SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 1, 2004
MOVADO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW YORK 0-22378 13-2595932
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification Number)
650 FROM ROAD
PARAMUS, NEW JERSEY 07652
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 267-8000
NOT APPLICABLE
(Former name or former address, if changed since last report)
This Amendment No. 1 amends the Current Report on Form 8-K of Movado Group, Inc.
("Movado") filed with the Securities and Exchange Commission on March 15, 2004
in connection with the consummation on March 1, 2004 of Movado's acquisition
from LVMH Moet Hennesy Louis Vuitton of the Ebel business ("Ebel"), except for
Ebel in Germany which Movado currently expects to complete on or about June 15,
2004. The audited combined financial statements of Ebel provided under Item 7(a)
below and the pro forma financial information provided under Item 7(b) below
include Ebel in Germany.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
The audited combined financial statements as of December 31, 2003, 2002 and 2001
and for each of the three years in the period ended December 31, 2003 of Ebel,
including the notes thereto and the report of independent auditors.
(b) Pro forma financial information.
Pro forma financial information of Movado and Ebel as follows: (i) unaudited pro
forma combined balance sheet for Movado and Ebel at January 31, 2004; (ii)
unaudited pro forma combined statement of operations of Movado and Ebel for the
year ended January 31, 2004; and (iii) notes to such unaudited pro forma
combined financial information.
(c) Exhibits:
Exhibit No. Description
----------- -----------
2.1 Share Purchase and Transfer of Assets and
Liabilities Agreement, dated December 22, 2003
(incorporated by reference to Exhibit 2.1 to
Movado's Current Report on Form 8-K filed on
March 15, 2004 (File No. 0-22378))
2.2 Amendment, dated March 1, 2004 (incorporated by
reference to Exhibit 2.2 to Movado's Current
Report on Form 8-K filed on March 15, 2004 (File
No. 0-22378))
23.1 Consent of Ernst & Young Ltd.
99.1 Press Release, dated March 1, 2004 (incorporated
by reference to Exhibit 99.1 to Movado's Current
Report on Form 8-K filed on March 15, 2004 (File
No. 0-22378))
99.2 The audited combined financial statements as of
December 31, 2003, 2002 and 2001 and for each of
the three years in the period ended December 31,
2003 of Ebel, including the notes thereto and the
report of independent auditors.
99.3 Pro forma financial information of Movado and
Ebel as follows: (i) unaudited pro forma combined
balance sheet for Movado and Ebel at January 31,
2004; (ii) unaudited pro forma combined statement
of operations of Movado and Ebel for the year
ended January 31, 2004; and (iii) notes to such
unaudited pro forma combined financial
information.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOVADO GROUP, INC.
Date: May 17, 2004 By: /s/ Timothy F. Michno
------------------------------
Name: Timothy F. Michno
Title: General Counsel and
Secretary
EXHIBIT INDEX
2.1 Share Purchase and Transfer of Assets and
Liabilities Agreement, dated December 22, 2003
(incorporated by reference to Exhibit 2.1 to
Movado's Current Report on Form 8-K filed on
March 15, 2004 (File No. 0-22378))
2.2 Amendment, dated March 1, 2004 (incorporated by
reference to Exhibit 2.2 to Movado's Current
Report on Form 8-K filed on March 15, 2004 (File
No. 0-22378))
23.1 Consent of Ernst & Young Ltd.
99.1 Press Release, dated March 1, 2004 (incorporated
by reference to Exhibit 99.1 to Movado's Current
Report on Form 8-K filed on March 15, 2004 (File
No. 0-22378))
99.2 The audited combined financial statements as of
December 31, 2003, 2002 and 2001 and for each of
the three years in the period ended December 31,
2003 of Ebel, including the notes thereto and the
report of independent auditors.
99.3 Pro forma financial information of Movado and
Ebel as follows: (i) unaudited pro forma combined
balance sheet for Movado and Ebel at January 31,
2004; (ii) unaudited pro forma combined statement
of operations of Movado and Ebel for the year
ended January 31, 2004; and (iii) notes to such
unaudited pro forma combined financial
information.
3
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33390004, 33313927 and 33380789) of Movado Group, Inc., of our
report dated May 14, 2004, with respect to the financial statements as of
December 31, 2003, 2002 and 2001 and for each of the three years in the period
ended December 31, 2003 of Ebel, including the notes thereto, included in the
Current Report on Form 8-K/A of Movado Group, Inc. dated May 17, 2004.
May 14, 2004
/s/ Ernst & Young Ltd.
EXHIBIT 99.2
------------
EBEL BUSINESS
Combined financial statements
for the years ended December 31, 2003, 2002 and 2001
THESE COMBINED FINANCIAL STATEMENTS HAVE BEEN PREPARED WITHIN THE FRAME OF THE
SHARE PURCHASE AND TRANSFER OF ASSETS AND LIABILITIES AGREEMENT, DATED DECEMBER
22, 2003, AS AMENDED BY THE AMENDMENT DATED MARCH 1, 2004 (HEREINAFTER THE
AGREEMENT) BETWEEN SOFIDIV SAS (BOULOGNE-BILLANCOURT, FRANCE), A SUBSIDIARY OF
LVMH MOET HENNESSY - LOUIS VUITTON (PARIS, FRANCE) AND CONCORD WATCH COMPANY SA
(BIENNE, SWITZERLAND), A SUBSIDIARY OF MOVADO GROUP, INC. (NEW JERSEY, USA). THE
AGREEMENT RELATES TO THE TRANSFER OF EBEL BUSINESS FROM LVMH TO MOVADO.
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TABLE OF CONTENTS
REPORT OF INDEPENDENT AUDITORS
COMBINED STATEMENTS OF OPERATIONS..............................................1
COMBINED BALANCE SHEETS - ASSETS...............................................2
COMBINED BALANCE SHEETS - LIABILITIES & COMBINED NET WORTH.....................3
CHANGES IN COMBINED NET WORTH..................................................4
COMBINED STATEMENTS OF CASH FLOWS..............................................5
NOTES TO THE COMBINED FINANCIAL STATEMENTS.....................................6
================================== [EBEL LOGO OMITTED]
REPORT OF INDEPENDENT AUDITORS
To the President
Sofidiv SAS
We have audited the accompanying combined balance sheets of the Ebel Business,
as defined in Note 2. BASIS OF PRESENTATION, as of December 31, 2003, 2002 and
2001 and the related combined statements of operations, changes in combined net
worth, and combined cash flows, for each of the three years in the period ended
December 31, 2003. These financial statements are the responsibility of the
management of Sofidiv SAS, a subsidiary of LVMH Moet Hennessy Louis Vuitton. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the Combined Financial Statements referred to above present
fairly, in all material respects, the combined financial position of Ebel
Business at December 31, 2003, 2002 and 2001 and the combined results of its
operations and its combined cash flows for each of the three years in the period
ended December 31, 2003, in conformity with generally accepted accounting
principles in France.
Accounting practices generally accepted in France vary in certain respects with
accounting principles generally accepted in the United States of America.
Information related to the nature and effect of such differences is presented in
Note 26 to the combined financial statements.
Geneva, Switzerland, May 14, 2004
/s/ Ernst & Young Ltd
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COMBINED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) NOTES 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
NET SALES 16 55,906 83,818 99,520
Cost of sales (35,194) (46,742) (53,697)
------------------------------------------
GROSS MARGIN 20,712 37,076 45,823
Marketing and selling expenses (29,751) (37,967) (40,092)
General and administrative expenses (6,950) (12,254) (10,488)
------------------------------------------
INCOME - (LOSS) FROM OPERATIONS 16 (15,989) (13,145) (4,757)
Financial expense - net 17 (1,437) (1,464) (4,964)
Dividends from investments carried at cost 8 5 -- --
Other income or expenses - net 18 (120,997) (1,001) 1,267
------------------------------------------
INCOME - (LOSS) BEFORE INCOME TAXES (138,418) (15,610) (8,454)
Income taxes 19 163 (570) 475
------------------------------------------
NET INCOME - (LOSS) (138,255) (16,180) (7,979)
- ------------------------------------------------------------------------------------------------------------
-1-
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COMBINED BALANCE SHEETS - ASSETS
- -------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) NOTES 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 4 5,047 4,243 13,988
Trade accounts receivable 5 18,341 23,169 31,236
Deferred income taxes - net 238 13 15
Inventories and work-in-progress - net 6 30,280 37,626 38,347
Prepaid expenses and other current assets 7 4,697 4,578 5,877
-----------------------------------------------------
CURRENT ASSETS 58,603 69,629 89,463
NON-CURRENT ASSETS
Investments carried at cost 8 78 83 81
Other non-current assets 89 - -
Brands and other intangible assets - net 9 198 126,020 123,402
Property, plant and equipment - net 10 9,124 11,023 9,881
-----------------------------------------------------
NON-CURRENT ASSETS 9,489 137,126 133,364
- -------------------------------------------------------------------------------------------------------------
Assets 68,092 206,755 222,827
- -------------------------------------------------------------------------------------------------------------
-2-
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COMBINED BALANCE SHEETS - LIABILITIES & COMBINED NET WORTH
- ---------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) NOTES 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term borrowings 11 75,781 60,175 53,805
Accounts payable 6,797 12,152 14,856
Accrued expenses and other current liabilities 12 8,117 14,396 22,621
Income taxes 141 28 315
Current portion of long-term debt 13 45 48 47
-----------------------------------------------------
CURRENT LIABILITIES 90,881 86,799 91,644
Non-current liabilities
Long-term debt, less current portion 13 4,185 21,406 21,013
Other long-term liabilities 14 3,953 5,394 5,507
-----------------------------------------------------
NON-CURRENT LIABILITIES 8,138 26,800 26,520
COMBINED NET WORTH
Funds allocated by the owner 15 131,055 112,290 111,332
Cumulative translation adjustment 15 (1,066) 3,527 (188)
Retained earnings (160,916) (22,661) (6,481)
-----------------------------------------------------
COMBINED NET WORTH (30,927) 93,156 104,663
- ---------------------------------------------------------------------------------------------------------------------
Liabilities & combined net worth 68,092 206,755 222,827
- ---------------------------------------------------------------------------------------------------------------------
-3-
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CHANGES IN COMBINED NET WORTH
- --------------------------------------------------------------------------------------------------------------------------------
FUNDS CUMULATIVE
ALLOCATED RETAINED TRANSLATION COMBINED
(EUR thousands) BY THE OWNER EARNINGS ADJUSTMENT NET WORTH
- --------------------------------------------------------------------------------------------------------------------------------
AS OF JANUARY 1, 2001 25,789 1,498 310 27,597
- --------------------------------------------------------------------------------------------------------------------------------
Non-cash capital contribution to Ebel SA 81,769 81,769
Capital contribution to Ebel SA 2,712 2,712
Capital contribution to LVMH Watch & Jewelry Germany 2,025 2,025
Subsequent purchase price adjustments (1,378) (1,378)
Financing of Ebel activities (1) 415 415
Net income (7,979) (7,979)
Foreign currency translation (498) (498)
- --------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2001 111,332 (6,481) (188) 104,663
- --------------------------------------------------------------------------------------------------------------------------------
Financing of Ebel activities (1) 958 958
Net income (16,180) (16,180)
Foreign currency translation 3,715 3,715
- --------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2002 112,290 (22,661) 3,527 93,156
- --------------------------------------------------------------------------------------------------------------------------------
Capital contribution to LVMH Watch & Jewelry Germany 4,000 4,000
Financing of Ebel activities (1) 14,765 14,765
Net income (138,255) (138,255)
Foreign currency translation (4,593) (4,593)
- --------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2003 131,055 (160,916) (1,066) (30,927)
- --------------------------------------------------------------------------------------------------------------------------------
(1) See Note 15. COMBINED NET WORTH
-4-
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COMBINED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
I OPERATING ACTIVITIES
Net income (138,255) (16,180) (7,979)
Depreciation and amortization 1,707 1,996 1,699
Brand exceptionnal depreciation 120,078 -- --
Change in provisions & allowances (842) (13,128) (7,102)
Change in deferred taxes (307) 2 293
Gains on disposals of fixed assets (13) (440) (1,337)
Others (17) - (12)
------------------------------------------------
NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES
BEFORE CHANGES IN CURRENT ASSETS AND LIABILITIES (17,649) (27,750) (14,438)
Inventories and work-in-progress (1,091) 6,045 (13,784)
Trade accounts receivable 2,966 6,567 (3,123)
Accounts payable (4,563) (2,302) (1,025)
Other current assets and liabilities 212 (240) (2,103)
------------------------------------------------
NET CHANGE IN CURRENT ASSETS AND LIABILITIES (2,476) 10,070 (20,035)
NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES (20,125) (17,680) (34,473)
II INVESTING ACTIVITIES
Purchases of brands and other intangible assets (85) (168) (122)
Purchases of property, plant and equipment (302) (2,387) (2,205)
Proceeds from sales of intangible & tangible assets 30 595 2,120
Net effect of acquisitions and disposals of consolidated companies -- -- 1,310
------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (357) (1,960) 1,103
III FINANCING ACTIVITIES
Changes in funds allocated by the owner 18,765 958 5,152
Principal repayments on short-term borrowings and long-term debt (46) (48) (385)
Changes in loans & borrowings to / from LVMH & its subsidiaries - (18,673) 13,554
------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,719 (17,763) 18,321
IV EFFECT OF EXCHANGE RATE FLUCTUATIONS 3,219 990 136
------------------------------------------------
NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS 1,456 (36,413) (14,913)
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (1) (45,964) (9,551) 5,362
CASH AND CASH EQUIVALENTS AT YEAR-END (1) (44,508) (45,964) (9,551)
- -----------------------------------------------------------------------------------------------------------------------------
(1) The statement of cash flows shows the change in cash (net of bank
overdrafts) and cash equivalents consisting of short-term investments that can
be readily converted into cash. The reconciliation between cash and cash
equivalents at year-end, as shown in the statement of cash flows, and the cash
and cash equivalents account as shown in the balance sheet is shown in note 4.
-5-
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NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Ebel, founded in 1911 in La Chaux-de-Fonds, Switzerland, is engaged in the
development, production and sale of luxury watches. Its image is founded on the
alliance of watch making expertise and elegant design found in the watches for
men and women assembled in its shops.
Ebel was acquired in the last quarter of 1999 by Sofidiv SAS
(Boulogne-Billancourt, France), a wholly-owned subsidiary of LVMH Moet
Hennessy-Louis Vuitton, (Paris, France).
2. BASIS OF PRESENTATION
These combined financial statements have been prepared in the context of the
share purchase and transfer of assets and liabilities agreement, dated December
22, 2003, as amended by the amendment dated March 1, 2004 (hereinafter the
Agreement) between Sofidiv SAS and Concord Watch Company SA (Bienne,
Switzerland), a wholly-owned subsidiary of Movado Group, Inc. (New Jersey, USA),
which transferred Ebel to Movado.
These combined financial statements represent the combination of the following
reporting entities included in the consolidated financial statements of LVMH:
Ebel SA, a Swiss incorporated company, and its subsidiaries as well as the Ebel
distribution operated through other LVMH's subsidiaries in some countries
(United States of America, United Kingdom, Spain, France, Germany, Japan,
Hong-Kong, Malaysia, Singapore, Taiwan, and Australia), this being referred to
in this combined financial statements as EBEL BUSINESS.
As an integrated business of LVMH, Ebel does not prepare separate combined
financial statements. Those combined financial statements of EBEL BUSINESS
represent the contribution of EBEL BUSINESS to the consolidated financial
statements of LVMH and include the specific assets, liabilities, revenues,
expenses and cash-flows directly attributable to EBEL Business, as well as
allocations of indirect expenses of certain distribution subsidiaries, to
present the financial position, results of operations and cash-flows of EBEL
BUSINESS. Purchase accounting entries related to the acquisition of EBEL
BUSINESS by LVMH were pushed down in the combined financial statements.
Allocations of indirect expenses, such as information technology, human
resources, rentals, accounting and logistics, were made based on sales of each
of the brands distributed by those distribution legal entities.
The consequences of events resulting directly and indirectly from the Agreement
and that occurred after the year-end are not reflected in those combined
financial statements.
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3. ACCOUNTING PRINCIPLES
3.1 GENERAL
The combined financial statements of Ebel Business have been prepared in
accordance with French accounting principles as defined by the French law of
January 3, 1985 and CRC (COMITE DE REGLEMENTATION COMPTABLE - French Accounting
Regulations Committee) regulation No. 99-02, published on June 22, 1999 and
applied for the preparation of LVMH financial statements.
3.2 TRANSLATION OF FINANCIAL STATEMENTS EXPRESSED IN FOREIGN CURRENCY, FOREIGN
CURRENCY TRANSACTIONS AND HEDGING OF FOREIGN EXCHANGE RISKS
a) TRANSLATION OF FINANCIAL STATEMENTS EXPRESSED IN FOREIGN CURRENCY
The combined financial statements are reported in euros, the reporting currency
of LVMH; the accounts of combined entities using a different functional currency
are converted into euros:
- - at the exchange rate prevailing at year-end for balance sheet items; and,
- - at the average rates for the financial year for statement of income items.
Translation adjustments arising from the application of these rates are recorded
in combined net worth under "Cumulative translation adjustment".
b) TRANSACTIONS EXPRESSED IN FOREIGN CURRENCY
Foreign currency transactions carried out by combined entities are converted to
their functional currency at the exchange rate prevailing at the transaction
date.
Trade receivables and debts denominated in foreign currency are converted at the
exchange rate prevailing on December 31. The unrealized losses and gains
resulting from this translation are recorded in the statement of operations.
Foreign exchange gains and losses arising from the translation of transactions
between combined entities, or receivables and debts with combined entities
denominated in foreign currency are recorded in the statement of operations.
c) HEDGING OF FOREIGN EXCHANGE RISKS
Foreign exchange futures and option contracts are revalued using the year-end
exchange rates. Unrealized gains and losses resulting from such revaluations
are:
- - recorded in the statement of operations to offset the unrealized gains or
losses on the assets or liabilities hedged by these instruments;
- - deferred if the instruments have been designated as hedges of transactions
for the following accounting period;
- - recorded as income or losses for the period if they have not been
designated as hedges.
Deferred unrealized gains and losses are included in "Other current assets" or
"Other current liabilities".
Foreign exchange gains and losses arising from contracts hedging commercial
risks are recorded as operating income or expenses to offset gains and losses
recognized on such risks, except for premiums and discounts on forward
contracts, which are recorded on a pro rata basis as financial income and
expenses. Foreign exchange gains and losses arising from contracts hedging
financial risks are recorded as financial income or expenses.
3.3 BRANDS AND OTHER INTANGIBLE ASSETS
Brands are recognized as assets at their value calculated on the date of their
acquisition. They are not amortized, but impaired, if applicable, in accordance
with the methods described in Note 9. Costs incurred in developing brands are
expensed.
Other intangible assets are amortized over their probable useful lives, in
particular, sofware is amortized over a three to five-year period.
-7-
3.4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at historical cost, excluding subsequent
revaluations, and includes, as the case may be, the interest expense capitalized
during the period prior to the date when the asset is placed in service.
Depreciation is charged using the straight-line method over the estimated useful
lives of the assets:
- - Buildings 40 years
- - Machinery and equipment 3 to 5 years
- - Commercial corners 3 years
3.5 INVENTORIES AND WORK-IN-PROGRESS
Inventories are recorded at the lower of cost, excluding financial expenses or
net realizable value; cost of finished goods includes manufacturing costs (labor
costs and direct or indirect manufacturing overheads production cost); the raw
material and merchandise cost is composed of their purchase price from
suppliers, plus incidental expenses.
Inventories (including diamonds and precious stones) are valued according to the
average weighted cost method, whereas gold inventory is valued, using the
first-in, first-out method (FIFO).
Inventories provisions are provided to cover risks arising from slow-moving
items and discontinued products.
3.6 TRADE ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Receivables are recorded at their face value. An allowance for doubtful accounts
is recorded when it is probable that they will not be collected.
3.7 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and short-term deposits which
are immediately available, as well as debit balances of cash-pooling with LVMH
and its subsidiaries.
3.8 RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the year they are incurred.
3.9 INCOME TAXES AND DEFERRED TAXATION
Current income tax comprises income tax payable by legal entities included in
the Ebel Business as well as allocation of tax expenses of the distribution
entities.
Deferred taxes are recorded to reflect timing differences arising between the
amount of assets and liabilities reported in the combined financial statements
and the amount resulting from the application of tax regulations. These amounts
are recorded on the basis of the enacted tax rates known at year-end.
Future tax savings from tax losses carried forward are only recorded as deferred
tax assets when their recovery is deemed likely.
Taxes that would become payable in the event of distribution of the retained
earnings of by Ebel and its subsidiaries are provided for if such a distribution
is probable.
3.10 PROVISIONS AND CONTINGENT LIABILITIES
3.10.1 WARRANTY COSTS
Ebel offers, under certain conditions, a five-year warranty for its watches.
Provisions for warranty are made at the time revenues are recognized.
3.10.2 RETURNS
In general, there is no open sale return policy from customers; however, a
provision is recorded for estimated returns.
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3.10.3 EMPLOYEE BENEFITS
When payments are made by the Ebel Business in respect of employee benefits to
third party organizations managing the payment of such benefits, such payments
are expensed in the year in which they fall due, with no liability being
recorded in this respect on the balance sheet.
When employee benefits are paid directly by the combined entities, a provision
is recorded in the balance sheet for the amount of the corresponding actuarial
liability, and any changes in this commitment are recorded in expenses for the
period. When this commitment is either partially or wholly funded by payments
made by combined entities to external fund managers, the amount of the
corresponding plan assets is deducted from the actuarial liability booked on the
balance sheet.
The actuarial liability is calculated on the basis of evaluations specific to
each country and including, in particular, assumptions regarding the salary
increase, inflation, life expectancy, staff turnover and the return on plan
assets.
3.11 REVENUE RECOGNITION
3.11.1 NET SALES
Ebel revenue transactions include direct sales to independent retailers and
distribution agents. Sales are recognized when title transfers, except for
guaranteed sales and formal arrangements for rights of returns.
Guaranteed sales are recognized as revenues and margin is provided for. Sales
with right of returns are not recognized until the title transfer to
unaffiliated customers.
3.11.2 ACCOUNTING FOR SHIPPING & HANDLING COSTS
The Ebel Business classifies amounts reimbursed by customers for shipping and
handling costs as revenues. The costs incurred by the Ebel Business for
transportation and handling are included in selling expenses.
3.11.3 ACCOUNTING FOR ADVERTISING FEES & COOPERATIVE ADVERTISING
Communication & promotion expenses are recognized in the statement of income
when the commercial event (such as exhibitions, advertising campaign) has taken
place.
With the exception of discounts linked to specific promotional events, which are
recorded as communication expenses, sales discounts resulting from contractual
agreements with the trade are recognized as a deduction from net sales.
3.12 OTHER INCOME AND EXPENSES
Revenues and expenses not directly linked to ordinary operations are classified
as other income or expenses.
3.13 USE OF ESTIMATES
The preparation of financial statement in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions
based on available information at the date of preparation of the financial
statements. Actual results might differ from these assumptions and estimates
that affect the amounts reported in the financial statements and accompanying
notes.
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4. CASH & CASH EQUIVALENTS
- ----------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash-pooling (debit balances) 3,063 783 6,654
Ordinary bank accounts 1,984 3,460 7,334
--------------------------------
CASH & CASH EQUIVALENTS 5,047 4,243 13,988
- ----------------------------------------------------------------------------------------------------------
OF WHICH, CASH POOLING BALANCES WITH LVMH AND ITS SUBSIDIAIRIES 3,063 783 6,654
OF WHICH, RESTRICTED CASH -- -- --
- ----------------------------------------------------------------------------------------------------------
As of December 31, 2003, net cash and cash equivalents at year-end, as shown in
the statement of cash-flows, amount to EUR (44,508) thousand. The reconciliation
of this amount with the data set out above is as follows:
- --------------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Ordinary bank accounts 1,984 3,460 7,334
Bank overdrafts (4) (11) (278)
Cash pooling, debit & credit balances, net (46,488) (49,413) (16,607)
-----------------------------------------------
NET CASH & CASH EQUIVALENTS (44,508) (45,964) (9,551)
- --------------------------------------------------------------------------------------------------------------------------
5. TRADE ACCOUNTS RECEIVABLE - NET
- --------------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Gross value 21,781 26,773 34,559
Allowance for doubtful accounts (3,440) (3,604) (3,323)
------------------------------------------
TRADE ACCOUNTS RECEIVABLE - NET 18,341 23,169 31,236
- --------------------------------------------------------------------------------------------------------------------------
OF WHICH, ACCOUNTS RECEIVABLE / (PAYABLE) FROM LVMH AND ITS SUBSIDIAIRIES (187) 196 44
- --------------------------------------------------------------------------------------------------------------------------
Accounts receivable for a total amount of CHF 2,123 thousand (EUR 1,363
thousand, EUR 1,462 thousand and EUR 1,432 thousand at December 31, 2003, 2002
and 2001 respectively) were fully provided for prior to the acquisition by LVMH
and its subsidiaries.
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6. INVENTORIES & WORK-IN-PROGRESS - NET
- --------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Finished goods 22,739 20,184 26,415
Raw material and work-in-progress 50,257 57,572 57,946
GROSS VALUE 72,996 77,756 84,361
Provision (42,716) (40,130) (46,014)
----------------------------------------------------
INVENTORIES & WORK-IN PROGRESS - NET 30,280 37,626 38,347
- --------------------------------------------------------------------------------------------------------------------
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
- ---------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Foreign currency hedging operations 1,498 638 1,027
Tax: income tax 244 507 110
other taxes 777 841 1,374
Advances and downpayments -- 31 38
Advertising & Promotion prepaid expenses 535 1,167 1,194
Other prepaid expenses 1,065 1,011 787
Receivables from sales of fixed assets -- 114 433
Other receivables, net 578 269 914
-----------------------------------------------------
PREPAID EXPENSES & OTHER CURRENT ASSETS 4,697 4,578 5,877
- ---------------------------------------------------------------------------------------------------------------------
OF WHICH, PREPAID EXPENSES AND OTHER CURRENT ASSETS
FROM LVMH AND ITS SUBSIDIARIES 384 401 206
- ---------------------------------------------------------------------------------------------------------------------
-11-
================================== [EBEL LOGO OMITTED]
8. INVESTMENTS CARRIED AT COST
- -------------------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
Group Gross Depreciation Net book Net book Net book
interest value value value value
- -------------------------------------------------------------------------------------------------------------------------------
Ebel Italia, SRL Milano (1) 100% 145 (145) -- -- --
Societe immobiliere du Parc 153-155 SA (2) 42% 76 -- 76 81 79
Ebel The Architects of Time (1) 100% 52 (52) -- -- --
Messe Schweiz AG Basel <1% 2 -- 2 2 2
Infosuisse <1% 1 (1) -- -- --
INVESTMENTS CARRIED AT COST 276 (198) 78 83 81
- -------------------------------------------------------------------------------------------------------------------------------
(1) Company in liquidation
(2) Ebel has no significant influence on this company. In 2003, this company
paid dividends for a total amount of CHF 7 thousand (EUR 5 thousand). Its
net equity at december 31, 2002 was CHF 519 thousand and its profit for
the 2002 year amounted to CHF 3 thousand.
9. BRANDS AND OTHER INTANGIBLE ASSETS - NET
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
(EUR thousands) Gross Depreciation Net book Net book Net book
value Amortization value value value
- -----------------------------------------------------------------------------------------------------------------------------------
Ebel brand (1) 117,211 (117,211) -- 125,758 123,161
Software 505 (364) 141 262 214
Other intangible assets 110 (53) 57 -- 27
- -------------------------------------------------------------------------------------------------------------------------------
BRANDS & OTHER INTANGIBLE ASSETS - NET 117,826 (117,628) 198 126,020 123,402
- -------------------------------------------------------------------------------------------------------------------------------
(1) DENOMINATED IN CHF (CHF 182,605 THOUSAND)
-12-
================================== [EBEL LOGO OMITTED]
Changes over the financial year 2003 are analyzed as follows:
- -------------------------------------------------------------------------------
(EUR THOUSANDS) Gross Depreciation Net Book
Value Amortization Value
- -------------------------------------------------------------------------------
AS OF JANUARY 1, 2003 126,331 (311) 126,020
Acquisitions 85 -- 85
Brand depreciation expense (1) -- (120,078) (120,078)
Other depreciation expense -- (134) (134)
Effect of exchange rate fluctuations (8,590) 2,895 (5,695)
-------------------------------------
AS OF DECEMBER 31, 2003 117,826 (117,628) 198
- -------------------------------------------------------------------------------
(1) REFER TO NOTE 18 - OTHER INCOME & EXPENSES AND NOTE 24 - SUBSEQUENT EVENTS
Brands values are estimated and tested at year-end mainly by the CASH-FLOW
METHOD, i.e. on the basis of the future cash flows expected to be generated by
the brand. However, other methods are used which may lead to an adjustment of
the results obtained by using the cash flow method: the ROYALTY METHOD, which
gives the brand a value equivalent to the royalties that must be paid for the
right to use such a brand; and finally the MARKET COMPARABLES METHOD, using
revenue and earnings multiples used in transactions with similar brands, or
stock market multiples applicable to the watch & jewelry business.
In the cash-flow method, the pro forma data is based on budgets and plans drawn
up by the management of the companies exploiting these brands; the expected
future cash-flows based on these documents are discounted to present value, and,
where necessary, weighted according to the probability that each of the
scenarios applied will occur. The discount rate used includes the rate of return
expected by an investor in the watch & jewelry sector and the risk premium
inherent to this business.
-13-
================================== [EBEL LOGO OMITTED]
10. PROPERTY, PLANT & EQUIPMENT - NET
- ----------------------------------------------------------------------------------------------------------------------
2003 2002 2001
(EUR thousands) Gross Depreciation Net book Net book Net book
value value value value
- ----------------------------------------------------------------------------------------------------------------------
Office buildings 10,264 (5,369) 4,895 5,337 5,457
Industrial buildings 4,103 (2,284) 1,819 2,066 2,138
Machinery & equipment 3,455 (2,611) 844 1,012 956
Other tangible assets 8,534 (6,968) 1,566 2,608 1,330
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT - NET 26,356 (17,232) 9,124 11,023 9,881
- ----------------------------------------------------------------------------------------------------------------------
Changes over the financial year 2003 are analyzed as follows:
- -----------------------------------------------------------------------------------------------
(EUR thousands) Gross Depreciation Net Book
value value
- -----------------------------------------------------------------------------------------------
AS OF JANUARY 1, 2003 28,043 (17,020) 11,023
Acquisitions 411 -- 411
Disposals (87) 70 (17)
Depreciation expense -- (1,573) (1,573)
Effect of exchange rate fluctuations (2,011) 1,291 (720)
-----------------------------------------------
AS OF DECEMBER 31, 2003 26,356 (17,232) 9,124
- -----------------------------------------------------------------------------------------------
-14-
================================== [EBEL LOGO OMITTED]
11. SHORT-TERM BORROWINGS
The breakdown of other short-term borrowings by nature and currency (expressed
as a percentage) is as follows:
- ----------------------------------------------------------------------------------------------------- -------------------------
(EUR THOUSANDS) 2003 2002 2001 (AS A %) 2003
- ----------------------------------------------------------------------------------------------------- -------------------------
Cash pooling credit balances 49,551 50,196 23,261 Swiss Franc 85.7
Borrowings from LVMH and its subsidiaries 26,226 9,968 30,266 Euro 13.9
Bank overdrafts 4 11 278 Others 0.4
--------------------------------- ----------
SHORT-TERM BORROWINGS 75,781 60,175 53,805 100.0
- ----------------------------------------------------------------------------------------------------- -------------------------
OF WHICH, SHORT-TERM BORROWINGS FROM LVMH AND ITS SUBSIDIAIRIES 75,777 60,164 53,527
- -----------------------------------------------------------------------------------------------------
The weighted average interest rate of the cash pooling accounts is estimated
approximately at 0.6% for the year ended December 31, 2003 (1.6% and 3.3% for
the years ended December 31, 2002 and 2001 respectively). For the borrowings
from LVMH and its subsidiaries, it is estimated approximately at 0.7% for the
year ended December 31, 2003 (1.6% and 2.9% for the years ended December 31,
2002 and 2001 respectively).
12. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
(EUR THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency hedging operations 1,334 734 1,006
Personnel and payroll expenses 3,424 3,271 4,867
Taxes other than income tax 10 958 24
Accrued management fees 368 -- 579
Provisions for reorganization -- 4,384 14,230
Other loss and contingency provisions 799 656 650
Provisions for returns 1,214 2,998 134
Other 968 1,395 1,131
-----------------------------------------------
ACCRUED EXPENSES & OTHER CURRENT LIABILITIES 8,117 14,396 22,621
- ----------------------------------------------------------------------------------------------------------------------------
OF WHICH, OTHER CURRENT LIABILITIES DUE TO LVMH AND ITS SUBSIDIARIES 159 261 1,313
- ----------------------------------------------------------------------------------------------------------------------------
-15-
================================== [EBEL LOGO OMITTED]
During the 2003 fiscal period, the changes in the balances of the provision for
reorganization and the loss and contingency provisions and for returned goods
are as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Transfers Effect of
At From Foreign At
December Amounts Long-term Currency December
(EUR thousands) 31, 2002 Increases Used Provisions Fluctuations 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------
Provisions for reorganization 4,384 -- (4,132) -- (252) --
Provisions for returns 2,998 1,491 (3,075) -- (200) 1,214
Provisions for warranties 346 5 (44) 298 (71) 534
Other provisions 310 189 (205) -- (29) 265
-----------------------------------------------------------------------------------
Current provisions 8,038 1,685 (7,456) 298 (552) 2,013
- ----------------------------------------------------------------------------------------------------------------------------
of which : income from operations 75 (5,300)
financial expense (income) - net -- (3)
other income and expenses 1,610 (2,153)
- ----------------------------------------------------------------------------------------------------------------------------
13. LONG-TERM DEBT
- ---------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Bank loans 4,185 4,537 4,491
Borrowings from LVMH and its subsidiaries (1) -- 16,869 16,522
Long-term debt 4,185 21,406 21,013
- ---------------------------------------------------------------------------------------------------------------------
Of which, long-term financial debt due to LVMH and its subsidiaries -- 16,869 16,522
- ---------------------------------------------------------------------------------------------------------------------
Bank loans 45 48 47
- ---------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 45 48 47
- ---------------------------------------------------------------------------------------------------------------------
(1) The borrowings from LVMH and its subsidiaries were reclassified in 2003 as
a short-term borrowing for a total amount of CHF 24,500 thousand (refer to
Note 11).
The bank loans are secured by two mortages (first and second tiers) on a
building owned by the Company.
-16-
================================== [EBEL LOGO OMITTED]
14. OTHER LONG-TERM LIABILITIES
- ----------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Employee benefits 2,165 2,704 2,781
Provisions for warranties 1,788 2,432 2,726
Other provisions -- 258 --
------------------------------------------------
Other long-term liabilities 3,953 5,394 5,507
- ----------------------------------------------------------------------------------------------------
During the 2003 fiscal period, the changes in loss and contingency provisions
are as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Transfers Effect of
At to Foreign At
December Amounts Short-term Currency December
(EUR thousands) 31, 2002 Increases Used Provisions Fluctuations 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------
Provisions for warranties 2,432 50 (235) (298) (161) 1,788
Other provisions 258 -- (258) -- -- --
-------------------------------------------------------------------------------------
Non-current provisions 2,690 50 (493) (298) (161) 1,788
- ----------------------------------------------------------------------------------------------------------------------------
of which : income from operations 50 (235)
others -- (258)
- ----------------------------------------------------------------------------------------------------------------------------
Employee benefits are discussed in Note 23.
-17-
================================== [EBEL LOGO OMITTED]
15. COMBINED NET WORTH
15.1 Funds allocated by the owner
Funds allocated by LVMH represent the investment of the owner in Ebel SA and
Business and were as follows:
- ---------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Investments in Ebel SA 103,180 103,180 103,180
Investment in LVMH Watch & Jewelry Germany GmbH 6,027 2,027 2,027
Financing of Ebel activities (1) 21,848 7,083 6,125
-------------------------------------------------
Funds allocated by the owner 131,055 112,290 111,332
- ---------------------------------------------------------------------------------------------------------------
(1) This amount reflects all specific assets, liabilities, revenues and
expenses attributable to Ebel Business, as well as allocation of indirect
expenses of certain distribution subsidiaries of LVMH.
15.2 Cumulative translation adjustment
The breakdown by currency of the cumulative translation adjustments recorded in
stockholders' equity is as follows:
- ----------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Swiss Franc 3,103 6,570 3,300
US Dollar (3,270) (2,291) (3,316)
Japanese Yen (393) (235) (100)
Sterling Pound (135) (21) 42
Singapore Dollar (146) (74) (6)
Hong-Kong Dollar (103) (107) (6)
Other (122) (315) (102)
---------------------------------------------------
Cumulative translation adjustment (1,066) 3,527 (188)
- ----------------------------------------------------------------------------------------------------------------
-18-
================================== [EBEL LOGO OMITTED]
16. INFORMATION BY GEOGRAPHICAL AREAS
The information below is presented on the basis of the location of Ebel
invoicing entities:
- --------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Net sales
Switzerland 18,629 31,284 42,076
U.S.A. 16,493 24,034 29,555
Europe (excluding Switzerland) 14,998 20,362 23,501
Asia & Oceania 5,786 8,138 4,388
--------------------------------------------------
Net sales 55,906 83,818 99,520
- --------------------------------------------------------------------------------------------------------------
Income - (loss) from operations
Switzerland (9,296) (7,806) (5,066)
U.S.A. (3,207) (3,430) 587
Europe (excluding Switzerland) (2,228) (912) (55)
Asia & Oceania (1,258) (997) (223)
--------------------------------------------------
Income - (loss) from operations (15,989) (13,145) (4,757)
- --------------------------------------------------------------------------------------------------------------
Total assets
Switzerland 48,156 183,280 188,456
U.S.A. 7,543 9,304 17,262
Europe (excluding Switzerland) 9,590 11,717 13,883
Asia & Oceania 2,803 2,454 3,226
--------------------------------------------------
Assets 68,092 206,755 222,827
- --------------------------------------------------------------------------------------------------------------
Total liabilities
Switzerland 83,723 88,572 76,510
U.S.A. 2,354 10,135 29,800
Europe (excluding Switzerland) 12,238 14,167 10,663
Asia & Oceania 704 725 1,191
--------------------------------------------------
Liabilities 99,019 113,599 118,164
- --------------------------------------------------------------------------------------------------------------
-19-
================================== [EBEL LOGO OMITTED]
The table set forth below presents, for the periods indicated, the percentage of
net sales by invoicing currencies:
- -------------------------------------------------------------------------------------------------------------------
(Expressed as a percentage) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
CHF 34 37 42
EUR 19 18 19
GBP 7 6 4
USD 30 29 30
JPY 4 4 1
Other currencies 6 6 4
-------------------------------------------------
Net sales 100 100 100
- -------------------------------------------------------------------------------------------------------------------
17. FINANCIAL EXPENSE - NET
- ---------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Interest expense (1,300) (1,419) (5,094)
Interest income 168 134 384
Other financial expense, net (321) (177) (254)
Foreign currency exchange gains (losses) 16 (2) --
--------------------------------------------------
Financial expense, net (1,437) (1,464) (4,964)
- ---------------------------------------------------------------------------------------------------------------------
of which, interest paid during the period (1,300) (1,419) (5,094)
of which, net interest income - (expense) charged to (by)
LVMH and its subsidiaries (841) (1,025) (4,404)
- ---------------------------------------------------------------------------------------------------------------------
-20-
================================== [EBEL LOGO OMITTED]
18. OTHER INCOME AND EXPENSES - NET
- -------------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Brand depreciation expense (120,078) -- --
Gains - (losses) on disposals of fixed assets 13 440 1,337
Distribution channel closures (664) -- --
Restructuring costs, net of release of provisions (265) (1,389) --
Other (3) (52) (70)
-------------------------------------------------------
Other income & expenses, net (120,997) (1,001) 1,267
- -------------------------------------------------------------------------------------------------------------------------
of which, net other income - (expense) charged to (by)
LVMH and its subsidiaries (84) 88 (149)
- -------------------------------------------------------------------------------------------------------------------------
An exceptional depreciation of the Ebel brand was recorded at December 31, 2003
to reflect the provisions of the Agreement.
19. INCOME TAXES
19.1 Analysis of the income tax expense
- -------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Current income tax (143) (355) 768
Deferred income tax 306 (215) (293)
--------------------------------------------------
Income tax 163 (570) 475
- -------------------------------------------------------------------------------------------------------------------
19.2 Tax losses carried forward
As of December 31, 2003, the unused tax losses carried forward of Ebel and its
subsidiaries amounted to CHF 186,682 thousand.
-21-
================================== [EBEL LOGO OMITTED]
20. EXPOSURE TO FOREIGN EXCHANGE RISKS
20.1 Financial instruments
Ebel Business carries out a significant portion of their sales and occasionally
their purchases in foreign currencies. Hedging instruments are used to reduce
the risks arising from foreign currency fluctuations against the companies'
functional currencies. They are allocated to either accounts receivable or
payable for the period or, within certain limits to anticipated future
transactions. The budget process includes the estimation of the future flows of
currencies, which are progressively hedged by forward exchange or option
contracts.
Financial instruments are used to hedge risks in connection with Ebel activity.
The counterpart of the hedge contracts is the parent company, LVMH.
Based on the exchange rate as of December 31, 2003, the nominal amounts and fair
value of the outstanding hedging derivatives are as follows:
- ------------------------------------------------------------------------------------------------------------------
(EUR thousands) Nominal amounts of hedge contracts allocated to
Market
2003 2004 2005 & 2006 TOTAL value
- ------------------------------------------------------------------------------------------------------------------
Forward exchange contracts
USD -- 2,613 -- 2,613 333
JPY -- 415 -- 415 12
GBP 1,272 674 -- 1,946 14
EUR 300 -- 300 --
Others 92 95 -- 187 (1)
1,664 3,797 -- 5,461 358
Options
USD -- 1,584 -- 1,584 139
JPY -- 296 -- 296 19
-- 1,880 -- 1,880 158
Ranges
USD -- 2,423 435 2,858 271
JPY -- 296 -- 296 20
-- 2,719 435 3,154 291
- ------------------------------------------------------------------------------------------------------------------
-22-
================================== [EBEL LOGO OMITTED]
20.2 Translation of the accounts of foreign subsidiaries
The portion of the consolidated net loss for 2003 deriving from subsidiaries or
businesses which prepare their financial statement in Pounds Sterling, Japanese
yens, US dollars or currencies linked to the US dollar amounts to EUR (5,126)
thousand. A 10% change in exchange rates for these currencies would have an
impact of EUR 466 thousand on net income.
21. OFF-BALANCE SHEET ITEMS
- -------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Guarantees:
Swiss custom administration (CHF 170 thousand) 109 117 115
Others (CHF 28 thousand) 18 19 19
- -------------------------------------------------------------------------------------------------------------------
At year-end 2003, as part of the ordinary course of its business, Ebel Business
had entered the following non-cancelable commitments:
- - purchases of components & raw materials (EUR 3,631 thousand);
- - brand ambassadors' contracts (EUR 1,123 thousand);
- - retailers space rental and promotional arrangements (EUR 678 thousand);
- - office and factory building leases (EUR 140 thousand);
- - information technology hardware rental agreements (EUR 687 thousand);
- - other operating leases (EUR 153 thousand).
The bank loans (refer to note 13.) are secured by two mortages (first and second
tiers) on a building owned by the Company.
Ebel may be a party from time to time to legal proceedings involving trademarks
and intellectual property, selective distribution agreements, license
agreements, employee relations, tax audits and other matter incidental to
business. Ebel considers that the provisions included in the balance sheet,
related to litigation and contingent liabilities known or in-process at December
31, 2003, are sufficient to cover any unfavourable outcome, so that Ebel's
financial position would not be materially adversely affected.
22. RESEARCH AND DEVELOPMENT COSTS
Research and development costs amounted to EUR 1,117 thousand in 2003 (EUR 1,440
in 2002, EUR 801 in 2001) and were fully expensed.
-23-
================================== [EBEL LOGO OMITTED]
23. EMPLOYEE INFORMATION
23.1 Headcount
As of December 31, the headcount of Ebel was as follows:
- ------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
By geographical area
Switzerland 195 244 251
Europe (excluding Switzerland) 50 60 66
U.S.A. 37 55 62
Japan 8 10 10
Asia (excluding Japan) 11 6 --
---------------------------------------------------
Total 301 375 389
- ------------------------------------------------------------------------------------------------------------
By category
Labors and production 110 143 161
Offices and clerical 84 105 109
Technicians and supervisory staff 27 38 41
Executives and management 80 89 78
---------------------------------------------------
Total 301 375 389
- ------------------------------------------------------------------------------------------------------------
23.2 Payroll costs
Payroll costs totaled EUR 21,294 thousand (EUR 22,768 thousand in 2002; EUR
22,000 thousand in 2001).
23.3 Compensation of directors and officers
In 2003, compensation paid to members of the Board of Directors and to members
of the Executive Committee, representing a total of nine individuals, amounted
to EUR 7 thousand and EUR 1,184 thousand respectively.
-24-
23.4 Expenses and provisions regarding pensions, medical costs and
similar commitments
(i) Description
Ebel granted to Swiss employees length-of-service awards and retirement
indemnities; additionally, Ebel is marginally engaged in defined benefit plans
in countries such as Japan and Germany, and mandatory schemes such as
end-of-career indemnities in France and in Taiwan. All other plans (granted in
the United States of America, Switzerland) are defined contribution plans.
The tables set forth below summarize information related to those employee
benefits.
(ii) Net expense for the year
- -----------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Service cost 279 357 33
Interest cost 84 92 42
Expected return on plan assets (33) (48) (170)
Amortization of actuarial gains & losses (478) (218) --
--------------------------------------------------
Net periodic pension cost (148) 183 (95)
- -----------------------------------------------------------------------------------------------------------------------
(iii) Breakdown of the provision recorded in the balance sheet
- -----------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 2,904 3,410 3,439
Fair value of plan assets (739) (706) (658)
Unrecognized actuarial gains & losses -- -- --
--------------------------------------------------
Provision recorded in the balance sheet 2,165 2,704 2,781
- -----------------------------------------------------------------------------------------------------------------------
Refer to Note 14: Other long-term liabilities
-25-
================================== [EBEL LOGO OMITTED]
(iv) Analysis of changes in commitments
- ------------------------------------------------------------------------------------------------------------------------------
Projected Fair value Provision
benefit of Actuarial in the
(EUR thousands) obligation plan assets gains & losses balance sheet
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2003 3,410 (706) -- 2,704
Net periodic pension cost 363 (33) (478) (148)
Payments made to beneficiaries (222) -- -- (222)
Contribution to plan assets -- -- -- 0
Foreign currency translation effect (169) -- -- (169)
Others (of which, actuarial gains & losses) (478) -- 478 0
--------------------------------------------------------------------------
Balance as of December 31, 2003 2,904 (739) 0 2,165
- ------------------------------------------------------------------------------------------------------------------------------
The actuarial assumptions used to estimate the commitments in the main countries
where such commitments have been undertaken, are as follows:
- -----------------------------------------------------------
Switzerland
- -----------------------------------------------------------
Discount rate 3.50%
Expected return on plan assets N/A
Rate of compensation increase N/A
- -----------------------------------------------------------
24. SUBSEQUENT EVENTS
The transfer of Ebel Business to Movado became effective on March 1, 2004. The
exceptional depreciation of the Ebel brand recorded at December 31, 2003
reflects the provisions of the Agreement.
-26-
================================== [EBEL LOGO OMITTED]
25. RELATED PARTIES
Exclusive agreements have been entered into by Ebel SA with LVMH subsidiaries
in the United States of America, United Kingdom, Spain, France, Germany, Japan,
Hong-Kong, Malaysia, Singapore, Taiwan and Australia for the distribution of the
Ebel products in those territories. A representation agreement is also in place
between Ebel SA and LVMH to represent the Ebel Brand in the Caribbean and South
American countries.
Ebel SA coordinated the after-sales service technical support for Dior watches.
Ebel SA and its French subsidiary, Swisswave Europe, also provided after-sales
repair services for Dior & Zenith watches in France. Warranty repairs were
recharged to Dior & Zenith.
Ebel SA provided Private Label Development, a Swiss based LVMH subsidiary with
accounting, payroll, information technology and general services. In the course
of 2003, the central resources providing such services were transferred to
Private Label Development which extended such technical support to Ebel SA.
As a parent company, LVMH manages and coordinates the operational activities of
Ebel Business, and provides this business with assistance in regard to various
management services, particularly in the legal, financial, tax or insurance
areas. LVMH also organizes a cash-pooling arrangement and centralizes the
financing requirements of the Ebel Business. It also centralizes the foreign
currency hedges entered into by the Ebel Business.
The amounts charged to/by the Ebel business were as follows:
- ------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
Net sales 500 1,411 196
Cost of sales (90) (61) 408
Marketing and selling expenses (421) (152) (58)
General and administrative expenses (1,285) (2,066) (1,542)
Financial expense - net (841) (1,025) (4,404)
Other income or expenses - net (84) 88 (149)
- ------------------------------------------------------------------------------
-27-
================================== [EBEL LOGO OMITTED]
As of December 31, the outstanding balances owed to/from the related parties
were as follows:
- ---------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents 3,063 783 6,654
Trade accounts receivable (187) 196 44
Prepaid expenses and other current assets 384 401 206
Liabilities
Short-term borrowings 75,777 60,164 53,527
Accounts payable 323 228 115
Accrued expenses and other current liabilities 165 261 1,313
Long-term debt, less current portion -- 16,869 16,522
Funds allocated by the owner
Funds allocated by the owner 131,055 112,290 111,332
Related cumulative translation adjustment (2,326) (531) (47)
- ---------------------------------------------------------------------------------------------------------
LVMH provided to Credit Suisse a comfort letter covering the overdraft lines
contracted by Ebel for a maximum potential amount of CHF 10 million. The letter
has no expiration date. In case of payment default, LVMH would have to perform
under the guarantee given up to the amount due by its subsidiary Ebel.
-28-
================================== [EBEL LOGO OMITTED]
26. SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES ADOPTED BY EBEL AND
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES
26.1 Differences between French GAAP and US GAAP
The accompanying combined financial statements for 2003, 2002 and 2001 are
prepared in accordance with accounting principles, which differ in certain
respects from those generally accepted in the United States (US GAAP). The
differences are described below:
a) Brands
Under French GAAP, the Ebel brand is not amortized but is subject to impairment
tests, on an annual basis at least or whenever indicators defined by Ebel would
show that the recoverable value may not exceed the carrying value of the brand
(refer to note 9 - Brand & intangible assets).
Under US GAAP, on January 1, 2002, Ebel adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, the Ebel brand was classified as an
indefinite-lived intangible asset and would no longer be amortized; rather, it
would be reviewed for impairment on an annual basis and whenever events indicate
that their carrying value may not be recoverable. Should the fair value of the
indefinite-lived intangible assets be less than its carrying value, an
impairment loss would be recognized in an amount equal to the difference.
Intangible assets that are not deemed to have an indefinite life would be
amortized over their estimated useful lives.
Under US GAAP, the Ebel brand value was adjusted to reflect the differences
between French and US GAAP in the purchase price allocation at the date of
acquisition (refer to note 26.1.b and 26.1.c). Reallocation of negative goodwill
to long-lived assets resulted in a reduction of EUR 8,931 thousand in the brand
value under US GAAP and had no significant effect on other long-lived assets.
Subsequent amortization expense and write-down were adjusted accordingly.
b) Deferred taxes on brands
Under French GAAP, deferred tax liabilities on acquired brands are not
recognized.
Under US GAAP, in conformity with SFAS No. 109, deferred tax liabilities on
acquired brands would be recorded; however, at the date of acquisition, such
liabilities would have been recorded against additional goodwill or brand. Prior
to the application of SFAS No. 142, the amortization of such additional goodwill
or brand and the reversal of the deferred tax liability would have offset each
other.
-29-
================================== [EBEL LOGO OMITTED]
c) Reorganizing costs
Under French GAAP, Ebel recorded liabilities for the estimated cost of
reorganization of distribution channels & product lines as part of the purchase
accounting.
Under US GAAP, such reorganization costs were not eligible to purchase
accounting and were recorded as incurred.
d) Hedging of foreign exchange risks
Under French GAAP, the Group revalues its foreign exchange derivative contracts
using the year-end exchange rates. Unrealized gains and losses may be deferred
if the instruments have been designated as hedge instruments by Management.
Under US GAAP, and following the adoption of SFAS 133, all derivatives whether
designated as a hedging relationship or not, are required to be recorded in the
balance sheet at fair value. Under SFAS 133, changes in the fair value of
derivatives are recognized in earnings except for the effective portion of the
change in fair value of derivatives that are designated and documented as
cash-flow hedges at inception.
Ebel does not comply with all the formal requirements regarding documentation as
per the SFAS 133 to meet the definition of hedging. As a result, effective
January 1, 2001, all derivative instruments held by Ebel would be recorded at
their fair value. Changes in fair value of all derivative instruments would be
recognized in earnings.
The adoption of SFAS 133 effective January 1, 2001 had a non-significant effect.
e) Tax losses carried forward and deferred taxes
Deferred taxes are included on the above adjustments to conform to US GAAP.
Ebel's policy for accounting for income taxes is substantially in accordance
with SFAS 109 `Accounting for income taxes'. However, under French GAAP,
deferred tax assets arising from tax losses are not recognized when their
recovery is deemed not probable.
Under US GAAP, deferred income tax assets on tax losses carried forward would
have been recorded, but would have been completely offset by recorded valuation
allowances.
f) Comprehensive income
Comprehensive income is not a concept addressed by French GAAP. Under US GAAP,
in accordance with SFAS No. 130 Reporting Comprehensive Income, comprehensive
income would include all non-owner changes in stockholders' equity.
Under US GAAP, comprehensive income would include, in addition to net income:
- - movements in cumulative translation adjustment;
- - unrealized gains or losses, net of tax effect on available-for-sale
securities, until realized (except for the net effects of
other-than-temporary declines in fair value below the cost basis, which
would be charged to the statement of income);
-30-
================================== [EBEL LOGO OMITTED]
- - movements in fair value of the derivative instruments designated as
cash-flow hedges;
- - equity adjustments for additional minimum pension liability not charged to
the statement of income yet.
26.2 Conversion to US GAAP
The effects of differences between accounting principles adopted by Ebel and
those generally accepted in the United States are presented on a gross basis
with a separate adjustment for taxes as follows:
26.2.1 Adjustments to net income / (loss)
- ----------------------------------------------------------------------------------------------------------------------------------
(EUR thousands) NOTES 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net income / (loss), as reported for French GAAP (138,255) (16,180) (7,979)
US GAAP adjustments
Brand amortization 26.1.a 16,017 -- (2,610)
Reorganizing costs 26.1.c (4,187) (10,045) (17,597)
Derivatives 26.1.d 190 (94) 507
Others (133) (356) (359)
Deferred taxes 19,742 25 406
--------------------------------------------------
Net income / (loss), as adjusted for US GAAP (106,626) (26,650) (27,632)
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income
Foreign currency translation (3,109) 3,067 (847)
--------------------------------------------------
Comprehensive income / (loss) (109,735) (23,583) (28,479)
- ----------------------------------------------------------------------------------------------------------------------------------
26.2.2 Adjustments to Income / (loss) from operations
- ----------------------------------------------------------------------------------------------------------------------------------
(EUR thousands) NOTES 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Income / (loss) from operations, as reported for French GAAP (15,989) (13,145) (4,757)
US GAAP adjustments
Reclassification from other income or expenses 18 (120,333) (1,001) 1,267
Brand depreciation 26.1.a 16,017 -- (2,610)
Reorganizing costs 26.1.c (4,187) (10,045) (31,569)
Others (133) (356) (359)
--------------------------------------------------
Income / (loss) from operations, as adjusted for US GAAP (124,625) (24,547) (38,028)
- ----------------------------------------------------------------------------------------------------------------------------------
-31-
================================== [EBEL LOGO OMITTED]
26.2.3 Adjustments to combined net worth
- -----------------------------------------------------------------------------------------------------------------------------------
Other
YEAR ENDED DECEMBER 31, 2003 Funds allocated Net Retained comprehensive Combined
(EUR thousands) NOTES by the owner income/(loss) earnings income net worth
- -----------------------------------------------------------------------------------------------------------------------------------
As reported for French GAAP 131,055 (138,255) (22,661) (1,066) (30,927)
US GAAP adjustments
Brand amortization 26.1.a -- 16,017 (5,426) (303) 10,288
Brand gross value 26.1.c -- -- (10,053) (236) (10,289)
Reorganizing costs 26.1.c -- (4,187) 2,062 2,125 --
Derivatives 26.1.d -- 190 413 -- 603
Others -- (133) (1,681) -- (1,814)
Deferred taxes -- 19,742 (18,706) (1,151) (115)
-------------------------------------------------------------------------------
As adjusted for US GAAP 131,055 (106,626) (56,052) (631) (32,254)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Other
YEAR ENDED DECEMBER 31, 2002 Funds allocated Net Retained comprehensive Combined
(EUR thousands) NOTES by the owner income/(loss) earnings income net worth
- -----------------------------------------------------------------------------------------------------------------------------------
As reported for French GAAP 112,290 (16,180) (6,481) 3,527 93,156
US GAAP adjustments
Brand amortization 26.1.a -- -- (5,426) (306) (5,732)
Brand gross value 26.1.c -- -- (10,053) (984) (11,037)
Reorganizing costs 26.1.c -- (10,045) 12,107 2,322 4,384
Derivatives 26.1.d -- (94) 507 -- 413
Others -- (356) (1,345) -- (1,701)
Deferred taxes -- 25 (18,724) (2,081) (20,780)
-------------------------------------------------------------------------------
As adjusted for US GAAP 112,290 (26,650) (29,415) 2,478 58,703
- -----------------------------------------------------------------------------------------------------------------------------------
-32-
================================== [EBEL LOGO OMITTED]
- -----------------------------------------------------------------------------------------------------------------------------------
Other
YEAR ENDED DECEMBER 31, 2001 Funds allocated Net Retained comprehensive Combined
(EUR thousands) NOTES by the owner income/(loss) earnings income net worth
- -----------------------------------------------------------------------------------------------------------------------------------
As reported for French GAAP 111,332 (7,979) 1,498 (188) 104,663
US GAAP adjustments
Brand depreciation 26.1.a -- (2,610) (2,816) (113) (5,539)
Brand gross value 26.1.c -- -- (10,053) (757) (10,810)
Reorganizing costs 26.1.c -- (17,597) 29,704 2,123 14,230
Derivatives 26.1.d -- 507 -- -- 507
Others -- (359) (1,006) -- (1,365)
Deferred taxes -- 406 (19,122) (1,654) (20,370)
-------------------------------------------------------------------------------
As adjusted for US GAAP 111,332 (27,632) (1,795) (589) 81,316
- -----------------------------------------------------------------------------------------------------------------------------------
-33-
================================== [EBEL LOGO OMITTED]
26.2.4 Adjustments to the cash-flow statement
Under French GAAP, cash equivalents as presented in the statement of cash-flows
are net of bank overdrafts and credit balances of cash pooling with LVMH and its
subsidiaries, and include certain available-for-sale securities and unrestricted
time deposits over 3 months. Adjustments required to conform to the US GAAP are
presented below:
- ----------------------------------------------------------------------------------------------------------------------
(EUR thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows - operating acitivites - French & US GAAP (20,125) (17,680) (34,473)
Net cash flows - investing activities - French GAAP & US GAAP (357) (1,960) 1,103
Net cash flows - financing activities - French GAAP 18,719 (17,763) 18,321
Bank overdrafts (6) (270) (847)
Cash pooling accounts due to LVMH and its subsidiairies 2,972 26,842 22,840
Net cash flows - financing activities - US GAAP 21,685 8,809 40,314
Effect of exchange rate changes - French GAAP 3,219 990 136
Bank overdrafts (1) 3 14
Cash pooling accounts due to LVMH and its subsidiairies (3,617) 93 421
Effect of exchange rate changes - US GAAP (399) 1,086 571
Cash & cash equivalents at beginning of the year - French GAAP (45,964) (9,551) 5,362
Bank overdrafts 11 278 1,111
Cash pooling accounts due to LVMH and its subsidiairies 50,196 23,261 -
Cash & cash equivalents at beginning of the year - US GAAP 4,243 13,988 6,473
Cash & cash equivalents at year end - French GAAP (44,508) (45,964) (9,551)
Bank overdrafts 4 11 278
Cash pooling accounts due to LVMH and its subsidiairies 49,551 50,196 23,261
Cash & cash equivalents at year-end - US GAAP 5,047 4,243 13,988
- ----------------------------------------------------------------------------------------------------------------------
-34-
================================== [EBEL LOGO OMITTED]
26.3 Additional information with respect to US GAAP - New accounting standards
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). This Statement, which is effective
for exit or disposal activities initiated after December 31, 2002, addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 requires companies to record a liability for costs
associated with an exit or disposal activity in the period in which the
liability is incurred. This differs from current practice, which requires the
liability to be recognized at the date of commitment. The adoption of SFAS 146
did not have a material impact on the combined financial statements of Ebel
business.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" (FIN 45). FIN 45 sets forth the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The disclosure provisions of FIN 45 are
effective for financial statements of annual periods that end after December 15,
2002. The initial recognition and measurement provisions of FIN 45 are
applicable to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the combined financial
statements of Ebel business.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" (EITF 00-21). This pronouncement
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. Ebel business does not believe this EITF
will have significant impact on its combined financial statements.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51 ("FIN 46"). The primary objectives of FIN 46 were to provide guidance on
the identification of entities for which control is achieved through means other
than through voting rights and how to determine when and which business
enterprise should consolidate the variable interest entity ("VIE").
In December 2003, the FASB published a revision to FIN 46 ("FIN 46R"), resulting
in multiple effective dates based on the nature as well as the creation date of
the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may
be accounted for either based on FIN 46 or FIN 46R. However, FIN 46R must be
applied no later than the end of the first reporting period that ends after
March 15, 2004. VIEs created after January 1, 2004 must be accounted for under
FIN 46R. Special Purpose Entities ("SPEs") created prior to February 1, 2003 may
be accounted for under FIN 46 or FIN 46 Revised's provisions no later than the
fourth quarter of fiscal 2003. Non-SPEs created prior to February 1, 2003,
should be accounted for under FIN 46 Revised's provisions no later than the end
of the first reporting period that ends after March 15, 2004.
FIN 46R requires consolidation of VIEs by business enterprises considered to be
the primary beneficiary of the VIE. The primary beneficiary of a VIE is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are ownership, contractual, or other pecuniary
interests in an entity. The primary beneficiary is required to consolidate the
assets, liabilities, and results of the activities of the VIE. FIN 46R requires
additional disclosures relating to transactions involving VIEs to be made by
primary beneficiaries and enterprises holding significant variable interests in
VIEs.
The Ebel business has not identified any variable interests in VIEs that would
require consolidation under FIN 46R and believes the application of FIN 46R will
not have any effect on its combined financial statements.
-35-
EXHIBIT 99.3
------------
Pro forma financial information.
The following sets forth pro forma combined financial information derived from
(i) the audited consolidated financial statements of Movado Group, Inc. (the
"Company" or "Movado") for the fiscal year ended January 31, 2004 and (ii) the
audited combined financial statements of the Ebel Business ("Ebel") for the
fiscal year ended December 31, 2003, which have been included in this Current
Report on Form 8-K/A. The unaudited pro forma combined balance sheet as of
January 31, 2004 combines the consolidated balance sheet of Movado and the
combined balance sheet of Ebel, and has been adjusted to give pro forma effect
to the acquisition of Ebel as if it had occurred on January 31, 2004. The
unaudited combined pro forma statement of operations for the year ended January
31, 2004 combines the consolidated statement of operations of Movado and the
combined statement of operations of Ebel and has been adjusted to give pro forma
effect to the acquisition of Ebel as if it had occurred on February 1, 2003.
Ebel's combined financial statements, from which this pro forma combined
financial information is derived, were prepared in accordance with accounting
principles generally accepted in France ("French GAAP"), which differ in certain
material respects from accounting principles generally accepted in the United
States of America ("U.S. GAAP"). The adjustments have been made within the pro
forma financial information to conform the Ebel financial statements to U.S.
GAAP. Significant differences between French GAAP and U.S. GAAP, as they relate
to Ebel, include, among other things:
o Under French GAAP and, effective January 1, 2002, under U.S. GAAP, the Ebel
brand is to be carried at cost without being amortized. An impairment test
is required to be performed on an annual basis and upon certain triggering
events, with any impairment being immediately recognized as an expense.
Prior to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, on January 1, 2002,
the Ebel brand would have been subject to amortization under U.S. GAAP.
o French GAAP does not allow for the recognition of deferred tax liabilities
on acquired brands, while U.S. GAAP requires the recognition of deferred
tax liabilities on acquired brands.
o French GAAP allows for recording the projected cost of restructuring plans,
including termination benefits, when the appropriate level of management
approved such plans on a general level. U.S. GAAP only allows for the
recording of these types of restructuring costs when certain specified
conditions are satisfied, including the specific identification of
activities and notifications to affected employees.
o French GAAP requires the revaluation of foreign exchange derivative
contracts using the year-end exchange rates with unrealized gains and
losses being deferred if the instruments are designated as hedge
instruments. U.S. GAAP requires foreign exchange derivative contracts to be
recorded at fair value and unrealized gains and losses can only be deferred
if certain formal documentation requirements are met as defined by SFAS
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended.
o Under French GAAP, deferred tax assets arising from tax losses are not
recognized when their recovery is not deemed probable. Under U.S. GAAP,
deferred tax assets arising from tax losses would have been recorded, but
if their recovery were not deemed probable would have been completely
offset by recorded valuation allowances.
o French GAAP requires the recognition of a reserve for estimated sales
returns. Under U.S. GAAP, in accordance with SFAS No. 48, REVENUE
RECOGNITION WHEN RIGHT OF RETURN EXISTS, sales and cost of sales reported
in the income statement would be reduced to reflect estimated future
returns.
The Ebel combined financial statements were prepared in Euros and have been
translated to U.S. dollars at the appropriate exchange rates. Material
non-recurring acquisition and integration expenses and related tax effects
directly resulting from and which will be incurred in the twelve months
following the transaction have been excluded from the unaudited pro forma
combined statement of operations. Certain reclassifications were made to the
Ebel combined financial statements to conform them to Movado's presentation.
The acquisition of Ebel will be accounted for under the purchase method of
accounting. Under this method, the purchase price will be allocated to the
assets acquired and liabilities assumed based on their estimated fair values.
For purposes of this pro forma information, the total purchase price was
estimated to be $44.5 million and preliminary estimates were made regarding the
fair value of acquired assets and liabilities. The actual fair values may vary
from the preliminary estimates.
The following pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of (i) results of operations
that would have been achieved had the acquisition taken place on February 1,
2003, (ii) the financial position of Movado had the acquisition taken place on
January 31, 2004 or (iii) the future operations of Movado.
The following pro forma financial information should be read in conjunction
with:
o The accompanying Notes to Unaudited Pro Forma Combined Financial
Statements;
o Movado's audited consolidated financial statements, related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended January 31, 2004, contained in Movado's
Annual Report on Form 10-K; and
o The audited combined financial statements as of December 31, 2003, 2002 and
2001 and for each of the three years in the period ended December 31, 2003
of Ebel, including the notes thereto, included in this Current Report on
Form 8-K/A.
2
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 2004
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Movado and Ebel
-----------------------------------
Pro Forma
Movado Ebel (a)(b) Adjustments Combined (i)
--------- ----------- ----------- ------------
Net sales $ 330,214 $ 59,288 $ -- $ 389,502
Costs and expenses:
Cost of sales 129,908 40,108 (478)(c) 169,538
Selling, general and administrative 165,525 43,156 (122)(c)
101 (d) 208,660
Brand impairment -- 117,530 (117,530)(e) --
--------- --------- ---------- ---------
295,433 200,794 (118,029) 378,198
--------- --------- ---------- ---------
Operating income 34,781 (141,506) 118,029 11,304
Interest expense, net 3,044 1,623 (1,294)(f) 3,373
Other expense (income), net -- (220) -- (220)
--------- --------- ---------- ---------
3,044 1,403 (1,294) 3,153
Income (loss) before taxes 31,737 (142,909) 119,323 8,151
Provision (benefit) for income taxes 8,886 (22,481) 22,297 (e)
341 (g) 9,043 (h)
--------- --------- ---------- ---------
Net income (loss) $ 22,851 $ (120,428) $ 96,685 $ (892)
========= ========= ========== =========
Earnings per share
Basic $ 1.90 $(0.07)
Diluted $ 1.84 $(0.07)
Weighted average shares outstanding
Basic 12,050 12,050
Diluted 12,439 12,439
See Notes to the Unaudited Pro Forma Combined Statement of Operations
3
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
Ebel amounts have been translated into U.S. dollars at a rate of EUR 0.885 =
US$1.00, the average daily exchange rate for the year ended December 31, 2003.
(a) For purposes of the Unaudited Pro Forma Combined Statement of
Operations, the twelve months ended December 31, 2003 for Ebel have been
combined with the twelve months ended January 31, 2004 for Movado to represent
the Unaudited Pro Forma Combined Statement of Operations for the year ended
January 31, 2004.
(b) Ebel's combined statement of operations was prepared in accordance with
French GAAP, which differs in certain material respects from U.S. GAAP. Ebel
also classified certain costs differently than Movado in its consolidated
statement of operations. The following schedule summarizes the material
adjustments to conform the Ebel combined statement of operations for the year
ended December 31, 2003 to U.S. GAAP and to reclassify certain costs to Movado's
basis of presentation.
Ebel
Ebel U.S. GAAP and
As Reported Reclassification Ebel Ebel
In thousAnds (Condensed) Adjustments Adjusted Adjusted
----------- ----------- ----------- -----------
(EUR) (EUR) (EUR) (US$)
Net sales 55,906 (3,412) (i) 52,494 $ 59,288
Costs and expenses:
Cost of sales 35,194 318 (ii) 35,512 40,108
Selling, general and administrative 36,701 1,509 (iii) 38,210 43,156
Brand impairment -- 104,061 (iv) 104,061 117,530
----------- ----------- ----------- -----------
71,895 105,888 177,783 200,794
----------- ----------- ----------- -----------
Operating loss (15,989) (109,300) (125,289) (141,506)
Interest expense, net 1,437 -- 1,437 1,623
Other expense (income), net 120,992 (121,187) (v) (195) (220)
----------- ----------- ----------- -----------
122,429 (121,187) 1,242 1,403
Income (loss) before taxes (138,418) 11,887 (126,531) (142,909)
Provision (benefit) for income taxes (163) (19,742) (vi) (19,905) (22,481)
----------- ----------- ----------- -----------
Net income (loss) (138,255) 31,629 (106,626) $ (120,428)
=========== =========== =========== ===========
4
(EUR 000's)
(i) Reclassification of cooperative advertising to (3,244)
conform with U.S. GAAP requirements
U.S. GAAP adjustment to adjust sales to reflect a (168)
reserve for estimated expected future sales returns
---------
(3,412)
=========
(ii) Reclassification of shipping and handling costs to 353
conform with U.S. GAAP requirements
U.S. GAAP adjustment to adjust cost of sales to (35)
reflect the reserve for estimated expected future
sales returns ---------
318
=========
(iii) U.S. GAAP adjustment to reflect reorganization 4,187
costs that were not eligible for purchase
accounting
Reclassification of cooperative advertising (3,244)
to conform with U.S. GAAP requirements
Reclassification of shipping and handling costs to (353)
conform with U.S. GAAP requirements
Reclassification of certain income or expense to 919
conform with U.S. GAAP requirements ---------
1,509
=========
(iv) Reclassification of brand impairment to conform 120,078
with U.S. GAAP requirements
U.S. GAAP adjustment to reflect lower carrying (16,017)
value of the brand asset resulting from
amortization under U.S. GAAP prior to January 1,
2004 and the non-recognition of certain
restructuring reserves in purchase accounting under
U.S. GAAP ---------
104,061
=========
(v) Reclassification of brand impairment to conform (120,078)
with U.S. GAAP requirements
U.S. GAAP adjustment to reflect the fair value of (190)
all derivative instruments as Ebel does not comply
with all requirements regarding documentation under
SFAS 133
Reclassification of certain income or expense to (919)
conform with U.S. GAAP requirements ---------
(121,187)
=========
(vi) U.S. GAAP adjustment to reflect the deferred tax (19,742)
benefit resulting from the brand impairment charge
(c) Reflects an estimated decrease in depreciation expense resulting from
the step-down of property, plant and equipment to their respective fair values,
as required by SFAS No. 141.
(d) Reflects the amortization of identifiable intangible assets over their
estimated average useful life of approximately five years.
(e) Reflects the elimination of the brand impairment charge and its
deferred tax benefit to reflect Movado's basis in intangible assets.
(f) Reflects the adjustment to reduce interest expense related to debt not
assumed by Movado.
(g) Reflects the estimated income tax effect of Movado's pro forma
adjustments, excluding the brand impairment charge (see footnote (e) above),
using an estimated statutory tax rate of 19%.
(h) On a pro forma basis, Movado's effective tax rate is in excess of
100%. This rate reflects the non-recognition of the deferred tax benefit of
Ebel's losses due to an establishment of a full valuation allowance, as their
recovery was not deemed probable. The pro forma effective tax rate represents
Movado's best estimate using the information available, and is subject to
change.
(i) The objective of the pro forma information provided herein is to
provide information about the continuing impact of the acquisition by showing
how it might have affected historical operating results if the acquisition had
5
been consummated at the beginning of the most recent full fiscal year. As such,
charges directly resulting from the transaction are necessarily excluded from
the unaudited pro forma combined statement of operations. Movado expects to
incur non-recurring charges directly resulting from the transaction within the
twelve months following the transaction, estimated as follows:
In thousands (US$)
---------
Reversal of inventory step-up $ 195 (i)
Integration costs 750 (ii)
Transition service costs 1,100 (iii)
Additional redundancy costs 1,100 (iv)
---------
Total impact on operating income $ 3,145
=========
(i) The estimated step-up of inventories to their respective fair
values, as required by SFAS No. 141, results in an increase in
cost of products sold as the inventory is sold to third party
customers, which is expected to occur within the twelve month
period following the transaction. Movado continues to refine
its estimate of replacement costs for acquired raw materials.
Accordingly, the fair value adjustment to inventory and the
resulting non-recurring impact to operating income may change.
(ii) Represents estimated incremental costs incurred in connection
with integration activities. These costs include the migration
of information systems, legal and accounting support and
internal travel costs incurred in the due diligence and
integration process.
(iii) Represents estimated contractual transition service fees for
certain administrative functions, such as accounting and
information technology support. Movado expects that these
administrative functions will be absorbed into its existing
organization without substantial additional cost.
(iv) In addition to severance, in certain instances, Movado is
legally required to provide employees with a notice period
before they are severed. This amount represents the estimated
nonrecurring personnel cost for certain employees between the
acquisition date and their actual termination date. Such costs
are not included in the estimated restructuring liability
included within purchase accounting.
6
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 31, 2004
(DOLLARS IN THOUSANDS)
Movado and Ebel
---------------------------------
Pro Forma
Movado Ebel (a)(b) Adjustments Combined
----------- ----------- ----------- ----------
ASSETS
Current assets:
Cash $ 82,083 $ 1,905 $ (44,478) (c) $ 39,510
Trade receivables, net 88,800 21,937 -- 110,737
Inventories, net 121,678 38,234 195 (c) 160,107
Other 27,932 4,693 -- 32,625
----------- ---------- ---------- ----------
Total current assets 320,493 66,769 (44,283) 342,979
Property, plant and equipment, net 42,112 11,348 (6,801) (c) 46,659
Other assets 28,362 241 5,681 (c) 34,284
----------- ---------- ---------- ----------
Total assets $ 390,967 $ 78,358 $ (45,403) $ 423,922
=========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,000 $ 56 $ 5,253 (d) $ 15,309
Accounts payable 23,631 7,349 -- 30,980
Accrued payroll and benefits 8,033 1,907 -- 9,940
Accrued liabilities 17,748 8,521 4,797 (c) 31,066
Current taxes payable 12,150 87 -- 12,237
Deferred income taxes 5,961 146 -- 6,107
----------- ---------- ---------- ----------
Total current liabilities 77,523 18,066 10,050 105,639
Long-term debt 25,000 5,253 (5,253) (d) 25,000
Deferred and noncurrent income taxes 2,282 -- -- 2,282
Other liabilities 11,449 4,839 -- 16,288
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 109 -- -- 109
Class A common stock 34 -- -- 34
Capital in excess of par value 89,491 -- -- 89,491
Retained earnings 192,601 51,538 (51,538) (e) 192,601
Accumulated other comprehensive income (loss) 34,473 (1,338) 1,338 (e) 34,473
Treasury stock, at cost (41,995) -- -- (41,995)
----------- ---------- ---------- ----------
Total shareholders' equity 274,713 50,200 (50,200) 274,713
----------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 390,967 $ 78,358 $ (45,403) $ 423,922
=========== ========== ========== ==========
See Notes to the Unaudited Pro Forma Combined Balance Sheet
7
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 31, 2004
Ebel amounts have been translated into U.S. dollars at the December 31, 2003
exchange rate of EUR 0.797 = US$1.00.
(a) For purposes of the Unaudited Pro Forma Combined Balance Sheet, the
balance sheet as of December 31, 2003 for Ebel has been combined with the
balance sheet as of January 31, 2004 for Movado to represent the Unaudited Pro
Forma Combined Balance Sheet as of January 31, 2004.
(b) Ebel's combined balance sheet was prepared in accordance with French
GAAP, which differs in certain material respects from U.S. GAAP. Ebel also
classified certain amounts differently than Movado in its combined balance
sheet. The following schedule summarizes the material adjustments to conform the
Ebel combined balance sheet as of December 31, 2003 to U.S. GAAP and to
reclassify certain amounts to Movado's basis of presentation.
Ebel Ebel After
U.S. GAAP U.S. GAAP
Ebel and Reclass- and Reclass- Excluded
As Reported ification ification Assets and Ebel Ebel
In thousands (Condensed) Adjustments Adjustments Liabilities(vi) Adjusted Adjusted
---------- ---------- ----------- -------------- --------- ---------
ASSETS (EUR) (EUR) (EUR) (EUR) (EUR) (US$)
Current assets:
Cash 5,047 5,047 (3,529) 1,518 $ 1,905
Trade receivables, net 18,341 18,341 (864) 17,477 21,937
Inventories, net 30,280 479 (v) 30,759 (298) 30,461 38,234
Other 4,935 603 (i) 5,538 (1,799) 3,739 4,693
---------- ---------- ---------- --------- --------- ---------
Total current assets 58,603 1,082 59,685 (6,490) 53,195 66,769
Property, plant and equipment, net 9,124 -- 9,124 (83) 9,041 11,348
Other assets 365 -- 365 (173) 192 241
---------- ---------- ---------- --------- --------- ---------
Total assets 68,092 1,082 69,174 (6,746) 62,428 $ 78,358
========== ========== ========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 75,781 -- 75,781 (75,781) -- $ --
Current portion of long-term debt 45 -- 45 -- 45 56
Accounts payable 6,797 -- 6,797 (942) 5,855 7,349
Accrued payroll and benefits -- 1,519 (iii) 1,519 -- 1,519 1,907
Accrued liabilities 8,117 (1,519) (iii)
2,293 (v) 8,891 (2,102) 6,789 8,521
Current taxes payable 141 141 (72) 69 87
Deferred income taxes -- 116 (ii) 116 -- 116 146
---------- ---------- ---------- --------- --------- ---------
Total current liabilities 90,881 2,409 93,290 (78,897) 14,393 18,066
Long-term debt 4,185 -- 4,185 -- 4,185 5,253
Deferred and noncurrent income taxes -- -- -- -- -- --
Other liabilities 3,953 -- 3,953 (98) 3,855 4,839
Shareholders' equity:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Class A common stock -- -- -- -- -- --
Capital in excess of par value -- -- -- -- -- --
Funds allocated by the owner 131,055 (131,055) (iv) -- -- -- --
Retained earnings (160,916) 603 (i)
(116) (ii)
(1,814) (v)
131,055 (v) (31,188) 72,249 41,061 51,538
Accumulated other comprehensive income (loss) (1,066) -- (1,066) -- (1,066) (1,338)
Treasury stock, at cost -- -- -- -- -- --
---------- ---------- ---------- --------- --------- ---------
Total shareholders' equity (30,927) (1,327) (32,254) 72,249 39,995 50,200
---------- ---------- ---------- --------- --------- ---------
Total liabilities and shareholders' equity 68,092 1,082 69,174 (6,746) 62,428 $ 78,358
========== ========== ========== ========= ========= =========
8
(i) U.S. GAAP adjustment to record foreign exchange derivative
instruments at their fair value.
(ii) U.S. GAAP adjustment to reflect the deferred tax liability on
foreign exchange derivative instruments recorded at their fair
value.
(iii) Reclassification of accrued payroll and benefits from accrued
liabilities to conform with Movado's classification.
(iv) Reclassification of "Funds allocated by the owner" to retained
earnings to conform with Movado's classification.
(v) U.S. GAAP adjustment to record a reserve for estimated
expected future sales returns.
(vi) Reflects the estimate of the assets and liabilities included
within the Ebel financial statements that were not acquired by
Movado under the terms of the Share Purchase and Transfer of
Assets and Liabilities Agreement. The adjustments represent
the exclusion of (1) all intercompany balances between Ebel
and LVMH and its subsidiaries, (2) balances related to
entities that were transferred to LVMH prior to Closing, (3)
certain balances at Ebel subsidiaries, such as cash, prepaid
assets and taxes payable, where the acquisition was structured
as an asset purchase and (4) other agreed upon excluded
balances.
(c) The acquisition of Ebel will be accounted for as a purchase in
accordance with SFAS No. 141, BUSINESS COMBINATIONS. Under purchase accounting,
the estimated acquisition consideration will be allocated to Ebel's assets,
including identifiable intangible assets with indefinite lives, which will be
evaluated for impairment on an annual basis, and identified intangible assets
with finite lives, which will be amortized over those lives, and liabilities
based on their relative fair values. Based on our preliminary purchase price
allocation, the fair value of assets acquired and liabilities assumed exceeds
the acquisition cost of Ebel. That excess has been allocated as a pro rata
reduction of the amounts that otherwise would have been assigned to all of the
acquired assets except for certain specific types of assets as set forth in SFAS
No. 141. The pro forma adjustments were based upon a preliminary assessment of
value by management of the tangible and intangible assets. The final purchase
price allocation may include an adjustment of the total consideration as well as
an adjustment to the estimate of the fair value of acquired assets and assumed
liabilities.
Adjusted
Fair Value Excess Value Fair Value
of Acquired Over Estimated of Acquired
In thousands Assets Purchase Price Assets
----------- -------------- -----------
Purchase price allocated to:
Acquired net assets of Ebel at December 31, 2003 (see footnote b) $ 50,200 $ (133) $ 50,067 (i)
Add (subtract) fair value adjustments:
Estimated increase in inventory to fair value 195 -- 195
Estimated decrease in property, plant and equipment to fair value (2,931) (3,870) (6,801)
Recognition of the estimated fair value of intangible assets subject
to amortization 1,127 (622) 505 (ii)
Recognition of the estimated fair value of intangible assets with
indefinite useful lives resulting from the acquisition 11,840 (6,531) 5,309 (ii)
Estimated restructuring liability (4,378) -- (4,378)(iii)
Estimated contractual liability to settle warranty backlog (419) -- (419)(iv)
Estimated fair value of the acquired net operating loss carry forward -- -- -- (v)
Estimated deferred tax impact of purchase accounting adjustments -- -- -- (vi)
--------- --------- ---------
Total adjustments 5,434 (11,156) (5,589)
--------- --------- ---------
Estimated fair value of acquired net tangible and intangible assets 55,634 (11,156) 44,478
Estimated purchase price of acquired net tangible and intangible assets 44,478 -- 44,478 (vii)
--------- --------- ---------
Excess fair value over estimated purchase price $ 11,156 $ (11,156) $ --
========= ========= =========
9
(i) Included in acquired net assets are $0.2 million of
non-current assets, which have been adjusted as part of the
pro rata allocation of the excess value of assets acquired and
liabilities assumed over the acquisition cost of Ebel.
(ii) Intangible assets are adjusted to reflect an estimated
allocation of (i) approximately $5.3 million to brand assets
encompassing the trademarks and trade names of Ebel, which are
considered to have indefinite useful lives, and (ii)
approximately $0.5 million to customer related intangible
assets which represents the value of relationships with
customers that are expected to have a useful life of five
years.
(iii) Represents the recognition of a liability assumed in
connection with the acquisition of Ebel. The liability is
comprised of approximately $2.2 million for employee
severance, $0.1 million for lease terminations, $1.7 million
for exit costs related to certain promotional and purchase
contracts and $0.4 million of other liabilities.
(iv) Represents an estimated incremental contractual liability to
engage a third party to service the acquired backlog of
warranty claims.
(v) As of December 31, 2003, there were deferred tax assets
resulting from Ebel's net operating loss carry forwards of
approximately Swiss Francs (CHF) 186.7 million. Movado
established a full valuation allowance on these deferred tax
assets, however, if these deferred tax assets are subsequently
recognized, the recognition of the tax benefit will be applied
to reduce the carrying value of acquired intangible assets to
zero, prior to being recognized as a reduction of income tax
expense. As of Closing, Movado expects the net operating loss
carry forwards to approximate CHF 75 million, for which a full
valuation allowance will be established.
(vi) Reflects the estimated income tax effect of Movado's purchase
price adjustments above using a statutory tax rate of 19%. The
purchase price adjustments result in net current and
non-current deferred tax assets of $0.6 million and $1.6
million, respectively. Movado has recorded a full valuation
allowance on these deferred tax assets.
(vii) Reflects the estimated acquisition consideration calculated as follows:
In thousands (US$)
---------
Cash consideration $ 44,200 (1)
Estimated purchase price adjustment (4,402) (2)
Estimated direct acquisition costs 4,680
---------
Total estimated purchase price $ 44,478
=========
(1) Represents a total cash consideration of CHF 61.5 million less
assumed debt of CHF 6.6 million. Converted at the December 31,
2003 exchange rate of CHF 1.242 = US$1.00, the cash consideration
approximates $44.2 million.
(2) In accordance with the terms of the Share Purchase and Transfer
of Assets and Liabilities Agreement, the purchase price will be
reduced to the extent that acquired net assets, before U.S. GAAP
adjustments and excluding the assumed mortgage of CHF 6.6
million, equals less than CHF 76.5 million.
(d) Represents the reclassification of assumed debt to current liabilities
to reflect Movado's intent to settle this liability within the next twelve
months.
(e) Reflects the elimination of Ebel's historical retained earnings and
other equity accounts pursuant to the application of purchase accounting in
accordance with SFAS No. 141.
10