- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JULY 31, 2002 [ ] 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.) 650 FROM ROAD, PARAMUS, NEW JERSEY 07652 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) </Table> (201) 267-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 that 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 September 11, 2002 the Registrant had 3,428,277 shares of Class A Common Stock, par value $0.01 per share, outstanding and 10,026,616 shares of Common Stock, par value $0.01 per share, outstanding. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
MOVADO GROUP, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q JULY 31, 2002 <TABLE> <CAPTION> Page ---- <S> <C> Part I Financial Information Item 1. Consolidated Balance Sheets at July 31, 2002, January 31, 2002 and July 31, 2001 3 Consolidated Statements of Income for the six months and three months ended July 31, 2002 and 2001 4 Consolidated Statements of Cash Flows for the six months ended July 31, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure about Market Risks 14 Item 4. Controls and Procedures 14 Part II Other Information Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15-16 Signatures 17 Certifications 18-19 </TABLE> 2
PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MOVADO GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (Unaudited) <TABLE> <CAPTION> JULY 31, JANUARY 31, JULY 31, 2002 2002 2001 ---- ---- ---- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 29,355 $ 16,971 $ 13,636 Trade receivables, net 102,120 92,014 105,362 Inventories, net 119,858 98,589 106,732 Other 32,970 19,467 25,880 --------- --------- --------- Total current assets 284,303 227,041 251,610 Property, plant and equipment, net 38,250 38,726 34,000 Other 26,171 24,909 23,006 --------- --------- --------- Total assets $ 348,724 $ 290,676 $ 308,616 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable to banks $ 32,000 $ 6,500 $ 44,350 Current portion of long-term debt 5,000 5,000 5,000 Accounts payable 22,037 23,824 16,558 Accrued liabilities 24,639 25,417 22,690 Current taxes payable 8,538 8,646 8,228 Deferred taxes payable 4,313 3,722 2,962 --------- --------- --------- Total current liabilities 96,527 73,109 99,788 Long-term debt 35,000 35,000 40,000 Deferred and non-current foreign income taxes 1,708 1,513 3,343 Other liabilities 7,844 8,584 6,692 --------- --------- --------- Total liabilities 141,079 118,206 149,823 --------- --------- --------- 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; 9,999,947, 9,797,776 and 9,735,448 shares issued, respectively 99 98 98 Class A Common Stock, $0.01 par value, 10,000,000 shares authorized; 3,473,123, 3,509,733 and 3,509,733 shares issued and outstanding, respectively 35 35 35 Capital in excess of par value 71,213 69,484 68,620 Retained earnings 162,031 153,830 142,366 Accumulated other comprehensive income (loss) 1,958 (23,286) (24,416) Treasury stock, 1,544,487, 1,544,487 and 1,556,670 shares, respectively, at cost (27,691) (27,691) (27,910) --------- --------- --------- Total shareholders' equity 207,645 172,470 158,793 --------- --------- --------- Total liabilities and shareholders' equity $ 348,724 $ 290,676 $ 308,616 ========= ========= ========= </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share amounts) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31, ------------------------- --------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 129,515 $ 134,864 $ 72,244 $ 78,352 Cost of sales 49,963 51,932 27,871 30,364 --------- --------- --------- --------- Gross Profit 79,552 82,932 44,373 47,988 Operating Expenses: Selling, general and administrative 69,616 73,105 35,825 39,215 --------- --------- --------- --------- Operating income 9,936 9,827 8,548 8,773 Net interest expense 2,014 2,887 1,087 1,655 --------- --------- --------- --------- Income before income taxes and cumulative effect of a change in accounting principle 7,922 6,940 7,461 7,118 Provision for income taxes 2,218 1,943 2,089 1,993 --------- --------- --------- --------- Income before cumulative effect of a change in accounting principle 5,704 4,997 5,372 5,125 Cumulative effect of a change in accounting principle, net of a tax benefit of $42 -- (109) -- -- --------- --------- --------- --------- Net income $ 5,704 $ 4,888 $ 5,372 $ 5,125 ========= ========= ========= ========= Basic income per share Income before cumulative effect of a change in accounting principle $ 0.48 $ 0.43 $ 0.45 $ 0.44 Cumulative effect of an accounting change -- (0.01) -- -- --------- --------- --------- --------- Net income per share $ 0.48 $ 0.42 $ 0.45 $ 0.44 ========= ========= ========= ========= Weighted basic average shares outstanding 11,794 11,650 11,826 11,670 ========= ========= ========= ========= Diluted income per share Income before cumulative effect of a change in accounting principle $ 0.47 $ 0.41 $ 0.44 $ 0.42 Cumulative effect of an accounting change -- (0.01) -- -- --------- --------- --------- --------- Net income per share $ 0.47 $ 0.40 $ 0.44 $ 0.42 ========= ========= ========= ========= Weighted diluted average shares outstanding 12,194 12,075 12,248 12,195 ========= ========= ========= ========= </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JULY 31, ------------------------- 2002 2001 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income $ 5,704 $ 4,888 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,872 3,412 Provision for losses on accounts receivable 920 839 Provision for losses on inventory 580 422 Changes in current assets and liabilities: Trade receivables (9,834) (8,638) Inventories (15,968) (13,198) Other current assets 1,458 (6,349) Accounts payable (3,253) (11,677) Accrued liabilities (1,583) (5,113) Deferred & current taxes payable (381) (4,010) Other non-current assets 4,315 (5,563) Other non-current liabilities (740) 5,858 -------- -------- Net cash used in operating activities (14,910) (39,129) -------- -------- Cash flows from investing activities: Capital expenditures (1,801) (4,930) Trademarks and other intangibles (165) (426) -------- -------- Net cash used in investing activities (1,966) (5,356) -------- -------- Cash flows from financing activities: Net proceeds from bank borrowings 25,500 35,550 Stock options exercised & other 1,886 1,379 Dividends paid (709) (698) -------- -------- Net cash provided by financing activities 26,677 36,231 -------- -------- Effect of exchange rate changes on cash and cash equivalents 2,583 (1,169) -------- -------- Net increase (decrease) in cash and cash equivalents 12,384 (9,423) Cash and cash equivalents at beginning of period 16,971 23,059 -------- -------- Cash and cash equivalents at end of period $ 29,355 $ 13,636 ======== ======== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
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 2002 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. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. NOTE 1 - RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current presentation. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands): JULY 31, JANUARY 31, JULY 31, 2002 2002 2001 ---- ---- ---- Finished goods $ 75,690 $ 63,956 $ 66,806 Component parts 40,820 32,531 35,910 Work-in-process 3,348 2,102 4,016 -------- -------- -------- $119,858 $ 98,589 $106,732 ======== ======== ======== NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows (in thousands): SIX MONTHS ENDED JULY 31, 2002 2001 ------ ------ Cash paid during the period for: Interest $1,668 $2,718 Income taxes $2,766 $6,062 6
NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) for the six and three months ended July 31, 2002 and 2001 are as follows (in thousands): <TABLE> <CAPTION> SIX MONTHS ENDED THREE MONTHS ENDED ---------------- ------------------ JULY 31, JULY 31, JULY 31, JULY 31, 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Balance at beginning of period ($23,286) ($18,169) ($17,749) ($25,497) Accounting change, net of tax -- 367 -- -- Net unrealized loss on investment, net of tax (71) -- (60) -- Effective portion of unrealized income on hedging contracts, net of tax 6,424 85 5,375 533 Foreign currency translation adjustment 18,891 (6,699) 14,392 548 -------- -------- -------- -------- Balance at end of period $ 1,958 ($24,416) $ 1,958 ($24,416) ======== ======== ======== ======== </TABLE> NOTE 5 - SEGMENT INFORMATION The Company conducts its business primarily in three operating segments: "Wholesale," "Retail" and "Other." The Company's Wholesale segment includes the designing, manufacturing and distribution of quality watches. Retail includes the Movado Boutiques and outlet stores. Other includes the Company's service center operations and shipping. Operating segment data for the six months and three months ended July 31, 2002 and 2001 are as follows (in thousands): <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JULY 31, --------------------------------- NET SALES OPERATING INCOME --------- ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Wholesale $103,159 $112,291 $ 11,138 $ 11,058 Retail 22,417 18,316 (1,186) (1,491) Other 3,939 4,257 (16) 260 -------- -------- -------- -------- Consolidated total $129,515 $134,864 $ 9,936 $ 9,827 ======== ======== ======== ======== </Table> <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED JULY 31, ----------------------------------- NET SALES OPERATING INCOME --------- ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Wholesale $57,702 $65,231 $ 8,738 $ 8,770 Retail 12,581 10,776 133 (123) Other 1,961 2,345 (323) 126 ------- ------- ------- ------- Consolidated total $72,244 $78,352 $ 8,548 $ 8,773 ======= ======= ======= ======= </Table> 7
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On August 15, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. In addition, the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The Company does not expect that the adoption of this statement will have a material impact on its financial position or results of operations. In May 2002, FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002," which relates to the accounting for the extinguishment of debt, certain lease modifications and other various technical corrections to other existing pronouncements. SFAS No. 145 is effective for fiscal years after May 15, 2002 and is effective for SFAS No. 13 transactions occurring after May 15, 2002. This statement rescinds SFAS No. 4 and, thus, the exception to applying Accounting Principles Board Opinion No. 30 ("APB No. 30") to all gains and losses related to extinguishment of debt. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. SFAS No. 64 previously amended SFAS No. 4 and is no longer necessary because SFAS No. 4 has been rescinded. This statement amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also rescinds SFAS No. 44 and makes various technical corrections to other existing pronouncements. The Company does not expect the adoption of this statement will have a material impact on its financial position or results of operations. On July 29, 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost as defined in Issue No. 94-3 was recognized at the date of an entity's commitment to an exit plan. Therefore, this statement eliminates the definition and requirements for recognition of exit costs in Issue No. 94-3. This Company does not expect the adoption of this statement will have a material impact on its financial position or results of operations. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS Statements included under Management's Discussion and Analysis of Financial Condition and Results of Operations and in any other part of 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, changes in consumer preferences and popularity of particular designs, new product development and introduction, competitive products and pricing, seasonality, availability of alternative sources of supply in the case of loss of any significant supplier, the loss of significant customers, the Company's dependence on key officers, the continuation of licensing arrangements with third parties, ability to secure and protect trademarks, patents and other intellectual property rights, ability to lease new stores on suitable terms in desired markets and to complete construction on a timely basis, continued availability to the Company of financing and credit on favorable terms, business disruptions, general risks associated with doing business outside the United States including, without limitations, import duties, tariffs, quotas, currency translation, political and economic stability and success of hedging strategies in respect of currency exchange rate fluctuations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There has been no material change in the Company's Critical Accounting Policies and Estimates, as disclosed in its Annual Report on Form 10-K for the fiscal year ended January 31, 2002. 9
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2002 AS COMPARED TO THE SIX MONTHS ENDED JULY 31, 2001. Net sales: Comparative net sales by product class were as follows: <TABLE> <CAPTION> Six Months Ended July 31, 2002 2001 ---- ---- <S> <C> <C> Concord, Movado, Coach, ESQ and Tommy Hilfiger Domestic $ 85,828 $ 88,685 International 17,331 23,606 Retail 22,417 18,316 Other 3,939 4,257 -------- -------- Net Sales $129,515 $134,864 ======== ======== </Table> Net sales decreased by $5.3 million or 4.0% for the six months ended July 31, 2002 as compared to the six months ended July 31, 2001. Domestic sales of our watch brands decreased by $2.9 million or 3.2% due to softness in the luxury segment of the retail market in addition to retailers more closely managing their inventories. International watch brand sales decreased by $6.3 million or 26.6% due to a slowdown in the luxury goods markets in the Far East, Europe and the Middle East. Retail sales increased by $4.1 million or 22.4%. Growth in the retail sales category was primarily attributable to new store openings and comparable store sales increases in the outlets of 10.8% and the Movado Boutiques of 4.8%. As of July 31, 2002, there were ten Movado Boutiques and 26 outlets as compared to seven Movado Boutiques and 24 outlets open as of July 31, 2001. Other net sales, which include sales from the Company's service center operations and shipping income, decreased by $0.3 million or 7.5%. Gross Margin. The gross profit for the six months ended July 31, 2002 was $79.6 million (61.4% of net sales) as compared to $82.9 million (61.5% of net sales) for the six months ended July 31, 2001. The gross profit decrease of $3.4 million primarily relates to the decrease in sales. Selling, General and Administrative. Selling, general and administrative expenses for the six months ended July 31, 2002 were $69.6 million or 53.8% of net sales as compared to $73.1 million or 54.2% for the six months ended July 31, 2001. The $3.5 million or 4.8% decrease was attributable to planned reductions in marketing expenditures, lower expenses due to decreased sales volume and decreases in expenses resulting from the Company's expense reduction initiatives, offset by spending in support of the growth of the retail businesses. Interest Expense. Net interest expense for the six months ended July 31, 2002 was $2.0 million as compared to $2.9 million for six months ended July 31, 2001, a 30.2% decrease. Interest decreased due to a decline in average short-term bank borrowings and a reduction of interest rates. 10
Income Taxes. The Company recorded a tax expense of $2.2 million for the six months ended July 31, 2002 as compared to a tax expense of $1.9 million for the six months ended July 31, 2001. Taxes were recorded at a 28.0% rate for both fiscal 2003 and fiscal 2002. The Company's effective tax rate reflects the current expectation of the overall foreign to domestic earnings mix, local statutory tax rates and the Company's ability to utilize net operating loss carryforwards in certain jurisdictions. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2002 AS COMPARED TO THE THREE MONTHS ENDED JULY 31, 2001. Net sales: Comparative net sales by product class were as follows: <Table> <Caption> Three Months Ended July 31, 2002 2001 ------------ -------------- <S> <C> <C> Concord, Movado, Coach, ESQ and Tommy Hilfiger Domestic $49,371 $52,264 International 8,331 12,967 Retail 12,581 10,776 Other 1,961 2,345 ------- ------- Net Sales $72,244 $78,352 ======= ======= </Table> Net sales decreased by $6.1 million or 7.8% for the three months ended July 31, 2002 as compared to the three months ended July 31, 2001. Domestic sales of our watch brands decreased by $2.9 million or 5.5%, which reflects a combination of our retailers more closely managing their inventories and the reduction in retail activity in the U.S. luxury goods markets. International watch brand sales decreased by $4.6 million or 35.7% due to adverse economic conditions in the luxury markets in the Far East, Europe, and the Middle East. Retail sales increased by $1.8 million or 16.8%. Growth in the retail sales category was primarily attributable to new store openings and comparable store sales increases in the outlets of 9.5% and the Movado Boutiques of 1.5%. As of July 31, 2002, there were ten Movado Boutiques and 26 outlets as compared to seven Movado Boutiques and 24 outlets open as of July 31, 2001. Other net sales, which include sales from the Company's service center operations and shipping income, decreased by $0.4 million or 16.4%. Gross Margin. The gross profit for the three months ended July 31, 2002 was $44.4 million (61.4% of net sales) as compared to $48.0 million (61.2% of net sales) for the three months ended July 31, 2001. The gross profit decrease of $3.6 million reflects the decrease in sales and the gross margin percentage increase in fiscal 2003 is the result of the Company's success in its supply chain productivity initiatives. Selling, General and Administrative. Selling, general and administrative expenses for the quarter were $35.8 million or 49.6% of net sales as compared to $39.2 million or 50.0% of net sales in the second quarter of last year. The $3.4 million or 8.6% decrease was attributable to planned reductions in marketing expenditures, lower 11
expenses due to decreased sales volume and the cost savings resulting from the Company's cost reduction initiatives, offset by increased spending in support of the Movado Boutiques. Interest Expense. Net interest expense for the three months ended July 31, 2002 was $1.1 million as compared to $1.7 million for the three months ended July 31, 2001, a 34.3% reduction. Interest decreased due to a decline in average short-term bank borrowings and a reduction of interest rates. Income Taxes. The Company recorded a tax expense of $2.1 million for the three months ended July 31, 2002 as compared to a tax expense of $2.0 million for the three months ended July 31, 2001. Taxes were recorded at a 28.0% rate for both the second quarter of fiscal 2003 and fiscal 2002. The Company's effective tax rate reflects the current expectation of the overall foreign to domestic earnings mix, local statutory tax rates and the Company's ability to utilize net operating loss carryforwards in certain jurisdictions. LIQUIDITY AND FINANCIAL POSITION Cash used in operating activities amounted to $14.9 million and $39.1 million for the six months ended July 31, 2002 and 2001, respectively. The reduction in cash flow used in operating activities for the comparative six months ended July 31, 2002 and 2001 was mainly due to the timing of inventory purchases and related payments, reductions in operating expenses and an increase of net income in fiscal 2003 as compared to fiscal 2002. Cash used in investing activities amounted to $2.0 million and $5.4 million for the six months ended July 31, 2002 and 2001, respectively, and was primarily for capital expenditures. For the six months ended July 31, 2002, capital expenditures were mainly for various information systems projects and general corporate and retail capital improvements. Expenditures for the six months ended July 31, 2001 relate primarily to the build-out of the Paramus, N.J. corporate offices, information systems enhancements and pre-construction costs for three new Movado Boutiques opened in the third quarter of fiscal 2002. Cash provided by financing activities amounted to $26.7 million and $36.2 million for the six months ended July 31, 2002 and 2001, respectively, which were due to seasonal short-term bank borrowings. In fiscal 2003, the Company's seasonal borrowing decreased due mainly to a reduction in capital expenditures and the results of the Company's productivity improvements and cost reductions. At July 31, 2002, the Company had two series of Senior Notes outstanding. Senior Notes due January 31, 2005 were originally issued in a private placement completed in fiscal 1994. These notes have required annual principal payments of $5.0 million since January 1998 and bear interest of 6.56% per annum. During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes under a Note Purchase and Private Shelf Agreement dated November 30, 1998. These notes bear interest at 6.90%, mature on October 30, 2010 and are subject to annual repayments of $5.0 million commencing October 31, 2006. On March 21, 2001, the Company entered into a new Note Purchase and Private Shelf Agreement, which allows for the issuance for up to three years after the date thereof of senior promissory notes in the aggregate principal amount of up to $40.0 million with maturities up to 12 years from their original date of issuance. On June 22, 2000, the Company completed the renewal of its revolving credit line with its bank group. The new agreement provides for a three year $100.0 million unsecured revolving line of credit. In addition, the Company has a $15.0 million uncommitted working capital line with its bank group which is renewed annually. In July 2002 and August 2002, the Company renewed its $15.0 million of uncommitted working capital lines. At July 31, 2002, the Company had $32.0 million of outstanding borrowings under its bank lines as compared 12
to $44.4 million at July 31, 2001. In addition, one bank in the domestic bank group issued five irrevocable standby letters of credit for retail and operating facility leases and Canadian payroll to various landlords and the Royal Bank of Canada totaling $0.5 million with expiration dates through May 15, 2003. A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank. Available credit under these lines totaled 8.8 million Swiss francs and 11.3 million Swiss francs, with dollar equivalents of approximately $5.9 million and $7.6 million at July 31, 2002 and 2001, respectively, of which a maximum of $5.0 million can be drawn. As of July 31, 2002, the Swiss bank has made guarantees to certain Swiss vendors on behalf of the Swiss subsidiary of approximately 1.3 million Swiss francs. Under a series of share repurchase authorizations approved by the Board of Directors, the Company has maintained a discretionary share buy-back program. There were no purchases during fiscal 2002 under the repurchase program and there have been no repurchases for the six months ended July 31, 2002. The Company paid dividends of approximately $709,000 and $698,000 for the six months ended July 31, 2002 and 2001, respectively. Cash and cash equivalents at July 31, 2002 amounted to $29.4 million compared to $13.6 million at July 31, 2001. The increase in cash relates to the timing of payments for inventory, translation of Swiss entities' cash balances and the reduction in cash requirements due to the Company's productivity improvement and expense reduction initiatives. Net debt to total capitalization at July 31, 2002 was 20.5% as compared to 47.7% at July 31, 2001. 13
Item 3. Quantitative and Qualitative Disclosure about Market Risks FOREIGN CURRENCY RISK The majority of the Company's purchases are denominated in Swiss francs. The Company reduces its exposure to the Swiss franc exchange rate risk through a hedging program. Under the hedging program, the Company purchases various financial instruments, predominately forward and option contracts. Gains and losses on financial instruments resulting from this hedging activity are partially offset by the effects of the currency movements on respective underlying hedged transactions. If the Company did not engage in a hedging program, any change in the Swiss franc currency rate would have an equal effect on the entities' cost of sales. As of July 31, 2002, the Company has a Swiss forward contract hedging portfolio of 177.0 million Swiss francs with contracts maturing at various dates ranging through June 10, 2003. In addition, the Company has six Swiss franc option contracts of which 15.0 million Swiss francs mature on July 31, 2003, 15.0 million Swiss francs mature on February 12, 2004 and 5.0 million Swiss francs mature on February 25, 2004. The Company's international trade business accounts for approximately 14.0% of the Company's sales in various currencies. The international trade operations are denominated in local currency and fluctuations in these currency rates may have an impact on our sales, cost of sales, operating expenses and net income. During the six months ended July 31, 2002 and 2001, there was no material effect to the results of operations due to foreign currency rate fluctuations. There can be no assurance that this trend will continue. INTEREST RATE RISK As of July 31, 2002, the Company has $32.0 million in short-term bank debt obligations with variable interest rates, which are based on LIBOR plus a applicable LIBOR loan spread. The Company does not hedge these interest rate risks. The Company also has $40.0 million Senior Note debt bearing fixed interest rates per annum. The difference between the market based interest rates at July 31, 2002 and the fixed rates were unfavorable. Item 4. Controls and Procedures Not applicable. 14
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 18, 2002, the Company held its annual meeting of shareholders at its corporate office in Paramus, New Jersey. The following matters were voted upon at the meeting: (i) Margaret Hayes Adame, Richard Cote, Efraim Grinberg, Gedalio Grinberg, Alan H. Howard, Donald Oresman, Leonard L. Silverstein were elected directors of the Company. The results of the vote were as follows: Withheld/ Nominee For Against ------- --- ------- Margaret Hayes Adame ...... 35,623,879 235,660 Richard Cote .............. 34,976,587 882,952 Efraim Grinberg ........... 34,977,987 881,552 Gedalio Grinberg .......... 34,977,987 881,552 Alan H Howard ............ 35,623,879 235,660 Donald Oresman ............ 35,623,429 236,110 Leonard L Silverstein .... 35,579,629 279,910 (ii) A proposal to ratify the selection of PricewaterhouseCoopers LLP as the Company's independent public accountants for the fiscal year ending January 31, 2003 was approved. The results of the vote were as follows: Withheld/ Exception/ For Against Abstain --- -------- ---------- 35,639,785 218,886 868 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amendment to the License Agreement dated June 3, 1999 between Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company S.A. entered into January 16, 2002.* 15
10.2 Second Amendment to the License Agreement dated June 3, 1999 between Tommy Hilfiger Licensing, Inc., Registrant and Movado Watch Company S.A. entered into August 1, 2002.* 10.3 Letter Agreement dated August 14, 2002 amending Line of Credit Agreement between the Registrant and the Bank of New York dated August 20, 2001. 10.4 Line of Credit Letter Agreement dated June 20, 2002 between the Registrant and Fleet National Bank. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None *Confidential portions of Exhibits 10.1 and 10.2 have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 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: September 16, 2002 By: /s/ Eugene J. Karpovich -------------------------------- Eugene J. Karpovich Senior Vice President and Chief Financial Officer (Chief Financial Officer and Principal Accounting Officer) 17
CERTIFICATIONS I, Efraim Grinberg, certify that: 1. I have reviewed this quarterly report on From 10-Q of Movado Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 16, 2002 /s/ Efraim Grinberg ------------------------------------- Efraim Grinberg President and Chief Executive Officer 18
CERTIFICATIONS I, Eugene J. Karpovich, certify that: 1. I have reviewed this quarterly report on From 10-Q of Movado Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 16, 2002 /s/ Eugene J. Karpovich ------------------------------------- Eugene J. Karpovich Senior Vice President and Chief Financial Officer 19