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, 1999 [ ] 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 6, 1999 the Registrant had 3,509,733 shares of Class A Common Stock, par value $0.01 per share, outstanding and 9,492,778 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, 1999 <TABLE> <CAPTION> Page ---- <S> <C> Part I Financial Information Item 1. Consolidated Balance Sheets at October 31, 1999, January 31, 1999 and October 31, 1998 3 Consolidated Statements of Income for the nine months ended October 31, 1999 and 1998 and the three months ended October 31, 1999 and 1998 4 Consolidated Statements of Cash Flows for the nine months ended October 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II Other Information Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 </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, 1999 1999 1998 ---------------- ------------------ ---------------- <S> <C> <C> <C> ASSETS - ------ Current assets: Cash $15,328 $5,626 $5,469 Trade receivables, net 129,974 109,102 138,076 Inventories, net 110,215 104,027 121,551 Assets held for sale - 22,187 - Other 16,669 21,489 20,749 ---------------- ------------------ ---------------- Total current assets 272,186 262,431 285,845 ---------------- ------------------ ---------------- Plant, property and equipment, net 27,371 22,998 23,451 Other assets 13,231 10,946 11,460 ---------------- ------------------ ---------------- $312,788 $296,375 $320,756 ================ ================== ================ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Loans payable to banks $20,000 $ 2,200 $53,611 Current portion of long-term debt 5,000 10,000 5,000 Accounts payable 18,736 25,181 15,733 Accrued liabilities 25,632 20,020 26,021 Deferred and current taxes payable 12,210 10,179 9,560 ---------------- ------------------ ---------------- Total current liabilities 81,578 67,580 109,925 ---------------- ------------------ ---------------- Long-term debt 50,000 55,000 35,000 Deferred and non-current foreign income taxes 5,481 5,728 5,950 Other liabilities 1,487 1,641 1,863 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; 9,490,754, 9,419,781 and 9,389,236 shares issued, respectively 95 94 94 Class A Common Stock, $0.01 par value, 10,000,000 shares authorized; 3,509,773, 3,530,922 and 3,533,529 shares issued and outstanding, respectively 35 35 35 Capital in excess of par value 65,558 65,332 64,872 Retained earnings 127,699 106,141 100,965 Accumulated other comprehensive income (6,320) (2,188) 4,497 Treasury Stock; 539,290, 159,019 and 137,319 shares, at cost, respectively (12,825) (2,988) (2,445) ---------------- ------------------ ---------------- 174,242 166,426 168,018 ---------------- ------------------ ---------------- $312,788 $296,375 $320,756 ================ ================== ================ </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, ----------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $216,223 $208,039 $99,032 $97,455 Costs and expenses: Cost of sales 84,326 86,272 37,391 39,967 Selling, general and administrative 103,630 97,633 42,629 40,460 -------------- ----------------- ----------------- ---------------- Operating income 28,267 24,134 19,012 17,028 Net interest expense 3,797 3,951 1,132 1,435 Gain on disposition of business 4,752 - - - -------------- ----------------- ----------------- ---------------- Income before income taxes 29,222 20,183 17,880 15,593 Provision for income taxes 6,722 4,642 4,113 3,586 -------------- ----------------- ----------------- ---------------- Net income $22,500 $15,541 $13,767 $12,007 ============== ================= ================= ================ Basic net income per share $1.78 $1.21 $1.10 $0.94 ============== ================= ================= ================ Diluted net income per share $1.73 $1.17 $1.07 $0.91 ============== ================= ================= ================ Dividends declared per share $0.075 $0.06 $0.025 $0.02 ============== ================= ================= ================ Average shares outstanding 12,610 12,860 12,463 12,813 Dilutive effect of stock options 404 422 403 337 -------------- ----------------- ----------------- ---------------- Average shares outstanding assuming dilution 13,014 13,282 12,866 13,150 ============== ================= ================= ================ </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, --------------------------------------- 1999 1998 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $22,500 $15,541 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,527 2,929 Deferred and non-current foreign income taxes 115 2,018 Provision for losses on accounts receivable 799 812 Gain on disposition of business (4,752) - Changes in current assets and liabilities: Trade receivables (21,821) (45,430) Inventories (8,852) (21,987) Other current assets 492 3,221 Accounts payable (5,975) (9,661) Accrued liabilities 2,348 9,032 Deferred and current taxes payable 2,471 (971) Other non-current assets 2,580 (854) Other non-current liabilities (312) 55 ----------------- ----------------- Net cash (used in) operating activities (6,880) (45,295) ----------------- ----------------- Cash flows used for investing activities: Capital expenditures (7,770) (7,248) Proceeds from disposition of business 28,409 2,416 Goodwill, trademarks and other intangibles (1,255) (862) ----------------- ----------------- Net cash provided by (used in) investing activities 19,384 (5,694) ----------------- ----------------- Cash flows from financing activities: Repayment of senior notes (5,000) (5,000) Net proceeds from bank borrowings 12,800 53,611 Principal payments under capital leases (69) (276) Stock options exercised 301 340 Dividends paid (942) (770) Purchase of treasury stock (9,837) (2,320) ----------------- ----------------- Net cash (used in) provided by financing activities (2,747) 45,585 ----------------- ----------------- Effect of exchange rate changes on cash and cash equivalents (55) (1) ----------------- ----------------- Net increase (decrease) in cash 9,702 (5,405) Cash at beginning of period 5,626 10,874 ----------------- ----------------- Cash at end of period $ 15,328 $ 5,469 ================= ================= </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 1999 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 - RECLASSIFICATIONS Certain prior period balances have been reclassified to conform with the current period presentation. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> OCTOBER 31, JANUARY 31, OCTOBER 31, 1999 1999 1998 ----------------------- ----------------------- ----------------------- <S> <C> <C> <C> Finished goods $71,816 $64,438 $76,923 Work-in-process and component parts 38,399 39,589 44,628 ----------------------- ----------------------- ----------------------- $110,215 $104,027 $121,551 ======================= ======================= ======================= </TABLE> NOTE 3 - 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, ----------------------------------- 1999 1998 ---- ---- <S> <C> <C> Cash paid during the period for: Interest $4,846 $4,125 Income taxes 4,524 3,782 </TABLE> 6
7 NOTE 4 - COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands): <TABLE> <CAPTION> NINE MONTHS THREE MONTHS ENDED OCTOBER 31, ENDED OCTOBER 31, ----------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $22,500 $15,541 $13,767 $12,007 Foreign currency translation adjustment (4,132) 9,634 1,024 10,018 ----------- ------------ ----------- ----------- Comprehensive income $18,368 $25,175 $14,791 $22,025 =========== ============ =========== =========== </TABLE> NOTE 5 - SEGMENT INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (the "Statement"), which requires reporting certain financial information regarding the Company's segments according to the "management approach". This approach requires reporting information regarding operating segments on the basis used internally by management to evaluate segment performance. The Company conducts its business primarily in two operating segments: "Wholesale" and "Other". The Company's wholesale segment includes the design, manufacture and distribution of quality watches. The Company's other segment includes the retail and service center operations. The Statement also requires quarterly disclosure of certain segment information. Operating segment data is as follows (in thousands): <TABLE> <CAPTION> NET SALES OPERATING PROFIT (LOSS) ------------------------------------ -------------------------------------- FOR THE NINE MONTHS ENDED OCTOBER 31, ----------------------------------------------------------------------------------- 1999 1998 1999 1998 -------------- --------------- --------------- ---------------- <S> <C> <C> <C> <C> Wholesale $ 191,619 $ 187,125 $ 29,268 $ 25,990 Other 24,604 20,914 (1,001) (1,856) -------------- --------------- --------------- ---------------- Consolidated $ 216,223 $ 208,039 $ 28,267 $ 24,134 ============== =============== =============== ================ <CAPTION> NET SALES OPERATING PROFIT (LOSS) ------------------------------------ -------------------------------------- FOR THE THREE MONTHS ENDED OCTOBER 31, ----------------------------------------------------------------------------------- 1999 1998 1999 1998 -------------- --------------- --------------- ---------------- <S> <C> <C> <C> <C> Wholesale $ 89,422 $ 89,861 $ 19,355 $ 17,224 Other 9,610 7,594 (343) (196) -------------- --------------- --------------- ---------------- Consolidated $ 99,032 $ 97,455 $ 19,012 $ 17,028 ============== =============== =============== ================ </TABLE> 7
8 NOTE 6 - DISPOSITION OF BUSINESS On December 22, 1998, the Company entered into an agreement with VLG North America, Inc. ("VLG") for the sale to VLG of substantially all of the assets, properties and rights related to the Piaget business. The transaction was completed on February 22, 1999 at a sales price of $28.4 million. After adjusting for the net assets sold and the expenses related to the sale, the Company earned an after tax gain of $3.7 million, or $0.28 per share. In fiscal 1999, the Piaget business had annual sales and operating income of approximately $14.2 million and $100,000 respectively. 8
9 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, 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, and success of hedging strategies with respect to currency exchange rate fluctuations. NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31, 1998. Net Sales. Net sales for the nine months ended October 31, 1999 increased 3.9% to $216.2 million from $208 million for the nine months ended October 31, 1998. Prior year sales included the Piaget distribution business, which the Company sold in February 1999. Sales from ongoing operations increased 9.7%. The increase in sales from ongoing operations was mainly attributable to a 10.5% increase in domestic sales and a 6.3% increase in international sales. The domestic sales increase resulted from increased sales in the Concord, Movado and Coach brands offset by a decrease in the Corum brand. Domestic sales also increased due to both volume increases as well as new store openings of both Retail Outlets and the Movado Boutiques. International sales increased primarily due to the continuing rollout of the Company's Coach brand. Gross Margins. Gross margins for the nine months ended October 31, 1999 and October 31, 1998 were $131.9 million (61.0% of sales) and $121.8 million (58.5% of sales), respectively. The gross margin increase of 250 basis points was attributable to a combination of a reduction in supply chain costs, a decline in the value of the Swiss franc against the U.S. dollar, which reduced the Company's production costs, and the disposition of the Piaget distribution business, which had margins below the Company's manufactured brands. Operating expenses. Operating expenses for the nine months ended October 31, 1999 were $103.6 million (47.9% of sales) as compared to $97.6 million (46.9% of sales) for the nine months ended October 31, 1998. The increase in operating expenses was due to the launch of the Company's Movado Boutiques late in the first quarter of fiscal 1999, the expansion of the Company's retail outlet business and continued investment in the Coach Brand. In addition, advertising expenses increased due to the introduction of the Company's new Concord and ESQ advertising campaigns in the third quarter of fiscal 2000. Overall selling expenses decreased due mainly to the disposition of the Piaget distribution business. General and administrative expenses continue to be impacted by the amortization and other costs of the Company's new core information system as well as cost increases in employee benefit programs as a result of an increase in headcount. Interest Expense. Net interest expense, which consists primarily of interest on the Company's 6.56% Senior Notes ("Senior Notes"), 6.90% Series A Senior Notes ("Series A Senior Notes") and borrowings against its working capital and revolving lines of credit, was $3.8 million for the nine months ended October 31, 1999 as 9
10 compared to $4.0 million for the nine months ended October 31, 1998. The decrease relates to lower interest expense on working capital borrowings due to lower receivables and inventory and interest income from the investment of the proceeds from the disposition of the Piaget business, offset partially by interest on the 6.90% Series A Senior Notes issued in December 1998. Income Taxes. The Company recorded a provision for income taxes of $6.7 million for the nine months ended October 31, 1999 and $4.6 million for the nine months ended October 31, 1998. Taxes were provided at an effective rate of 23%, which the Company believes will approximate the effective annual rate for fiscal 2000; 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 primarily 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, 1999 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1998. Net Sales. Net sales for the three months ended October 31, 1999 increased 1.6% to $99 million from $97.5 million for the comparable prior year period. Sales for the prior period included the Piaget distribution business which the Company sold in February 1999. Sales from ongoing operations increased 5.7% to $99 million from $93.7 million for the comparable prior year period. The sales increase from ongoing operations was attributable to a 5.2% increase in domestic sales and an 9.1% increase in international sales. The international sales increase was the result of increased sales of the Concord and Coach brands. The domestic sales increase was primarily attributable to increases in retail sales by the Company's Movado Boutiques and outlet stores, offset somewhat by a decline in the Corum brand. Gross Margins. Gross margins for the three months ended October 31, 1999 were $61.6 million (62.2% of sales) as compared to $57.5 million (59% of sales) for the three months ended October 31, 1998. The increase in gross margins as a percentage of sales was primarily attributable to a reduction in supply chain costs, a decline in the value of the Swiss franc against the U.S. dollar, which reduces the Company's production costs, and the disposition of the Piaget distribution business, which had gross margins below the Company's manufactured brands. Operating Expenses. Operating expenses for the three months ended October 31, 1999 were $42.6 million (43% of net sales) as compared to $40.5 million (41.5% of net sales) for the three months ended October 31, 1998. The increases in operating expenses were due to the continuing expansion of the Company's Movado Boutiques and retail outlet businesses, introduction of the Company's new Concord and ESQ advertising campaigns and the continued investment in the Coach brand. General and administrative expenses continue to be impacted by the amortization and other costs of the Company's new core information system as well as cost increases in employee benefit programs as a result of an increase in headcount. Interest Expense. Net interest expense, which consists primarily of interest on the Company's Senior Notes, Series A Senior Notes and borrowings against its working capital and revolving lines of credit, was $1.1 million for the three months ended October 31, 1999 as compared to $1.4 million for the three months ended October 31, 1998. Interest expense on borrowings decreased due to lower interest expense on working capital borrowings and interest income from the investment of the proceeds from the disposition of the Piaget business offset partially by interest on the Series A Senior Notes issued in December 1998. Income Taxes. The Company recorded a provision for income taxes of $4.1 million for three months ended October 31, 1999 and $3.6 million for the three months ended October 31, 1998. Taxes were provided at an effective rate of 23%, which the Company believes will approximate the effective annual rate for fiscal 2000; 10
11 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 primarily 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 bank borrowings under working capital lines of credit with domestic and Swiss banks as well as funds from operations. 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 product lines. In addition, the Company is required to make a $5 million sinking fund payment on January 31, 2000 in connection with its Senior Notes, which were issued in the original principal amount of $40 million. 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 July 23, 1997, between the Company, Chase Manhattan Bank, as agent, Fleet Bank N.A. as co-agent, and other banks signatory thereto ("Restated Bank Credit Agreement"), and $28.3 million of uncommitted working capital lines of credit. At October 31, 1999, the Company had $20.0 million in outstanding balances under the Restated Bank Credit Agreement. The Company is currently in the process of renegotiating the revolving and working capital lines. In March 1998, the Company's Board of Directors authorized the repurchase of up to 400,000 shares of the Company's common stock. In March 1999, the Board approved a revised stock repurchase program for the repurchase of shares of the Company's common stock up to an aggregate repurchase price of $10.0 million in addition to the shares previously purchased. In October 1999, the Board approved a $10.0 million increase in the total amount authorized for share repurchases up to a total aggregate repurchase amount of $20 million. Since March 1998, the Company has repurchased approximately 534,800 shares at an aggregate cost of approximately $12.4 million. As of October 31, 1999, the Company's debt to total capitalization ratio was 30.1% as compared to 28.8% at January 31, 1999 and 35.8% at October 31, 1998. The decrease in the debt to total capitalization from October 31, 1998 is primarily due to lower borrowings in fiscal 2000. The increase from January 31, 1999 was primarily due to an increase in loans under the working capital lines. The Company's net working capital, consisting primarily of trade receivables and inventories, amounted to $190.6 million at October 31, 1999, $194.9 million at January 31, 1999 and $175.9 million at October 31, 1998. The decrease in working capital from January 31, 1999 was primarily the result of an increase in loans payable to banks offset by the cash proceeds from the sale of the Piaget business. The increase in working capital from October 31, 1998 was primarily due to an increase in receivables due to growth in the Company's business, and the proceeds from the sale of the Piaget business. Accounts receivable at October 31, 1999 were $130.0 million as compared to $109.1 million at January 31, 1999 and $138.1 million at October 31, 1998. The increase in accounts receivable from January 31, 1999 was 11
12 due to seasonal sales volume increases. The decrease in accounts receivable from October 31, 1998 was primarily the result of better cash collections. Inventories at October 31, 1999 were $110.0 million as compared to $104.0 million at January 31, 1999 and $121.6 million at October 31, 1998. The increase from January 31, 1999 relates to the anticipation of the upcoming selling season. The decrease from October 31, 1998 relates to the Company's implementation of new inventory reduction initiatives which includes, more effective supply chain management and better utilization of inventories. The Company's fiscal 2000 year-to-date capital expenditures approximated $7.8 million as of October 31, 1999 and $7.2 million as of October 31, 1998. Expenditures in fiscal 2000 primarily related to the construction of the Company's sales booth for the Basel Fair in Switzerland and improvements in information systems. The Company expects that capital expenditures in the future will approximate the average of fiscal 1999 and 1998 levels. 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. 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 PCs, servers, network components, desktop software and core business software which support manufacturing, distribution, sales, accounting, after sales service, retail point of sale, and electronic data interchange (EDI). A new global technical network infrastructure (hardware, software, and communication technology) and a new retail point-of-sale and merchandise system that are Year 2000 compliant have been implemented. As part of the Project, new client/server core business applications software (which is designed to be Year 2000 compliant) supporting manufacturing, distribution, sales, accounting and after sales service was implemented in the U.S. in March 1999. The Company expects to complete the implementation of this software in Switzerland in May 2000 and in Canada and the Far East during the second half of fiscal 2001. Existing business applications software systems operating in Switzerland, Canada and the Far East, however, have been made Year 2000 compliant. The Company has tested its applications software by reviewing the database and program definitions to confirm that the date formats are four digit year specific and by simulating the date change to January 1, 2000. As a result of the Project and its contingency planning, the Company expects that it will be Year 2000 compliant, on a global basis, by the end of calendar year 1999. By the use of questionnaire the Company is monitoring the Year 2000 system status of customers and vendors involved with electronic interchange of data with our systems. This monitoring will continue throughout calendar year 1999. Non-electronic data exchange contingency approaches, including reliance on communications by fax, will be used, if required, with those customers or vendors which fail to reach Year 2000 system compliance by January 1, 2000. 12
13 Costs Costs associated with systems replacement and modification to become Year 2000 compliant under the contingency plan (outside of the Project) are expected to be approximately $400,000. The estimated total cost of the Project is approximately $11.0 million. The total amount expended on the Project through October 31, 1999 was approximately $10.2 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 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. The Company believes that, with the completion of the Project and the implementation of the Company's contingency plan, the possibility of significant interruptions of normal operations should be reduced. No major information technology projects have been deferred as a result of the Project. 13
14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None 14
15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1* Second Amendment dated as of September 1, 1999 to the December 1, 1996 license agreement between Sara Lee Corporation and Movado Group, Inc. 10.2* License Agreement entered into as of June 3, 1999 between Tommy Hilfiger Licensing, Inc. and Movado Group, Inc. 27 Financial Data Schedule. (b) Reports on Form 8-K None *Confidential portions of Exhibits 10.1 and 10.2 were omitted and filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the Securities Exchange Act of 1934. 15
16 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 14, 1999 By: /s/ Kenneth J. Adams ------------------------------- Kenneth J. Adams Senior Vice President and Chief Financial Officer (Chief Financial Officer) Dated: December 14, 1999 By: /s/ Glenn E. Tynan ------------------------------- Glenn E. Tynan Vice President and Corporate Controller (Principal Accounting Officer) 16
17 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1* Second Amendment dated as of September 1,1999 to the December 1, 1986 license agreement between Sara Lee Corporation and Movado Group, Inc. 10.2* License Agreement entered into as of June 3, 1999 between Tommy Hilfiger Licensing, Inc. and Movado Group, Inc. 27 Financial Data Schedule. *Confidential portions of Exhibits 10.1 and 10.2 were omitted and filed separately with the Securities and Exchange Commission pursuant to rule 24b-2 of the Securities Exchange Act of 1934. 17