement")
by and between Coach, a division of Sara Lee Corporation, ("Licensor") and
Movado Group, Inc., ("MGI").
WHEREAS, Licensor and MGI desire that NA Trading SA, a Swiss
Corporation with an address at Bettlachtrasse 8, CH-2504 Grenchen, Switzerland
("NAT") bear primary responsibility for the manufacture, marketing and
distribution of the Licensed Products outside the United States and
WHEREAS, NAT is willing to undertake such responsibilities in
accordance with the terms of and in consideration of the mutual covenants and
premises contained in the Original License Agreement as amended hereby and
WHEREAS, the parties desire to make certain additional changes to the
Original License Agreement as set forth below:
NOW THEREFORE in consideration of the mutual covenants and the premises
set forth herein, the Original License Agreement is hereby amended as follows:
1. NAT is hereby added as a party to the Original License Agreement; the
term "Licensee" shall mean MGI and NAT jointly and severally and the
term "Agreement" shall mean the Original License Agreement as amended
hereby.
2. Delete Section 1.2 of the Original License Agreement and replace with
the following:
1.2 "Licensor Channels" shall mean retail outlets and
wholesale distributors controlled by Licensor, including
without limitation Licensor's catalog, Licensor's stand alone
retail stores, Licensor's factory outlet stores, Licensor's
retail stores that are situated within department stores
located outside the United States and Licensor Special
Accounts (as hereinafter defined); provided, however, that any
such retail outlet or wholesale distributor (with the
exception of Licensor Special Accounts) not operated by
Licensor or by any entity controlled by Licensor shall not be
deemed a Licensor Channel.
3. Delete Section 1.3 of the Original License Agreement and replace it
with the following new Section 1.3:
1.3 "Non-Licensor Channels" shall mean retail outlets and
wholesale distributors not controlled by Licensor, including
without limitation
( * CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED FROM PAGES 3 AND 4
AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC")
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934 ("1934 ACT") ).
1
<PAGE> 2
department stores, jewelry store chains, Licensee's factory
outlet stores and Licensee Special Accounts (as hereinafter
defined).
4. Immediately following Section 1.10 of the Original License Agreement
add the following new Section 1.11:
1.11 "Control, controlling and controlled" shall mean, (i)
ownership or voting control, directly or indirectly, of more
than fifty percent (50%) of the voting power represented by
the outstanding voting stock of a corporation or other
majority equity interest if not a corporation and (ii) the
power to direct the management and determine the policies of
the applicable entity whether directly or indirectly.
5. Following Section 3.2 on page 4 of the Original License Agreement,
insert as Section 3.3 the following paragraph:
3.3 Licensee shall not place or use other marks, including
without limitation, trademarks, trade names, sub-brands, line
names, collection names, model names, designs, logos or
endorsements (hereinafter referred to as "Authorized Marks")
in connection with the Licensed Products, except as
specifically authorized by Licensor pursuant to the terms of
this Agreement. Licensee acknowledges that Licensor is the
owner of all right, title, and interest in and to such
Authorized Marks that are developed by Licensor, or developed
by Licensee exclusively for use in connection with Licensed
Products, and that are used exclusively in connection with
Licensed Products or other products sold by or on behalf of
Licensor under any of the Licensed Marks ("Licensor Owned
Authorized Marks") and that all use thereof shall inure to the
benefit of Licensor. To the extent any rights in and to such
Licensor Owned Authorized Marks, or with respect to any
materials used in the advertising or promotion of the Licensed
Products including without limitation copy, artwork, and
photographs, are deemed to accrue to Licensee pursuant to this
Agreement or otherwise, Licensee hereby assigns any and all
such rights, at such time as they may be deemed to accrue, to
Licensor. Licensee agrees that it will execute and deliver to
Licensor any documents reasonably requested by Licensor
necessary to effect any such assignment.
6. Delete Section 11.1 on pages 16 and 17 in the Original License
Agreement and replace it with the following:
11.1 Licensee shall pay to Licensor a royalty on Licensee's
sales of the Licensed Products to all Non-Licensor Channels
(Combined U.S. and non-U.S.). The sales to which the royalty
rates will be applied (except for sales to Non-Licensor
Channels (non-U.S.), sales to wholesale distributors
2
<PAGE> 3
and sales to Licensee Special Accounts) shall be based on the
Wholesale Price as in effect in the United States when such
sales are made, and no reduction in the royalty shall be
allowed for discounts given off such Wholesale Price. With
respect to Licensee's sales to Non-Licensor Channels
(non-U.S.), wholesale distributors and Licensee Special
Accounts, the sales to which the royalty rates will be applied
shall be based on actual invoice price net of all taxes,
duties, freight, insurance and credits for returns actually
made, but no deduction shall be made for discounts for cash or
prompt payment or for uncollectible accounts; provided,
however, that as to any Licensed Products sold to any
wholesale distributor controlled by Licensee, the sales to
which the royalty rates will be applied shall be based on the
actual invoice price for such Licensed Products when first
sold by any such wholesale distributor to any entity not
controlled by Licensee, net of all taxes, duties, freight,
insurance and credits for returns actually made, without
deduction for discounts for cash or prompt payment or for
uncollectible accounts. The base royalty rates to be applied
to Licensee's sales are as follows:
*
With respect to all sales to Licensee Special Accounts,
Licensee shall pay, in addition to the base royalty *.
7. Delete the fourth sentence of Section 12.4 of the Original License
Agreement and replace it with the following sentence:
"Sales" as used in this paragraph shall mean all sales, based
on Wholesale Price or based on actual invoice price in the
specific case of sales to Licensee Special Accounts or sales
to wholesale distributors, of Licensed Products made by
Licensee to Non-Licensor Channels anywhere in the world.
8. Delete the second sentence of Section 12.7 on page 21 of the Original
License Agreement, and replace it with the following sentence:
*
( * CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE
SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT).
3
<PAGE> 4
*
9. Delete the first sentence of Section 13.2 on page 23 of the Original
License Agreement and replace it with the following sentence:
Within ninety (90) days following the end of each Contract Year of this
Agreement, and within ninety (90) days after the termination of this
Agreement, Licensee shall deliver to Licensor a statement signed by an
authorized officer of Licensee reporting actual sales of the Licensed
Products to Non-Licensor Channels (based on the applicable U.S.
Wholesale Price or invoice price pursuant to Section 11.1 herein),
royalties due, royalties paid and advertising expenditures during the
preceding Contract Year. Sales of Licensed Products to Non-Licensor
Channels shall be broken out to accurately reflect sales to U.S.
Non-Licensor Channels, sales to Non-U.S. Non-Licensor Channels, sales
to Licensee Special Accounts, sales to wholesale distributors, and
sales by model type in units and dollars.
10. Delete Section 16.4 of the Original License Agreement and replace it
with the following:
16.4 In the event that a third party brings any claim,
institutes any action or commences any proceeding against
Licensee arising from Licensee's use of any of the Licensed
Marks, the Trade Name, the Licensor Owned Authorized Marks or
any product design, prototype, pattern, styling or
copyrightable material owned by Licensor as provided in
Paragraph 7.1 of this Agreement, Licensee shall promptly
notify Licensor thereof and Licensor shall indemnify, defend
and hold harmless Licensee and each officer, director,
employee, agent, representative, contractor and customer of
Licensee and of each entity controlled by Licensee from and
against all losses, liabilities, damages, claims, judgments,
fines, suits, demands, costs, interest and expenses of any
kind or nature (including reasonable attorneys' fees and
disbursements) arising out of or in connection with any such
claim, action or proceeding. Licensee shall cooperate in such
defense as reasonably requested by Licensor, at Licensor's
expense. Any award received by Licensor in any such claim,
action or proceeding shall belong exclusively to Licensor.
This Paragraph shall survive termination or expiration of the
Agreement.
( * CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE
SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT).
4
<PAGE> 5
11. Add the following new Section 16.5 to the Original License Agreement
immediately following Section 16.4.
16.5 Licensor will bear all costs and expenses in connection
with any research to determine the availability of,
applications to register and all maintenance of any and all
registrations relating to Licensor Owned Authorized Marks and
the Licensed Marks.
12. Section 18 is deleted and replaced with the following new Section 18:
18. NO ASSIGNMENT OR SUBLICENSE BY LICENSEE This Agreement and
all its rights and duties hereunder are personal to the
Licensee and shall not, without the written consent of
Licensor, be assigned, sublicensed or otherwise encumbered by
Licensee or by operation of law; provided, however, that
notwithstanding anything to the contrary contained herein
Licensee shall have the right (a) to have the Licensed
Products manufactured by one or more third party manufacturers
and, (b) to assign or sublicense any or all of its rights and
duties hereunder to any other entity which is controlled,
directly or indirectly, by Licensee provided that the original
Licensee named herein simultaneously with such assignment,
enters into an agreement with Licensor in a form reasonably
satisfactory to Licensor by which Licensee guarantees all of
the obligations, including without limitation, all financial
and performance obligations, of such assignee. All references
herein to "Licensee" shall include any and all such permitted
assignees and sublicensees.
13. Except as set forth in this Amendment, the Original License Agreement
will remain in full force and effect.
5
<PAGE> 6
14. This Amendment may be signed by the parties duly executing counterpart
originals.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their authorized officers and to become effective as of the date
first above written.
COACH
A Division of Sara Lee Corporation
By: /s/ A. Catling
Name: Alan Catling
Title: Exec. Vice President
MOVADO GROUP, INC.
By: /s/ Timothy F. Michno
Name: Timothy F. Michno
Title: General Counsel/Secretary
NA TRADING SA
By: /s/ Michael J. Bush
Name: Michael J. Bush
Title: Director
6
<PAGE> 1
[LOGO MOVADO GROUP] EXHIBIT 10.2
October 22, 1997
Mr. Jean Rene Bannwart
Corum, Ries Bannwart & Co.
Rue de petit Chateau
CH-2301 La Chaux-de-Fonds
Switzerland
RE: AMENDMENT NUMBER 6 TO FRANCHISE AGREEMENT
Dear Mr. Bannwart:
This has reference to the Franchise Agreement by and between Corum Ries Bannwart
& Co. ("Manufacturer") and Movado Group, Inc. ("Distributor") dated February 27,
1969 as amended (the "Agreement").
As the parties to the Agreement wish to further amend the Agreement to exclude
the countries of Central America from the Territory, in consideration of the
mutual promises contained herein and in the Agreement as hereby amended it is
agreed as follows. The term "Territory" as used in the Agreement shall
henceforth mean: the United States of America, including the United States
Virgin Islands, Puerto Rico and all other territories and possessions of the
United States, Canada and all of the Caribbean Islands.
The Agreement, as hereby amended, shall otherwise remain in full force and
effect.
If the foregoing is acceptable, please indicate your agreement by signing both
originals of this letter and returning one to me. Thank you.
Movado Group, Inc.
By /s/ Timothy F. Michno
Timothy F. Michno
Agreed to and Accepted
Corum Ries Bannwart & Co.
By /s/ J.P. Bannwart
J.P. Bannwart, President
[Movado Letterhead]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED OCTOBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 5,469
<SECURITIES> 0
<RECEIVABLES> 138,076
<ALLOWANCES> 0
<INVENTORY> 121,551
<CURRENT-ASSETS> 285,845
<PP&E> 23,451
<DEPRECIATION> 0
<TOTAL-ASSETS> 320,756
<CURRENT-LIABILITIES> 109,925
<BONDS> 35,000
0
0
<COMMON> 129
<OTHER-SE> 167,889
<TOTAL-LIABILITY-AND-EQUITY> 320,756
<SALES> 208,039
<TOTAL-REVENUES> 208,039
<CGS> 86,272
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,951
<INCOME-PRETAX> 20,183
<INCOME-TAX> 4,642
<INCOME-CONTINUING> 15,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,541
<EPS-PRIMARY> 1.21<F1>
<EPS-DILUTED> 1.17
<FN>
<F1>THE AMOUNT IS REPORTED AS EPS BASIC AND NOT FOR EPS PRIMARY.
</FN>
</TABLE>
