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, 1996 ------------------ 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 --------- MOVADO GROUP, INC. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) New York 13-2595932 ----------------------------------- --------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) (201)-406-4800 (Registrant's Telephone Number, Including Area Code) ------------------------------------------------------------------ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 . ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ------ ------- APPLICABLE ONLY TO CORPORATE ISSUERS 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 12, 1996 the rgeistrant had 2,586,891 shares of Class A Common Stock, par value $0.01 per share, outstanding and 3,440,806 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, 1996 <TABLE> <CAPTION> Page Part I Financial Information ---- <S> <C> Item 1. Consolidated Balance Sheets as of October 31, 1996, October 31, 1995 and January 31, 1996 3 Consolidated Statements of Income for the nine months ended October 31, 1996 and 1995 and the three months ended October 31, 1996 and 1995 4 Consolidated Statements of Cash Flows for the nine months ended October 31, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Exhibit Index 12 </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 OCTOBER 31, JANUARY 31, 1996 1995 1996 --------- --------- --------- <S> <C> <C> <C> ASSETS Current assets: Cash $ 4,040 $ 5,770 $ 3,829 Trade receivables, net 112,701 99,591 75,335 Inventories 102,894 96,664 89,101 Other 10,972 11,833 12,521 --------- --------- --------- Total current assets 230,607 213,858 180,786 --------- --------- --------- Plant, property and equipment, net 14,312 12,274 11,794 Other assets 8,338 7,827 7,800 --------- --------- --------- $ 253,257 $ 233,959 $ 200,380 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable to banks $ 43,859 $ 35,778 $ 8,782 Accounts payable 20,681 18,415 22,042 Accrued liabilities 17,012 13,971 9,289 Deferred and current taxes payable 9,129 9,230 7,994 --------- --------- --------- Total current liabilities 90,681 77,394 48,107 --------- --------- --------- Long-term debt 45,000 40,000 40,000 Deferred and non-current foreign income taxes 4,033 3,860 3,860 Other liabilities 3,396 3,909 3,572 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; 3,431,732, 3,411,410 and 3,426,610 shares issued, respectively 34 34 34 Class A Common Stock, $0.01 par value, 10,000,000 shares authorized; 2,588,891, 2,588,891, and 2,588,891 shares issued and outstanding, respectively 26 26 26 Capital in excess of par value 34,315 34,009 34,252 Retained earnings 68,335 57,638 60,319 Cumulative translation adjustment 7,565 17,217 10,338 Treasury Stock, 9,201 shares, at cost (128) (128) (128) --------- --------- --------- 110,147 108,796 104,841 --------- --------- --------- $ 253,257 $ 233,959 $ 200,380 ========= ========= ========= </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, -------------------------------------- -------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $158,629 $140,269 $ 76,864 $ 68,079 Costs and expenses: Cost of sales 70,681 65,909 33,897 31,947 Selling, general and administrative 72,568 60,863 31,439 25,468 -------- -------- -------- -------- 143,249 126,772 65,336 57,415 -------- -------- -------- -------- Operating income 15,380 13,497 11,528 10,664 Net interest expense 3,490 3,650 1,367 1,369 -------- -------- -------- -------- Income before income taxes 11,890 9,847 10,161 9,295 Provision for income taxes 3,330 2,954 2,811 2,789 -------- -------- -------- -------- Net income $ 8,560 $ 6,893 $ 7,350 $ 6,506 ======== ======== ======== ======== Income per share: $ 1.42 $ 1.15 $ 1.22 $ 1.08 ======== ======== ======== ======== Shares used in per share computations: 6,009 5,998 6,011 6,003 ======== ======== ======== ======== </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, --------------------------------------- 1996 1995 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 8,560 $ 6,893 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,691 2,381 Deferred and non-current foreign income taxes (530) (307) Provision for losses on accounts receivable (5) (560) Changes in current assets and liabilities: Trade receivables (37,471) (30,597) Inventories (14,975) (8,584) Other current assets (2,694) 5,606 Accounts payable 125 (4,807) Accrued liabilities 7,867 4,916 Deferred and current taxes payable 2,326 2,547 (Increase) decrease in other non-current assets (1,204) 938 Increase in other non-current liabilities 223 875 -------- -------- Net cash used in operating activities (35,087) (20,699) -------- -------- Cash flows used for investing activities: Capital expenditures (4,382) (2,292) Goodwill, trademarks and other intangibles (69) (99) -------- -------- Net cash used in investing activities (4,451) (2,391) -------- -------- Cash flows from financing activities: Net proceeds from current borrowings under lines of credit 35,641 24,915 Proceeds from long-term debt 5,000 -- Principal payments under capital leases (365) (621) Exercise of stock options 63 6 Purchase of treasury stock -- (128) Dividends paid (529) (443) -------- -------- Net cash provided by financing activities 39,810 23,729 -------- -------- Effect of exchange rate changes on cash (61) 235 Net decrease in cash 211 874 Cash at beginning of period 3,829 4,896 -------- -------- Cash at end of period $ 4,040 $ 5,770 ======== ======== </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 1996 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 - RECLASSIFICATION Certain amounts from prior years have been reclassified to conform to the fiscal 1997 presentation. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> OCTOBER 31, JANUARY 31, 1996 1996 ----------- ----------- <S> <C> <C> Finished goods $ 61,392 $ 51,034 Work-in-process and component parts 41,502 38,067 -------- -------- $102,894 $ 89,101 ======== ======== </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, -------------------- 1996 1995 ---- ---- <S> <C> <C> Cash paid during the period for: Interest $2,727 $3,010 Income taxes 1,745 1,127 Non-cash investing and financing activities: Equipment acquired under capital leases $ 198 $ 116 </TABLE> 6
7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Nine months ended October 31, 1996 compared to nine months ended October 31, 1995. Net Sales. Net sales increased 13.1% to $158.7 million from $140.3 million for the nine months ended October 31, 1996 and October 31, 1995, respectively. The increase was attributable to a 15.7% increase in domestic sales reflecting growth in the Company's Concord, Movado and ESQ brands. International sales increased 2.5%. Gross Margins. Gross profit for the nine months ended October 31, 1996 was $87.9 million (55.4% of net sales) as compared to $74.4 million (53.0% of net sales) for the comparable prior year period. The increase in margin is mainly attributable to the Company continuing to experience a shift in overall sales mix toward its higher margin Movado, Concord and Esquire brands, as well as a strengthening of the U.S. dollar against the Swiss franc which affects the Company's product acquisition costs. Operating Expenses. Operating expenses increased 19.2% for the nine months ended October 31, 1996 to 45.7% of net sales from 43.4% of net sales for the comparable prior year period. Excluding the effect of a one-time, pre-tax charge of $600,000 included in last year's results, operating expenses increased approximately $12.3 million. The increase in operating expenses is mainly attributable to increases in advertising, marketing and other variable costs related to higher sales volumes. Interest Expense. Net interest expense, which consists primarily of interest on the Company's $40,000,000 of 6.56% Senior Notes and borrowings against its working capital and revolving lines of credit, was $3.5 million for the nine months ended October 31, 1996 as compared to $3.7 million for the comparable prior year period. The lower interest expense is mainly due to a reduction in average interest rates partially offset by increased average amounts outstanding, as compared to the period ended October 31, 1995. Income Taxes. The Company recorded a provision for income taxes of $3.3 million for nine months ended October 31, 1996 as compared to a provision of $3.0 million for the comparable prior year period. Taxes were provided at a 28% effective rate which the Company believes will approximate the effective annual rate for fiscal 1997; 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 28% 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, 1996 compared to three months ended October 31, 1995. Net Sales. Net sales increased 12.9% to $76.9 million from $68.1 million for the three months ended October 31, 1996 and October 31, 1995, respectively. The increase was attributable to a 9.9% increase in domestic sales reflecting unit sales increases in the Company's Movado and ESQ brands. International sales for the quarter increased 33%. 7
8 Gross Margins. Gross profit for the three months ended October 31, 1996 was $43.0 million (55.9% of net sales) as compared to $36.1 million (53.1% of net sales) for the comparable prior year period. The increase in margin is mainly attributable to the Company continuing to experience a shift in overall sales mix toward its higher margin Movado, Concord and ESQ brands as well as a strengthening of the U.S. dollar against the Swiss franc which affects the Company's product acquisition costs. Operating Expenses. Operating expenses increased 23.4% for the three months ended October 31, 1996 to 40.9% of net sales from 37.4% of net sales for the comparable prior year period. Operating expenses increased approximately $6.0 million. The increase in operating expenses is mainly attributable to increases in advertising, marketing and other variable costs related to higher sales volumes. Interest Expense. Net interest expense, which consists primarily of interest on the Company's $40,000,000 of 6.56% Senior Notes and borrowings against its working capital and revolving lines of credit, was $1.4 million for the three months ended October 31, 1996 and 1995, respectively. Interest expense remained flat as compared with the prior year period as a result of a slight decrease in interest rates on the working capital lines offset by higher average borrowings. Income Taxes. The Company recorded a provision for income taxes of $2.8 million for three months ended October 31, 1996 as compared to a provision of $2.8 million for the comparable prior year period. Taxes were provided at a 28% effective rate which the Company believes will approximate the effective annual rate for fiscal 1997; 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 28% 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 domestic 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 domestic lines of credit were renewed during the third quarter. 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 debt to total capitalization ratio was 44.7% at October 31, 1996, 41.1% at October 31, 1995 and 31.8% at January 31, 1996. The increase from January 31, 1996 was primarily the result of the Company financing seasonal working capital requirements under its working capital lines of credit. 8
9 The Company's net working capital consisting primarily of trade receivables and inventories amounted to $139.9 million at October 31, 1996, $136.4 million at October 31, 1995 and $132.7 million at January 31, 1996. Accounts receivable at October 31, 1996 were $112.7 million as compared to $99.6 million at October 31, 1995 and $75.3 million at January 31, 1996. The increase in the receivables was primarily the result of the Company's increased domestic sales volume and the timing of shipments during the third quarter of fiscal 1997. Inventories at October 31, 1996 were $102.9 million as compared to $96.7 million at October 31, 1995 and $89.1 million at January 31, 1996. The increase in inventories reflects both the seasonal build in inventories as well as the expansion of the company's sales base and product line. The Company's fiscal 1997 year-to-date capital expenditures approximate $4.4 million compared to $2.3 million through October 31, 1995. Expenditures were primarily related to improvements in the Company's management and sales management information systems, costs incurred in connection with the expansion of domestic distribution operations and the move of the Company's Swiss distribution operations. Additionally, costs related to the company's new Piaget flagship store in New York City are included in fiscal 1997. The Company expects that its annual capital expenditures in fiscal year 1997 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, including the Piaget store, and the expansion of distribution operations to support continued sales growth. 9
10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Line of Credit Letter Agreement dated August 30, 1996, signed September 18, 1996 between The Chase Manhattan Bank and the Registrant. 10.2 Letter Agreement dated August 9, 1996 amending line of credit letter agreement dated May 31, 1995 between Fleet Bank, NA and the Registrant. 10.3 Line of Credit Letter Agreement dated November 13, 1996 between Marine Midland Bank and the Registrant. 10.4 Amended and restated Movado Group, Inc. Deferred Compensation Plan for Executives dated June 15, 1996. 10.5 Movado Group, Inc. 1996 Stock Incentive Plan amending and restating 1993 Employee Stock Option Plan. 10.6 Movado Group, Inc. Annual Incentive Compensation Plan for fiscal year 1997. 11. Computation of net income per share. 27. Financial schedules. (b) Reports on Form 8-K None 10
11 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 13, 1996 By: /s/ Kenneth J. Adams ------------------------------- Kenneth J. Adams Senior Vice President and Chief Financial Officer (Chief Financial Officer) Dated: December 13, 1996 By: /s/ John J. Rooney ------------------------------- John J. Rooney Corporate Controller (Principal Accounting Officer) 11
12 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Line of Credit Letter Agreement dated August 30, 1996, signed September 18, 1996 between The Chase Manhattan Bank and the Registrant. 10.2 Letter Agreement dated August 9, 1996 amending line of credit letter agreement dated May 31, 1995 between Fleet Bank, NA and the Registrant. 10.3 Line of Credit Letter Agreement dated November 13, 1996 between Marine Midland Bank and the Registrant. 10.4 Amended and restated Movado Group, Inc. Deferred Compensation Plan for Executives dated June 15, 1996. 10.5 Movado Group, Inc. 1996 Stock Incentive Plan amending and restating 1993 Employee Stock Option Plan. 10.6 Movado Group, Inc. Annual Incentive Compensation Plan for fiscal year 1997. 11. Computation of net income per share. 27. Financial schedules. 12