1 ================================================================================ 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, 1997 [ ] 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 OF (IRS EMPLOYER 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, 1997, the Registrant had 3,572,460 shares of Class A Common Stock, par value $0.01 per share, outstanding and 9,261,027 shares of Common Stock, par value $0.01 per share, outstanding. ================================================================================
2 MOVADO GROUP, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q OCTOBER 31, 1997 <TABLE> <CAPTION> Page ---- <S> <C> Part I Financial Information Item 1. Consolidated Balance Sheets at October 31, 1997, January 31, 1997 and October 31, 1996 3 Consolidated Statements of Income for the nine months ended October 31, 1997 and 1996 and the three months ended October 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the nine months ended October 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit Index 14 </TABLE> 2
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, 1997 1997 1996 ----------- ----------- ----------- <S> <C> <C> <C> ASSETS Current assets: Cash $ 2,882 $ 4,885 $ 4,040 Trade receivables, net 125,670 75,688 112,701 Inventories 103,574 87,177 102,894 Other 16,184 16,914 10,972 --------- --------- --------- Total current assets 248,310 184,664 230,607 --------- --------- --------- Plant, property and equipment, net 17,358 15,066 14,312 Other assets 10,331 8,713 8,338 --------- --------- --------- $ 275,999 $ 208,443 $ 253,257 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable to banks $ 35,386 $ 7,778 $ 43,859 Current portion of long-term debt 5,000 5,000 -- Accounts payable 14,226 25,297 20,681 Accrued liabilities 19,353 13,188 17,012 Deferred and current taxes payable 8,572 6,711 9,129 --------- --------- --------- Total current liabilities 82,537 57,974 90,681 --------- --------- --------- Long-term debt 40,000 40,000 45,000 Deferred and non-current foreign income taxes 5,311 3,477 4,033 Other liabilities 2,861 3,122 3,396 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; 9,259,902, 6,459,761 and 6,434,497 shares issued, respectively 93 65 64 Class A Common Stock, $0.01 par value, 10,000,000 shares authorized; 3,572,460, 4,847,478 and 4,854,170 shares issued and outstanding, respectively 36 48 49 Capital in excess of par value 64,039 34,450 34,262 Retained earnings 82,011 71,291 68,335 Cumulative translation adjustment (761) (1,856) 7,565 Treasury stock, 17,251 shares, at cost (128) (128) (128) --------- --------- --------- 145,290 103,870 110,147 --------- --------- --------- $ 275,999 $ 208,443 $ 253,257 ========= ========= ========= </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
4 MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED OCTOBER 31, THREE MONTHS ENDED OCTOBER 31, ----------------------------- ------------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $176,447 $158,629 $84,536 $76,864 Costs and expenses: Cost of sales 75,223 70,681 35,438 33,897 Selling, general and administrative 82,448 72,568 35,398 31,439 -------- -------- ------- ------- Operating income 18,776 15,380 13,700 11,528 Net interest expense 3,968 3,490 1,685 1,367 -------- -------- ------- ------- Income before income taxes 14,808 11,890 12,015 10,161 Provision for income taxes 3,406 3,330 2,707 2,811 -------- -------- ------- ------- Net income $ 11,402 $ 8,560 $ 9,308 $ 7,350 ======== ======== ======= ======= Income per share: $ 0.96 $ 0.76 $ 0.77 $ 0.65 ======== ======== ======= ======= Shares used in per share computations: 11,846 11,267 12,089 11,271 ======== ======== ======= ======= </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
5 MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED OCTOBER 31, ----------------------------- 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 11,402 $ 8,560 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,943 2,691 Deferred and non-current foreign income taxes 1,721 (530) Provision for losses on accounts receivable 628 (5) Changes in current assets and liabilities: Trade receivables (50,540) (37,471) Inventories (15,901) (14,975) Other current assets 1,726 (2,694) Accounts payable (11,164) 125 Accrued liabilities 6,043 7,867 Deferred and current taxes payable 1,779 2,326 Increase in other non-current assets (1,298) (1,204) (Decrease) increase in other non-current liabilities (54) 223 -------- -------- Net cash used in operating activities (52,715) (35,087) -------- -------- Cash flows used for investing activities: Capital expenditures (4,764) (4,382) Goodwill, trademarks and other intangibles (978) (69) -------- -------- Net cash used in investing activities (5,742) (4,451) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net of underwriting discounts and offering expenses 29,499 -- Net proceeds from current borrowings under lines of credit 27,838 35,641 Proceeds from long term debt -- 5,000 Principal payments under capital leases (221) (365) Exercise of stock options 104 63 Dividends paid (682) (529) -------- -------- Net cash provided by financing activities 56,538 39,810 -------- -------- Effect of exchange rate changes on cash (84) (61) Net (decrease) increase in cash (2,003) 211 Cash at beginning of period 4,885 3,829 -------- -------- Cash at end of period $ 2,882 $ 4,040 ======== ======== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
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 1997 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 - STOCK SPLIT On April 3, 1997, the Company's Board of Directors approved a five-for-four stock split of the Company's Common and Class A Common Stock. The stock split was effected May 1, 1997. On September 11, 1997, the Company's Board of Directors approved a three-for-two stock split of the Company's Common and Class A Common Stock. The stock split was effected September 29, 1997. The accompanying financial statements contained in this report have been retroactively adjusted to reflect the impact of the stock splits. NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, Earnings Per Share, which specifies the computation, presentation and disclosure requirements for earnings per share. Management of the Company believes that adoption of Statement No. 128 which is required for the fiscal year ending January 31, 1998, will not have a material impact on the Company's earnings per share calculation. NOTE 3 - INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> OCTOBER 31, JANUARY 31, OCTOBER 31, 1997 1997 1996 ----------- ----------- ----------- <S> <C> <C> <C> Finished goods $ 62,110 $ 53,497 $ 61,392 Work-in-process and component parts 41,464 33,680 41,502 -------- -------- -------- $103,574 $ 87,177 $102,894 ======== ======== ======== </TABLE> 6
7 NOTE 4 - 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, ----------------- 1997 1996 ---- ---- <S> <C> <C> Cash paid during the period for: Interest $3,400 $2,727 Income taxes 92 1,745 Non-cash investing and financing activities: Equipment acquired under capital leases -- $ 198 </TABLE> NOTE 5 - BANK CREDIT ARRANGEMENT On July 23, 1997, the Company amended its revolving credit and working capital lines with its domestic bank group to provide for a three year $90.0 million unsecured revolving line of credit and $16.6 million of uncommitted working capital lines of credit. These new facilities replace the $20.0 million revolving line of credit and $35.0 million domestic working capital line of credit and certain of the Company's Swiss working capital lines. NOTE 6 - PUBLIC OFFERING On October 21, 1997, the Company completed a stock offering in which 1,500,000 shares of common stock were issued which provided the Company with proceeds of approximately $29.5 million, net of underwriting discounts and offering expenses. 7
8 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 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, and success of hedging strategies in respect of currency exchange rate fluctuations. Nine months ended October 31, 1997 compared to nine months ended October 31, 1996. Net Sales. Net sales increased 11.2% to $176.4 million from $158.6 million for the nine months ended October 31, 1997 and October 31, 1996, respectively. The increase was attributable to an 8.7 % increase in domestic sales and a 23.2% increase in international sales. The growth reflected sales increases in the Company's Concord and Movado brands of 21% domestically and 15% internationally. The growth in both domestic and international sales reflect increased unit sales of the Concord and Movado brands and includes new product introductions. Concord introduced the Veneto and LaScala lines and Movado introduced the Vizio line. Geographically, international sales increases occurred in virtually all markets including the Far East, Middle East and Caribbean. The increase in sales was partially offset by decreases in sales of Piaget and ESQ brands. The sales decrease in Piaget was due to the planned reduction in the Company's Piaget retailer base in order to create greater exclusivity in the retail channel. The decrease in ESQ sales was predominantly due to the expansion of the brand's retail network, which occurred during fiscal 1997. Gross Margins. Gross profit for the nine months ended October 31, 1997 was $101.2 million (57.4% of net sales) as compared to $87.9 million (55.4% of net sales) for the comparable prior year period. Gross margin was favorably impacted by sales mix, particularly an increase in the proportion of sales of the Company's higher margin Concord and Movado brands to total sales. The Company's margin also benefited somewhat from increases in the U.S. dollar against the Swiss Franc which occurred late in the previous year. Operating Expenses. Operating expenses increased 13.6% for the nine months ended October 31, 1997 to 46.7% of net sales from 45.7% of net sales for the comparable prior year period. The increase in 8
9 operating expenses occurred from planned increases in marketing and advertising particularly in the Company's Concord, Movado and ESQ brands. Interest Expense. Net interest expense, which consisted primarily of interest on the Company's $40 million of 6.56% Senior Notes and borrowings against its working capital and revolving lines of credit, was $4.0 million for the nine months ended October 31, 1997 as compared to $3.5 million for the comparable prior year period. The higher interest expense was mainly due to higher average borrowings on the Company's bank credit lines due to increased seasonal working capital requirements related to the Company's growth. This was offset somewhat by reduced average borrowing rates as a result of renegotiating our bank credit lines in July 1997. Income Taxes. The Company recorded a provision for income taxes of $3.4 million for the nine months ended October 31, 1997 as compared to a provision of $3.3 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 1998; 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, 1997 compared to three months ended October 31, 1996. Net Sales. Net sales increased 10.0% to $84.5 million from $76.9 million for the three months ended October 31, 1997 and October 31, 1996, respectively. The increase was attributable to a 7.4% increase in domestic sales and a 24% increase in international sales. The growth reflected sales increases in the Company's Concord and Movado brands of 15% domestically and 21% internationally. The growth in both domestic and international sales reflect unit sales increases in the Concord and Movado brands and includes new product introductions. Concord introduced the Veneto and LaScala lines and Movado introduced the Vizio line. Geographically, international sales increases occurred in virtually all markets including the Far East, Middle East and Caribbean. The increase in sales was partially offset by decreases in sales of Piaget and ESQ. The sales decrease in Piaget was due to the planned reduction in our Piaget retailer base in order to create greater exclusivity in the retail channel. The decrease in ESQ sales was predominately due to the expansion of the brand's retail network, which occurred during fiscal 1997. Gross Margins. Gross profit for the three months ended October 31, 1997 was $49.1 million (58.1% of net sales) as compared to $43.0 million (55.9% of net sales) for the comparable prior year period. The increase in margin was mainly attributable to the Company continuing to experience a shift in overall sales mix toward its higher margin Movado and Concord brands. The Company's margin also benefited somewhat from increases in the U.S. dollar against the Swiss Franc which occurred late in the previous year. Operating Expenses. Operating expenses increased 12.6% for the three months ended October 31, 1997 to 41.9% of net sales from 40.9% of net sales for the comparable prior year period. The increase in operating expenses occurred from planned increases in marketing and advertising particularly in the Company's Concord, Movado and ESQ brands. Interest Expense. Net interest expense, which consisted primarily of interest on the Company's $40 million of 6.56% Senior Notes and borrowings against its working capital and revolving lines of credit, 9
10 was $1.7 million and $1.4 million for the three months ended October 31, 1997 and 1996, respectively. The higher interest expense was predominantly due to higher average borrowings on the Company's bank credit lines due to increased seasonal working capital requirements related to the Company's growth. This was offset somewhat by reduced average borrowing rates as a result of renegotiating our bank credit lines in July 1997. Income Taxes. The Company recorded a provision for income taxes of $2.7 million for the three months ended October 31, 1997 as compared to a provision of $2.8 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 1998; 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 has also entered into a revolving credit agreement with its domestic banks. Funds available under this agreement are in addition to the Company's working capital lines. The Company's future requirements for capital will relate not only to working capital requirements for the expected continued growth of its existing brands, domestically and internationally, but also funding new lines of business including the Spring 1998 launch of the Company's new Coach watch line, product line extensions and retail boutiques for the Movado brand. In addition, the Company is required to make a $5 million sinking fund payment on February 2, 1998 in connection with its $40 million 6.56% Senior Notes. In order to meet the increase in working capital requirements, the Company amended its revolving credit and working capital lines with its domestic bank group to provide for a three year $90.0 million unsecured revolving line of credit and $16.6 million of uncommitted working capital lines of credit. These new facilities replaced a $20.0 million revolving line of credit and $35.0 million domestic working capital lines of credit and certain of the Company's Swiss working capital lines. At October 31, 1997, the Company had an outstanding balance of $ 40.4 million under these facilities. The Company's debt to total capitalization ratio was 35.6% at October 31, 1997, as compared to 44.7% at October 31, 1996. The decrease is predominantly due to a 1.5 million share stock offering on October 21, 1997. The use of the net proceeds of $29.5 million from the offering are for working capital and general corporate purposes including the expansion of existing brands, introduction of new brands, the establishment of retail boutiques and other marketing, advertising and distribution efforts. Such proceeds have been temporarily used to reduce the Company's borrowings under its revolving credit line. Debt to total capitalization at January 31, 1997 was 33.7%. The increase in debt to total capitalization from January 31, 1997 was predominantly due to an increase in loans payable to banks due to increases in seasonal working capital requirements. 10
11 The Company's net working capital, consisting primarily of trade receivables and inventories, amounted to $165.8 million at October 31, 1997, $139.9 million at October 31, 1996 and $126.7 million at January 31, 1997. The increase in the working capital from October 31, 1996 was primarily the result of an increase in receivables due to growth in the Company's business. The increase in working capital from January 31, 1997 was primarily the result of an increase in receivables due to growth in the Company's business and increase in inventories which reflected the seasonal build. Accounts receivable at October 31, 1997 were $125.7 million as compared to $112.7 million at October 31, 1996 and $75.7 million at January 31, 1997. The increase in the receivables was primarily the result of growth in the Company's business. Inventories at October 31, 1997 were $103.6 million as compared to $102.9 million at October 31, 1996 and $87.2 million at January 31, 1997. The inventory balance at October 31, 1997 was relatively flat as compared to October 31, 1996. The increase in inventories from January 31, 1997 reflects the seasonal build, as well as the expansion of the Company's sales base and product line. The Company's fiscal 1998 year-to-date capital expenditures approximate $ 4.8 million compared to $4.4 million through October 31, 1996. Expenditures were primarily related to improvements in the Company's management and sales management information systems and costs incurred in connection with the expansion of domestic distribution operations. The Company expects its annual capital expenditures in fiscal year 1998 will exceed the average levels experienced over the last three fiscal years due to planned improvements in management information systems, expansion of its retail store network and the expansion of distribution operations to support continued sales growth. 11
12 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(1) Articles of Incorporation. 11 Computation of net income per share. 27 Financial schedules. (b) Reports on Form 8-K None 12
13 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 12, 1997 By: /s/ Kenneth J. Adams ---------------------------------- Kenneth J. Adams Senior Vice President and Chief Financial Officer (Chief Financial Officer) Dated: December 12, 1997 By: /s/ John J. Rooney ---------------------------------- John J. Rooney Corporate Controller (Principal Accounting Officer) 13
14 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------ ----------- <S> <C> 3(1) Articles of Incorporation. 11 Computation of net income per share. 27 Financial schedules. </TABLE> 14