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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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
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
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
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
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
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
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
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
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
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
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
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
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
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