UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended October 31, 2009
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
                                     For the transition period from        to
 
Commission File Number 1-16497
 
MOVADO GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)

New York
 
13-2595932
(State or other jurisdiction
 
(IRS Employer
of incorporation or organization)
 
Identification No.)
 
650 From Road, Ste. 375
Paramus, New Jersey
 
07652-3556
(Address of principal executive offices)
 
(Zip Code)
 (201) 267-8000
 
(Registrant's telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for that past 90 days. Yes   x   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,'' "accelerated filer'' and "smaller reporting company'' i n Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨   Accelerated filer x   Non-accelerated filer ¨   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   ¨   No x
 
The number of shares outstanding of the registrant's common stock and class A common stock as of November 30, 2009 was 17,931,736 and 6,634,319, respectively.



 
 

 

MOVADO GROUP, INC.

Index to Quarterly Report on Form 10-Q
October 31, 2009


     
Page
Part I
Financial Information (Unaudited)
 
       
 
Item 1.
Consolidated Balance Sheets at October 31, 2009, January 31, 2009 and October 31, 2008
 
3
       
   
Consolidated Statements of Income for the three months and nine months ended October 31, 2009 and 2008
 
4
       
   
Consolidated Statements of Cash Flows for the nine months ended October 31, 2009 and 2008
 
5
       
   
Notes to Consolidated Financial Statements
6
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
       
 
Item 4.
Controls and Procedures
30
     
Part II
Other Information
 
       
 
Item 1.
Legal Proceedings
31
       
 
Item 1A.
Risk Factors
31
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
       
 
Item 6.
Exhibits
33
     
Signature
 
34
     
     
     

 
 

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
   
October 31, 2009
   
January 31, 2009
   
October 31, 2008
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
  $ 49,478     $ 86,621     $ 85,077  
Trade receivables, net
    105,469       76,710       118,464  
Inventories, net
    228,766       228,884       236,734  
Other current assets
    35,711       47,863       42,245  
Total current assets
    419,424       440,078       482,520  
                         
Property, plant and equipment, net
    58,142       66,749       71,359  
Deferred income taxes
    10,014       23,449       17,753  
Other non-current assets
    28,648       33,714       34,761  
Total assets
  $ 516,228     $ 563,990     $ 606,393  
                         
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Loans payable to banks
  $ -     $ 40,000     $ -  
Current portion of long-term debt
    -       25,000       10,000  
Accounts payable
    17,373       20,794       33,146  
Accrued liabilities
    43,760       47,686       50,010  
Deferred and current income taxes payable
    484       430       392  
Total current liabilities
    61,617       133,910       93,548  
                         
Long-term debt
    24,910       -       59,324  
Deferred and non-current income taxes payable
    6,116       6,856       6,706  
Other non-current liabilities
    20,763       22,459       21,279  
Total liabilities
    113,406       163,225       180,857  
                         
Commitments and contingencies (Note 8)
                       
                         
Equity:
                       
Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares issued
    -       -       -  
Common Stock, $0.01 par value, 100,000,000 shares authorized; 25,103,084, 24,592,682 and 24,588,116 shares issued, respectively
      251         246         246  
Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 6,634,319, 6,634,319 and 6,634,319 shares issued and outstanding, respectively
      66         66         66  
Capital in excess of par value
    137,078       131,796       131,972  
Retained earnings
    289,414       320,481       344,501  
Accumulated other comprehensive income
    76,114       44,041       44,520  
Treasury Stock, 7,171,348, 6,826,734 and 6,824,799 shares, respectively, at cost
    (102,071 )     (97,371 )     (97,329 )
Total Movado Group, Inc. shareholders’ equity
    400,852       399,259       423,976  
Noncontrolling interests
    1,970       1,506       1,560  
Total equity
    402,822       400,765       425,536  
Total liabilities and equity
  $ 516,228     $ 563,990     $ 606,393  

See Notes to Consolidated Financial Statements

 
3

 

MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended October 31,
   
Nine Months Ended October 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net sales
  $ 128,966     $ 135,846     $ 286,242     $ 366,888  
Cost of sales
    68,618       50,405       138,544       133,944  
                                 
Gross profit
    60,348       85,441       147,698       232,944  
Selling, general and administrative
    57,409       70,821       155,098       205,571  
                                 
Operating  (loss)  / income
    2,939       14,620       (7,400 )     27,373  
                                 
Interest expense
    (1,080 )     (691 )     (3,797 )     (2,191 )
Interest income
    16       413       87       1,893  
                                 
(Loss) / income before income taxes and noncontrolling interests
    1,875       14,342       (11,110 )     27,075  
Provision for / (benefit from) income taxes (Note 9)
    22,519       (1,434 )     19,725       1,802  
Net (loss) / income
    (20,644 )     15,776       (30,835 )     25,273  
    Less: Net income attributed to noncontrolling interests
    226       47       232       159  
Net  (loss) / income attributed to Movado Group, Inc.
  $ (20,870 )   $ 15,729     $ (31,067 )   $ 25,114  
                                 
Basic  (loss) / income per share:
                               
Net (loss) / income per share
  $ (0.85 )   $ 0.64     $ (1.27 )   $ 1.01  
Weighted basic average shares outstanding
    24,558       24,391       24,509       24,892  
                                 
Diluted (loss) / income per share:
                               
Net (loss) / income per share
  $ (0.85 )   $ 0.62     $ (1.27 )   $ 0.97  
Weighted diluted average shares outstanding
    24,558       25,225       24,509       25,792  
                                 
Dividends per share
  $ -     $ 0.08     $ -     $ 0.24  
 










 
See Notes to Consolidated Financial Statements



 
4

 

MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended October 31,
   
2009
   
2008
Cash flows from operating activities:
         
Net (loss) / income
  $ (30,835 )   $ 25,273  
Adjustments to reconcile net (loss) / income to net cash used in operating activities:
                 
Depreciation and amortization
    14,346       13,615  
Deferred income taxes
    20,442       (5,953 )
Provision for losses on accounts receivable
    1,453       1,855  
Provision for losses on inventory
    656       1,818  
Loss on disposition of property, plant and equipment
    -       37  
Stock-based compensation
    862       (475 )
Excess tax / (benefit) from stock-based compensation
    478       (361 )
Changes in assets and liabilities:
                 
Trade receivables
    (25,787 )     (29,752 )
Inventories
    15,989       (43,391 )
Other current assets
    9,937       5,721  
Accounts payable
    (4,294 )     (4,393 )
Accrued liabilities
    (4,353 )     4,751  
Current income taxes payable
    (430 )     (2,049 )
Other non-current assets
    1,429       3,072  
Other non-current liabilities
    (1,700 )     (2,920 )
Net cash used in operating activities
    (1,807 )     (33,152 )
                   
Cash flows from investing activities:
                 
Capital expenditures
    (3,373 )     (16,990 )
Trademarks
    (382 )     (629 )
Net cash used in investing activities
    (3,755 )     (17,619 )
                   
Cash flows from financing activities:
                 
Proceeds from borrowings
    55,909       40,000  
Repayments of borrowings
    (89,928 )     (31,753 )
Stock options exercised and other changes
    203       934  
Purchase of treasury stock
    -       (37,872 )
Excess (tax) / benefit from stock-based compensation
    (478 )     361  
Financing fee
    (2,751 )     -  
Distribution of minority interests earnings
    -       (297 )
Dividends paid
    (1,220 )     (5,909 )
Net cash used in financing activities
    (38,265 )     (34,536 )
                   
Effect of exchange rate changes on cash and cash equivalents
    6,684       833  
                   
Net decrease in cash and cash equivalents
    (37,143 )     (84,474 )  
                   
Cash and cash equivalents at beginning of period
    86,621       169,551  
                   
Cash and cash equivalents at end of period
  $ 49,478     $ 85,077  




See Notes to Consolidated Financial Statements

 
5

 


MOVADO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Movado Group, Inc. (the “Company”) in a manner consistent with that used in the preparation of the consolidated financial statements included in the Company’s fiscal 2009 Annual Report filed on Form 10-K.  In the opinion of management, unless otherwise noted, the accompanying consolidated financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial position and results of operations for the periods presented.  These consolidated financial statements should be read in conjunction with the aforementioned Annual Report.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

NOTE 1 – RECLASSIFICATIONS AND REVISIONS

Certain reclassifications were made to prior year’s financial statement amounts and related note disclosures to conform to the fiscal 2010 presentation as a result of the adoption of new accounting guidance related to noncontrolling interests in the consolidated financial statements.  Additionally, certain expenses associated with the Company’s watch repair activities were reclassified from selling, general and administrative expenses to cost of sales on the Company’s Consolidated Statements of Income.

During the previous quarters of fiscal 2010, the Company had accounted for certain items within inventory and cost of sales which resulted in an overstatement of gross margin by $1.3 million and $1.0 million for the three months ended April 30, 2009 and July 31, 2009, respectively.  Such amounts were not material to the previously issued financial statements for the first and second quarter of fiscal 2010.  The Company has reflected this revision in its financial statements for the nine months ended October 31, 2009 and, as a result, the adjustment recorded had no impact on the results for the three months ended October 31, 2009.  Furthermore, the Company will make the corresponding adjustments to the April 30, 2009 and July 31, 2009 financial statements as appropriate the next time those financial statements are filed.

NOTE 2 – FAIR VALUE MEASUREMENTS
 
As of February 1, 2008, the Company adopted accounting guidance related to fair value measurements for financial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements and on February 1, 2009, the Company adopted fair value measurements for non-recurring financial assets and liabilities. The adoption did not have a material effect on the Company’s consolidated financial statements. The guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The guidance establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value into three broad levels as follows:
 
·       Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
·
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
 
·
Level 3 - Unobservable inputs based on the Company’s assumptions.
 
 
The guidance requires the use of observable market data if such data is available without undue cost and effort.  The Company’s adoption of the guidance did not result in any changes to the accounting for its financial assets and

 
6

 

liabilities.  Therefore, the primary impact to the Company upon its adoption of this guidance was to expand its fair value measurement disclosures.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of October 31, 2009 (in thousands):
 
   
Fair Value at October 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Available-for-sale securities
  $ 216     $ -     $ -     $ 216  
SERP assets - employer
    720       -       -       720  
SERP assets - employee
    12,131       -       -       12,131  
Hedge derivatives
    -       1,919       -       1,919  
Total
  $ 13,067     $ 1,919     $ -     $ 14,986  
                                 
Liabilities:
                               
SERP liabilities - employee
  $ 12,131     $ -     $ -     $ 12,131  
Hedge derivatives
    -       152       -       152  
Total
  $ 12,131     $ 152     $ -     $ 12,283  
 
The fair values of the Company’s available-for-sale securities are based on quoted prices.  The hedge derivatives are entered into by the Company principally to reduce its exposure to the Swiss franc exchange rate risk.  Fair values of the Company’s hedge derivatives are calculated based on quoted foreign exchange rates, quoted interest rates and market volatility factors.  The assets related to the Company’s defined contribution supplemental executive retirement plan (“SERP”) consist of both employer (employee unvested) and employee assets which are invested in investment funds with fair values calculated based on quoted market prices.  The SERP liability represents the Company’s liability to the employees in the plan for their vested balances.

NOTE 3 – TOTAL EQUITY

The components of equity for the nine months ended October 31, 2009 and 2008 are as follows (in thousands):

           
Accumulated
   
   
Class A
Capital in
   
Other
     
 
Common
Common
Excess of
Retained
Treasury
Comprehensive
Noncontrolling
   
 
Stock
Stock
Par Value
Earnings
Stock
Income
Interests
Total
 
 Balance, January 31, 2009
         $ 246
         $ 66
      $131,796
      $320,481
      ($97,371)
           $44,041
                $1,506
      $400,765
 
   Net (loss) / income
     
        (31,067)
   
232
        (30,835)
 
   Stock options exercised, net of tax
5
 
            4,618
 
            (4,700)
   
(77)
 
    Stock-based compensation expense
   
            862
       
            862
 
   Supplemental executive retirement plan
   
           (198)
       
           (198)
 
   Net unrealized gain on investments, net of tax
         
81
 
              81
 
  Net change in effective portion of hedging contracts, net of tax
         
                 (738)
 
             (738)
 
   Foreign currency translation adjustment
         
32,730
232
         32,962
 
 Balance, October 31, 2009
          $251
         $ 66
    $137,078
      $289,414
      ($102,071)
           $76,114
                $1,970
      $402,822
 


 
7

 


           
Accumulated
   
   
Class A
Capital in
   
Other
     
 
Common
Common
Excess of
Retained
Treasury
Comprehensive
Noncontrolling
   
 
Stock
Stock
Par Value
Earnings
Stock
Income
Interests
Total
 
 Balance, January 31, 2008
          $243
         $ 66
      $128,902
      $325,296
      ($57,202)
$65,748
                 $2,007
      $465,060
 
   Net income
     
25,114
   
159
        25,273
 
   Dividends declared
     
(5,909)
     
(5,909)
 
   Stock repurchase
       
(37,872)
   
(37,872)
 
   Stock options exercised, net of tax
3
 
3,429
 
(2,255)
   
            1,177
 
   Stock-based compensation expense
   
            (475)
       
            (475)
 
   Supplemental executive retirement plan
   
           116
       
           116
 
   Net unrealized loss on investments, net of tax
         
(92)
 
              (92)
 
   Net change in effective portion of  hedging contracts, net of tax
         
(1,777)
 
             (1,777)
 
   Foreign currency translation adjustment
         
(19,359)
(309) 
         (19,668)
 
   Distribution of noncontrolling interests earnings
           
(297)
(297)
 
 Balance, October 31, 2008
          $246
         $ 66
    $131,972
      $344,501
      ($97,329)
$44,520
                 $1,560
      $425,536
 

The components of comprehensive income / (loss) for the three months and nine months ended October 31, 2009 and 2008 are as follows (in thousands):

   
Three Months Ended
October 31,
   
Nine Months Ended
October 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net (loss) / income
  $ (20,644 )   $ 15,776     $ (30,835 )   $ 25,273  
Net unrealized gain / (loss) on investments, net of tax
    (16 )     (142 )     81       (92 )
Net change in effective portion of hedging contracts, net of tax
    (491 )     (1,796 )     (738 )     (1,777 )
Foreign currency translation adjustments (1)
    16,572       (26,306 )     32,730       (19,359 )
Comprehensive income / (loss)
    (4,579 )     (12,468 )     1,238       4,045  
Less: Comprehensive income / (loss) attributable to noncontrolling interests
    270       (400 )     464       (447 )
Total comprehensive income / (loss)
     attributable to Movado Group, Inc.
  $ (4,849 )   $ (12,068 )   $ 774     $ 4,492  

 (1) The foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in international subsidiaries.

NOTE 4 – SEGMENT INFORMATION

The Company follows accounting guidance related to disclosures about segments of an enterprise and related information.  This guidance requires disclosure of segment data based on how management makes decisions about allocating resources to segments and measuring their performance.

The Company conducts its business primarily in two operating segments: Wholesale and Retail.  The Company’s Wholesale segment includes the designing, manufacturing and distribution of quality watches, in addition to revenue generated from after sales service activities and shipping. The Retail segment includes the Movado Boutiques and

 
8

 

outlet stores.  The Company divides its business into two major geographic segments: United States operations, and International, which includes the results of all other Company operations.  The allocation of geographic revenue is based upon the location of the customer. The Company’s international operations are principally conducted in Europe, Asia, Canada, the Middle East, South America and the Caribbean.  The Company’s international assets are substantially located in Switzerland.

Operating Segment Data for the Three Months Ended October 31, 2009 and 2008 (in thousands):

       
   
Net Sales
   
Operating Income (Loss) (1)
 
   
2009
   
2008
   
2009
   
2008
 
                         
Wholesale
  $ 110,987     $ 117,496     $ 4,208     $ 16,161  
Retail
    17,979       18,350       (1,269 )     (1,541 )
Consolidated total
  $ 128,966     $ 135,846     $ 2,939     $ 14,620  

Operating Segment Data for the Nine Months Ended October 31, 2009 and 2008 (in thousands):
       
   
Net Sales
   
Operating (Loss) Income (1)
 
   
2009
   
2008
   
2009
   
2008
 
                         
Wholesale
  $ 232,396     $ 309,773     $ (4,176 )   $ 31,637  
Retail
    53,846       57,115       (3,224 )     (4,264 )
Consolidated total
  $ 286,242     $ 366,888     $ (7,400 )   $ 27,373  

   
Total Assets
 
   
October 31,
2009
   
January 31,
 2009
   
October 31,
2008
 
                   
Wholesale
  $ 472,845     $ 515,517     $ 547,937  
Retail
    43,383       48,473       58,456  
Consolidated total
  $ 516,228     $ 563,990     $ 606,393  


(1) Fiscal 2009 Wholesale Operating Income includes severance related costs of $3.4 million and $5.6 million for the three and nine months ended October 31, 2008.

Geographic Segment Data for the Three Months Ended October 31, 2009 and 2008 (in thousands):
       
   
Net Sales
   
Operating (Loss) Income (2)
 
   
2009
   
2008
   
2009
   
2008
 
                         
United States
  $ 79,615     $ 79,021     $ (4,883 )   $ 3,595  
International
    49,351       56,825       7,822       11,025  
Consolidated total
  $ 128,966     $ 135,846     $ 2,939     $ 14,620  

United States and International net sales are net of intercompany sales of $56.7 million and $68.3 million for the three months ended October 31, 2009 and 2008, respectively.

 
9

 

Geographic Segment Data for the Nine Months Ended October 31, 2009 and 2008 (in thousands):

       
   
Net Sales
   
Operating (Loss) Income (2)
 
   
2009
   
2008
   
2009
   
2008
 
                         
United States
  $ 171,339     $ 202,975     $ (22,619 )   $ (9,180 )
International
    114,903       163,913       15,219       36,553  
Consolidated total
  $ 286,242     $ 366,888     $ (7,400 )   $ 27,373  

United States and International net sales are net of intercompany sales of $159.8 million and $209.9 million for the nine months ended October 31, 2009 and 2008 respectively.

(2) Fiscal 2009 United States Operating Income / (Loss) includes severance related costs of $2.4 million and $3.6 million for the three and nine months ended October 31, 2008.  Fiscal 2009 International Operating Income includes severance related costs of $1.0 million and $2.0 million for the three and nine months ended October 31, 2008.

   
Total Assets
 
   
October 31,
2009
   
January 31,
2009
   
October 31,
2008
 
                   
United States
  $ 214,586     $ 289,567     $ 307,055  
International
    301,642       274,423       299,338  
Consolidated total
  $ 516,228     $ 563,990     $ 606,393  

   
Long-Lived Assets
 
   
October 31,
 2009
   
January 31,
2009
   
October 31,
2008
 
                   
United States
  $ 42,842     $ 50,369     $ 54,803  
International
    15,300       16,380       16,556  
Consolidated total
  $ 58,142     $ 66,749     $ 71,359  

NOTE 5 – INVENTORIES, NET

Inventories consist of the following (in thousands):
   
October 31,
2009
   
January 31,
2009
   
October 31,
2008
 
                   
Finished goods
  $ 144,287     $ 146,073     $ 147,424  
Component parts
    63,104       81,423       79,322  
Work-in-process
    21,375       1,388       9,988  
    $ 228,766     $ 228,884     $ 236,734  
 
NOTE 6 – DEBT AND LINES OF CREDIT

On June 5, 2009, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and Movado LLC (together with the Company, the “Borrowers”), each a wholly-owned domestic subsidiary of the Company, entered into a Loan and Security Agreement (the “Original Loan Agreement”) with Bank of America,

 
10

 

N.A. as agent and lender thereunder.  The Original Loan Agreement provided for a $50.0 million asset based senior secured revolving credit facility, including a $15.0 million letter of credit subfacility, that matures on June 5, 2012.

On July 17, 2009, the Borrowers entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Bank of America, N.A. and Bank Leumi USA, as lenders, and Bank of America, N.A., as agent (in such capacity, the “Agent”), which amended and restated the Original Loan Agreement.  The Amended Loan Agreement added Bank Leumi USA as a lender thereunder and, to accommodate Bank Leumi USA holding up to $15.0 million of the Borrowers’ obligations thereunder, increased the size of the Borrowers’ asset based senior secured revolving credit facility (the “Facility”) from $50.0 million to $55.0 million, including a $15.0 million letter of credit subfacility. The maturity date of the Facility remains June 5, 2012. The collateral securing the Facility also remains unchanged.

Availability is determined by reference to a borrowing base which is based on the sum of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. As in the Original Loan Agreement, $10.0 million in availability is blocked until the date on which the Borrowers have achieved for a four fiscal quarter period a consolidated fixed charge ratio of at least 1.25 to 1.0 and have domestic EBITDA greater than a specified amount, but under the Amended Loan Agreement, the availability block must remain in place for at least one year and the domestic EBITDA test has been increased from $0 to $10.0 million.  In the Original Loan Agreement, the amount of the availability block could be reduced by the amount by which the borrowing base exceeded the aggregate amount of the commitments, up to a maximum reduction of $7.5 million. As the aggregate amount of the commitments under the Amended Loan Agreement has increased to $55.0 million, the maximum reduction in the availability block attributable to excess borrowing base has been reduced to $5.0 million.  Availability under the Facility may be further reduced by certain reserves established by the Agent in its good faith credit judgment.

The initial applicable margins were reduced for LIBOR rate loans from 4.50% to 4.25% and for base rate loans from 3.50% to 3.25%. Whereas the applicable margins under the Original Loan Agreement were fixed for the term of the Facility, under the Amended Loan Agreement, after July 17, 2010 the applicable margins decrease or increase by 0.25% per annum from the initial applicable margins depending on whether average availability for the most recently completed fiscal quarter is either greater than $12.5 million, or is $5.0 million or less, respectively.  The Company has also agreed to pay certain fees and expenses and provide certain indemnities, all of which are customary for such financings.

Under the Amended Loan Agreement, prior to the date on which the availability block is released (the “Block Release Date”), if borrowing availability is less than $10.0 million (increased from $7.5 million in the Original Loan Agreement, but under the Amended Loan Agreement such threshold may be reduced to the extent the borrowing base exceeds $55.0 million, up to a maximum $5.0 million reduction), Borrowers will be subject to a minimum EBITDA covenant. Unlike under the Original Loan Agreement, however, Borrowers will be subject to a minimum EBITDA covenant after the Block Release Date, as well, if borrowing availability is less than $15.0 million.  As of October 31, 2009, the Borrowers were not subject to the minimum EBITDA covenant.
 
In addition, after the Block Release Date, if borrowing availability is less than $15.0 million (increased from $10.0 million in the Original Loan Agreement), Borrowers will be subject to a minimum fixed charge coverage ratio.

Finally, the Borrowers’ deposit accounts will be subject to cash dominion prior to the Block Release Date if borrowing availability is less than $7.5 million, but such threshold may be reduced to the extent the borrowing base exceeds $55.0 million, up to a maximum $5.0 million reduction. After the Block Release Date, cash dominion will be imposed if borrowing availability is less than $15.0 million (increased from $10.0 million in the Original Loan Agreement).  As of October 31, 2009, the Borrowers were not subject to cash dominion nor do the Borrowers expect to be subject to such a requirement in the foreseeable future.

 
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The Amended Loan Agreement contains affirmative and negative covenants binding on the Borrowers and their subsidiaries that are customary for asset based facilities, including restrictions and limitations on the incurrence of debt for borrowed money and liens, dispositions of assets of the Borrowers, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments, prepayments of subordinated and certain other debt, mergers, consolidations, liquidations and dissolutions, and transactions with affiliates.

The Amended Loan Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, failure of any representation or warranty to be true in any material respect when made or deemed made, violation of covenants, cross default, material judgments, material ERISA liability, bankruptcy events, material loss of collateral in excess of insured amounts, asserted or actual revocation or invalidity of the loan documents, change of control and events or circumstances having a material adverse effect.

The borrowings under the Facility are joint and several obligations of the Borrowers and also cross-guaranteed by each Borrower.  In addition, the Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the Borrowers’ U.S. assets other than certain excluded assets.

On June 5, 2009, $40.0 million in loans were drawn under the Facility, which were used, in part, to repay amounts outstanding under the Company’s former U.S. credit facility with JPMorgan Chase Bank, N.A. (“JPM Chase”) (the “Former US Facility”), which was terminated.  In addition, approximately $1.5 million in letters of credit were issued, which were used to backstop letters of credit and other obligations outstanding in connection with the Former US Facility.  As of October 31, 2009, total availability under the Facility, giving effect to the availability block, the $20.0 million outstanding under the Facility and the letters of credit, was $28.2 million.

During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes (“Series A Senior Notes”) under a Note Purchase and Private Shelf Agreement, dated November 30, 1998 and amended on June 5, 2008 (as amended, the “First Amended 1998 Note Purchase Agreement”), between the Company and The Prudential Insurance Company of America (“Prudential”).  These notes bore interest of 6.90% per annum, were to mature on October 30, 2010 and were subject to annual repayments of $5.0 million commencing October 31, 2006.  These notes contained various financial covenants including an interest coverage ratio and maintenance of consolidated net worth and certain non-financial covenants that restricted the Company’s activities regarding investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends and limitation of the amount of debt outstanding.  Upon entering into the Original Loan Agreement on June 5, 2009, all outstanding amounts and related fees due under the Series A Senior Notes were paid in full, and the First Amended 1998 Note Purchase Agreement was terminated.

As of March 21, 2004, the Company amended its Note Purchase and Private Shelf Agreement, originally dated March 21, 2001 (as amended, the “First Amended 2001 Note Purchase Agreement”), among the Company, Prudential and certain affiliates of Prudential (together, the “Purchasers”).  This agreement allowed for the issuance of senior promissory notes in the aggregate principal amount of up to $40.0 million with maturities up to 12 years from their original date of issuance.  On October 8, 2004, the Company issued, pursuant to the First Amended 2001 Note Purchase Agreement, 4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes") in an aggregate principal amount of $20.0 million, which were to mature on October 8, 2011 and were subject to annual repayments of $5.0 million commencing on October 8, 2008.  Proceeds of the Senior Series A-2004 Notes have been used by the Company for capital expenditures, repayment of certain of its debt obligations and general corporate purposes.  These notes contained certain financial covenants, including an interest coverage ratio and maintenance of consolidated net worth and certain non-financial covenants that restricted the Company’s activities regarding investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends and limitation of the amount of debt outstanding.  On June 5, 2008, the Company amended the First Amended 2001 Note Purchase Agreement (as amended, the “Second Amended 2001 Note Purchase Agreement”), with Prudential and the Purchasers.  Upon entering into the Original Loan Agreement on June 5, 2009, all outstanding

 
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amounts and related fees due under the Senior Series A-2004 Notes were paid in full, and the Second Amended 2001 Note Purchase Agreement was terminated.

The credit agreement dated as of December 15, 2005, as amended, by and between the Company as parent guarantor, its Swiss subsidiaries, MGI Luxury Group S.A., Movado Watch Company SA, Concord Watch Company S.A. and Ebel Watches S.A. as borrowers, and  JPM Chase, JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank and Citibank, N.A. (as amended, the "Swiss Credit Agreement"), provided for a revolving credit facility of 33.0 million Swiss francs and was to mature on December 15, 2010.  The obligations of the Company’s Swiss subsidiaries under this credit agreement were guaranteed by the Company under a Parent Guarantee, dated as of December 15, 2005, in favor of the lenders.  The Swiss Credit Agreement contained financial covenants, including an interest coverage ratio, average debt coverage ratio and limitations on capital expenditures and certain non-financial covenants that restricted the Company’s activities regarding investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends and limitation of the amount of debt outstanding. Borrowings under the Swiss Credit Agreement bore interest at a rate equal to LIBOR (as defined in the Swiss Credit Agreement) plus a margin ranging from .50% per annum to .875% per annum (depending upon a leverage ratio).  Upon entering into the Original Loan Agreement on June 5, 2009, the Swiss Credit Agreement was terminated.

The credit agreement dated as of December 15, 2005, as amended, by and between the Company, MGI Luxury Group S.A. and Movado Watch Company SA, as borrowers, and JPM Chase, JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank, Bank Leumi and Citibank, N.A. (as amended, the "Former US Credit Agreement"), provided for a revolving credit facility of $90.0 million (including a sublimit for borrowings in Swiss francs of up to an equivalent of $25.0 million) with a provision to allow for a further increase of up to an additional $10.0 million, subject to certain terms and conditions. The Former US Credit Agreement was to mature on December 15, 2010.  The obligations of MGI Luxury Group S.A. and Movado Watch Company SA were guaranteed by the Company under a Parent Guarantee, dated as of December 15, 2005, in favor of the lenders. The obligations of the Company were guaranteed by certain domestic subsidiaries of the Company under subsidiary guarantees, in favor of the lenders.  The Former US Credit Agreement contained financial covenants, including an interest coverage ratio, average debt coverage ratio and limitations on capital expenditures and certain non-financial covenants that restricted the Company’s activities regarding investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends and limitation of the amount of debt outstanding.  Borrowings under the Former US Credit Agreement bore interest, at the Company’s option, at a rate equal to the adjusted LIBOR (as defined in the Former US Credit Agreement) plus a margin ranging from .50% per annum to .875% per annum (depending upon a leverage ratio), or the Alternate Base Rate (as defined in the Former US Credit Agreement).  Upon entering into the Original Loan Agreement on June 5, 2009, all outstanding amounts and related fees due under this revolving credit facility were paid in full, and the Former US Credit Agreement was terminated.

On June 16, 2008, the Company renewed a line of credit letter agreement with Bank of America and an amended and restated promissory note in the principal amount of up to $20.0 million payable to Bank of America, originally dated December 12, 2005.  The Company's obligations under the agreement were guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.  The maturity date was to be June 16, 2009.  The amended and restated promissory note contained various representations and warranties and events of default that are customary for instruments of that type.  Upon entering into the Original Loan Agreement on June 5, 2009, this uncommitted line of credit agreement was terminated.

On July 31, 2008, the Company renewed a promissory note, originally dated December 13, 2005, in the principal amount of up to $37.0 million, at a revised amount of up to $7.0 million, payable to JPM Chase.  Pursuant to the promissory note, the Company promised to pay JPM Chase $7.0 million, or such lesser amount as may then be the unpaid balance of each loan made or letter of credit issued by JPM Chase to the Company thereunder, upon the maturity date of July 31, 2009. The promissory note bore interest at an annual rate equal to (i) a floating rate equal to the prime rate, (ii) a fixed rate equal to an adjusted LIBOR plus 0.625% or (iii) a fixed rate equal to a rate of interest offered by JPM Chase from time to time on any single commercial borrowing. The promissory note contained various

 
13

 

events of default that are customary for instruments of that type. In addition, it was an event of default for any security interest or other encumbrance to be created or imposed on the Company's property, other than as permitted in the lien covenant of the Former US Credit Agreement.  Upon entering into the Original Loan Agreement on June 5, 2009, this uncommitted line of credit agreement was terminated.

A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank.  These lines of credit totaled 8.0 million Swiss francs, with dollar equivalents of $7.9 million and $6.9 million at October 31, 2009 and 2008, respectively.  As of October 31, 2009, there were 5.0 million Swiss francs, with dollar equivalents of $4.9 million borrowed against these lines.  As of October 31, 2009, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.7 million in various foreign currencies.  
 
NOTE 7 – EARNINGS PER SHARE

The Company presents net income per share on a basic and diluted basis.  Basic earnings per share are computed using weighted-average shares outstanding during the period.  Diluted earnings per share are computed using the weighted-average number of shares outstanding adjusted for dilutive common stock equivalents.

The weighted-average number of shares outstanding for basic earnings per share was 24,558,000 and 24,391,000 for the three months ended October 31, 2009 and 2008, respectively.  For the three months ended October 31, 2009, the number of shares outstanding for diluted earnings per share was the same as the basic earnings per share because the Company generated a net loss.  For the three months ended October 31, 2008, diluted earnings per share was increased by 834,000, due to potentially dilutive common stock equivalents issuable under the Company’s stock compensation plans.

For the three months ended October 31, 2009 and October 31, 2008, approximately 730,000 and 64,000 of potentially dilutive common stock equivalents, respectively, were excluded from the computation of dilutive earnings per share because their effect would have been antidilutive.

The weighted-average number of shares outstanding for basic earnings per share was 24,509,000 and 24,892,000 for the nine months ended October 31, 2009 and 2008, respectively.  For the nine months ended October 31, 2009, the number of shares outstanding for diluted earnings per share was the same as the basic earnings per share because the Company generated a net loss.  For the nine months ended October 31, 2008, diluted earnings per share was increased by 900,000, due to potentially dilutive common stock equivalents issuable under the Company’s stock compensation plans.

For the nine months ended October 31, 2009 and October 31, 2008, approximately 1,080,000 and 50,000 of potentially dilutive common stock equivalents, respectively, were excluded from the computation of dilutive earnings per share because their effect would have been antidilutive.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

At October 31, 2009, the Company had outstanding letters of credit totaling $0.9 million with expiration dates through June 30, 2010.  JPM Chase has issued nine irrevocable standby letters of credit for retail and operating facility leases to various landlords, for the administration of the Movado Boutique private-label credit card and Canadian payroll to the Royal Bank of Canada.  Under the Facility, approximately $1.8 million in letters of credit were issued to backstop the letters of credit issued by JPM Chase.

As of October 31, 2009, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.7 million in various foreign currencies.

 
14

 

The Company is involved from time to time in legal claims involving trademarks and other intellectual property, contracts, employee relations and other matters incidental to the Company’s business.  Although the outcome of such matters cannot be determined with certainty, the Company’s general counsel and management believe that the final outcome would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 9 – INCOME TAXES

The Company recorded a tax expense of $22.5 million for the three months ended October 31, 2009.  The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates as well as expected future income.  The realization of deferred tax assets, however, depends on the Company’s ability to generate future income and the weight of all available evidence, including losses in recent years.  In the third quarter of fiscal 2010, the Company determined that it was appropriate to record a full valuation allowance against its net deferred tax assets in the U.S., primarily due to the Company’s U.S. loss position in recent years.  Under current circumstances, expected future income is not sufficient to overcome such negative evidence, and although the Company may ultimately utilize the underlying tax benefits within the statutory limits, the Company recognized a non-cash deferred tax expense of $20.8 million.  Management will continue to evaluate the appropriate level of allowance on all deferred tax assets, considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.  In addition, in the third quarter of fiscal 2010, a non-cash provision of $2.2 million was recorded for net federal income tax on the future remittance of approximately $10.0 million current year earnings of a foreign subsidiary.  No provision has been made for the remaining undistributed earnings of foreign subsidiaries, as those earnings are considered permanently reinvested.  The effective tax rate excluding these and other certain non-cash adjustments was -14.0%. 

The Company recorded a tax benefit of $1.4 million for the three months ended October 31, 2008, which reflected the expected utilization of a Swiss net operating loss carryforward acquired with the Ebel brand in fiscal 2005 resulting in a net benefit of approximately $3.7 million.  The effective tax rate excluding these and other certain non-cash adjustments was 13.6%.

The Company recorded tax expense of $19.7 million for the nine months ended October 31, 2009.  The effective tax rate excluding the above non-cash charges of $23.0 million and other certain non-cash adjustments was 31.0%. 

The Company recorded tax expense of $1.8 million for the nine months ended October 31, 2008, which reflected the expected utilization of a Swiss net operating loss carryforward acquired with the Ebel brand in fiscal 2005 resulting in a net benefit of approximately $3.7 million.  The effective tax rate excluding these and other certain non-cash adjustments was 18.0%.

NOTE 10 – STREAMLINING INITIATIVES

During the second half of fiscal 2009, the Company announced initiatives designed to streamline operations, reduce expenses, and improve efficiencies and effectiveness across the Company’s global organization.  During fiscal 2009, the Company recorded $8.7 million of severance related accruals.  Any costs incurred pursuant to these initiatives were recorded in SG&A expenses in the Consolidated Statements of Income.  The Company expects that the remaining severance related liability will be paid during fiscal 2010.







 
15

 


A summary rollforward of severance related accruals is as follows (in thousands):

   
Severance Related
 
Balance at January 31, 2009
  $ 4,409  
Provision charged
    -  
Severance paid
    (3,488 )
Balance at October 31, 2009
  $ 921  

NOTE 11 DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes derivative financial instruments to reduce foreign currency fluctuation risks. The Company accounts for its derivative financial instruments in accordance with accounting guidance which establishes accounting and reporting standards for derivative instruments and hedging activities.  The guidance requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in the fair value of those instruments will be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged.

The Company’s risk management policy is to enter into forward exchange contracts and purchase foreign currency options, under certain limitations, to reduce exposure to adverse fluctuations in foreign exchange rates and, to a lesser extent, in commodity prices related to its purchases of watches. When entered into, the Company designates and documents these derivative instruments as a cash flow hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions.  Changes in the fair value of a derivative that is designated and documented as a cash flow hedge and is highly effective, are recorded in other comprehensive income until the underlying transaction affects earnings, and then are later reclassified into earnings in the same financial statement line item as the hedged transaction.  The Company formally assesses, both at the inception and at each financial quarter thereafter, the effectiveness of the derivative instrument hedging the underlying forecasted cash flow transaction.  Any ineffectiveness related to the derivative financial instruments’ change in fair value will be recognized in the period in which the ineffectiveness was calculated.

The Company uses forward exchange contracts to offset its exposure to certain foreign currency liabilities. These forward contracts are not designated as qualified hedges and, therefore, changes in the fair value of these derivatives are recognized into earnings, thereby offsetting the current earnings effect of the related foreign currency liabilities.

All of the Company’s derivative instruments have liquid markets to assess fair value.  The Company does not enter into any derivative instruments for trading purposes.

As of October 31, 2009, the Company’s entire net forward contracts hedging portfolio consisted of 56.0 million Swiss francs equivalent for various expiry dates ranging through March 23, 2010.







 
16

 

The following table summarizes the fair value and presentation in the consolidated balance sheets for derivatives designated as hedging instruments under the relevant accounting guidance and derivatives not designated as hedging instruments under the relevant guidance as of October 31, 2009 (in thousands):

 
Asset Derivatives
 
Liability Derivatives
 
                                     Balance
     
Balance
     
                                     Sheet
 
Fair
 
Sheet
 
Fair
 
                                     Location
 
Value
 
Location
 
Value
 
Derivatives designated as hedging instruments:
               
Foreign Exchange Contracts
Other Current Assets
  $ -  
Accrued Liabilities
  $ -  
                   
Derivatives not designated as hedging instruments:
                   
Foreign Exchange Contracts
Other Current Assets
  $ 1,919  
Accrued Liabilities
  $ 152  
                     
Total Derivative Instruments
    $ 1,919       $ 152  

As of October 31, 2009, the balance of deferred net gains on derivative financial instruments documented as cash flow hedges included in accumulated other comprehensive income (“AOCI”) was $0.7 million in net gains, net of tax of $0.5 million, compared to $2.0 million in net gains at October 31, 2008, net of tax of $1.3 million. The Company estimates that a substantial portion of the deferred net gains at October 31, 2009 will be realized into earnings over the next 12 to 24 months as a result of transactions that are expected to occur over that period. The primary underlying transaction which will cause the amount in AOCI to affect cost of goods sold consists of the Company’s sell through of inventory purchased in Swiss francs. The maximum length of time the Company hedges its exposure to the fluctuation in future cash flows for forecasted transactions is 24 months.  For the three months ended October 31, 2009 and 2008, the Company reclassified from AOCI to earnings $0.5 million of net gains, net of tax of $0.3 million and $0.7 million in net gains, net of tax of $0.5 million, respectively.  For the nine months ended October 31, 2009 and 2008, the Company reclassified from AOCI to earnings $1.3 million of net gains, net of tax of $0.7 million and $2.0 million in net gains, net of tax of $1.3 million, respectively.

During the three months and nine months ended October 31, 2009 and 2008, the Company recorded no charge related to its assessment of the effectiveness of its derivative hedge portfolio because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged.  Changes in the contracts’ fair value due to spot-forward differences are excluded from the designated hedge relationship.  The Company records these transactions in the cost of sales of the Consolidated Statements of Income.

NOTE 12 SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that occurred after October 31, 2009 up through December 9, 2009, the date the Company issued these financial statements.  During this period the Company did not have any material subsequent events.

 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q, including, without limitation, statements under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as statements in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases and oral statements made by or with the approval of an authorized executive officer of the Company, which are not historical in nature, are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, forecasts and projections about the Company, its future performance, the industry in which the Company operates and management’s assumptions. Words such as “expects”, “anticipates”, “targets”, “goals”, “projects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should” and variations of such words and similar expressions are also intended to identify such forward-looking statements. The Company cautions readers that forward-looking statements include, without limitation, those relating to the Company’s future business prospects, projected operating or financial results, revenues, working capital, liquidity, capital needs, plans for future operations, expectations regarding capital expenditures and operating expenses, effective tax rates, margins, interest costs, and income as well as assumptions relating to the foregoing.  Forward-looking statements are subject to certain risks and uncertainties, some of which cannot be predicted or quantified.  Actual results and future events could differ materially from those indicated in the forward-looking statements due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company’s reports filed with the SEC including, without limitation, the following: general economic and business conditions which may impact disposable income of consumers in the United States and the other significant markets where the Company’s products are sold, uncertainty regarding such economic and business conditions, trends in consumer debt levels and bad debt write-offs, general uncertainty related to possible terrorist attacks and the impact on consumer spending, changes in consumer preferences and popularity of particular designs, new product development and introduction, competitive products and pricing, seasonality, availability of alternative sources of supply in the case of the loss of any significant supplier, the loss of significant customers, the Company’s dependence on key employees and officers, the ability to successfully integrate the operations of acquired businesses without disruption to other business activities, the continuation of licensing arrangements with third parties, the ability to secure and protect trademarks, patents and other intellectual property rights, the ability to lease new stores on suitable terms in desired markets and to complete construction on a timely basis, the ability of the Company to successfully implement its expense reduction plan, the continued availability to the Company of financing and credit on favorable terms, business disruptions, disease, general risks associated with doing business outside the United States including, without limitation, import duties, tariffs, quotas, political and economic stability, and success of hedging strategies with respect to currency exchange rate fluctuations.

These risks and uncertainties, along with the risk factors discussed under Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, should be considered in evaluating any forward-looking statements contained in this Quarterly Report on Form 10-Q or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are qualified by the cautionary statements in this section. The Company undertakes no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.




 
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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses.  Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and the results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s most critical accounting policies have been discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

As of October 31, 2009, there have been no material changes to any of the critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
 
Effective February 1, 2009, the Company adopted new accounting guidance related to business combinations, which changed how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods.  This guidance will be applied on all future acquisitions.
 
Effective February 1, 2009, the Company adopted new accounting guidance related to noncontrolling interests in consolidated financial statements.  The guidance requires (i) classification of noncontrolling interests, commonly referred to as minority interests, within stockholders’ equity, (ii) net income to include the net income attributable to the noncontrolling interests and (iii) enhanced disclosure of activity related to noncontrolling interests. In accordance with this guidance, the Company reclassified its noncontrolling interests to a separate component within equity on the Consolidated Balance Sheets and separately presented the net income attributable to its noncontrolling interests on the Consolidated Statements of Income.
 
Effective February 1, 2009, the Company adopted new accounting guidance related to disclosures about derivative instruments and hedging activities which changes the disclosure requirements for derivative instruments and hedging activities. The Company is required to provide enhanced disclosures about how and why it uses derivative instruments, how they are accounted for, and how they affect the Company’s financial performance.  See Note 11, Derivative Financial Instruments.

Effective July 1, 2009, the Company adopted new accounting guidance related to subsequent events which requires the Company to disclose material events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  See Note 12, Subsequent Events.

Effective August 1, 2009, the Company adopted new accounting guidance related to the FASB Accounting Standards Codification (the “Codification”) and the hierarchy of GAAP.  The Codification identifies the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  All guidance contained in the Codification carries an equal level of authority.  The adoption of the Codification did not have an impact on the consolidated financial statements.

Effective September 1, 2009, the Company adopted new accounting guidance related to fair value disclosures and disclosures measuring liabilities at fair value.  The guidance states that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value.  The adoption of this guidance did not have an impact on the consolidated financial statements.

 
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Recent Developments

Economic conditions both in the United States and around the world have deteriorated since the beginning of fiscal 2009.  As the events that have caused this deterioration continue to unfold, the Company does not have significant, meaningful visibility into the further effects they could have on the U.S. and the global economy, although they likely will continue to have a negative impact on the Company’s sales and profits throughout fiscal 2010.  Nevertheless, the Company intends to continue to take actions to appropriately manage its business while strategically positioning itself for long-term success, including:

·  
capitalizing on the strength of the Company’s brands to gain market share across all price categories;
·  
continuing to manage expenses that began with the expense reduction initiatives implemented throughout fiscal 2009;
·  
working with retail customers to help them better manage their inventory, improve their productivity and reduce the Company’s credit risk; and
·  
continuing to tightly manage cash and inventory levels.

On April 9, 2009, the Company announced that its Board of Directors has decided to discontinue the quarterly cash dividend.  This decision was based on the Company’s desire to retain capital during the current challenging economic environment.  Under the Amended Loan Agreement described below, dividends are prohibited until certain financial performance measures are achieved.

The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates as well as expected future income.  The realization of deferred tax assets, however, depends on the Company’s ability to generate future income and the weight of all available evidence, including losses in recent years.  In the third quarter of fiscal 2010, the Company determined that it was appropriate to record a full valuation allowance against its net deferred tax assets in the U.S., primarily due to the Company’s U.S. loss position in recent years.  Under current circumstances, expected future income is not sufficient to overcome such negative evidence, and although the Company may ultimately utilize the underlying tax benefits within the statutory limits, the Company recognized a non-cash deferred tax expense of $20.8 million.  Management will continue to evaluate the appropriate level of allowance on all deferred tax assets, considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.

In addition, in the third quarter of fiscal 2010, a non-cash provision of $2.2 million was recorded for net federal income tax on the future remittance of approximately $10.0 million current year earnings of a foreign subsidiary.  No provision has been made for the remaining undistributed earnings of foreign subsidiaries, as those earnings are considered permanently reinvested.

Overview

The Company conducts its business primarily in two operating segments: Wholesale and Retail.  The Company’s Wholesale segment includes the designing, manufacturing and distribution of quality watches.  The Retail segment includes the Movado Boutiques and outlet stores.

The Company divides its watch business into distinct categories.  The luxury category consists of the Ebel® and Concord® brands.  The accessible luxury category consists of the Movado® and ESQ® brands.  The licensed brands category represents brands distributed under license agreements and includes Coach®, HUGO BOSS®, Juicy Couture®, Lacoste® and Tommy Hilfiger®.

 
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Results of operations for the three months ended October 31, 2009 as compared to the three months ended October 31, 2008

Net Sales: Comparative net sales by business segment were as follows (in thousands):

   
Three Months Ended October 31,
 
   
2009
   
2008
 
             
Wholesale:
           
United States
  $ 61,636     $ 60,671  
International
    49,351       56,825  
Total Wholesale
    110,987       117,496  
                 
Retail
    17,979       18,350  
                 
Net Sales
  $ 128,966     $ 135,846  

Net sales for the three months ended October 31, 2009 were $129.0 million, below prior year by $6.9 million or 5.1%.  Excluding $8.4 million of liquidation of excess discontinued inventory in the current year period, net sales were $120.6 million, or below the prior year by 11.2%.  The Company is presenting net sales excluding sales of excess discontinued inventory because the Company believes that it is useful to eliminate the effect of this unusual item in order to improve the comparability of the Company’s results for the periods presented.  As a result of the weaker U.S. dollar compared to the prior year period and the translation of the international subsidiaries’ financial results, the effect of foreign currency favorably impacted net sales in the three months ended October 31, 2009 by $1.5 million.

Net sales in the wholesale segment were $111.0 million, below prior year by $6.5 million or 5.5%.  Excluding $8.4 million of liquidation of excess discontinued inventory in the current year period, net sales in the wholesale segment were $102.6 million, or below prior year by 12.7%.  The decrease in wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult global economic environment as lower sales were recorded in all watch categories when compared to the prior year period.

Net sales in the U.S. wholesale segment were $61.6 million, above prior year by $1.0 million or 1.6%.  Excluding $8.4 million of liquidation of excess discontinued inventory in the current year period, net sales in the U.S. wholesale segment were $53.2 million, or below prior year by 12.2%.   The decrease in U.S. wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult U.S. economic environment as lower sales were recorded in the luxury and accessible luxury watch categories when compared to the prior year period.  Net sales in the licensed brand watch category were 10.4% higher compared to the prior year period.

Net sales in the international wholesale segment were $49.4 million, below prior year by $7.5 million or 13.2%.  The decrease in international wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult global economic environment as lower sales were recorded in the luxury and licensed brand watch categories when compared to the prior year period.  Net sales in the accessible luxury watch category were slightly higher when compared to the prior year period.  As a result of the weaker U.S. dollar compared to the prior year period and the translation of the international subsidiaries’ financial results, the effect of foreign currency favorably impacted net sales in the three months ended October 31, 2009 by $1.5 million.

Net sales in the retail segment were $18.0 million, below prior year by $0.4 million or 2.0%.  The decrease was the result of lower sales in the Movado Boutiques, primarily attributable to the ongoing difficult U.S. economic environment.  Net sales in the Company’s outlet stores were relatively flat year-over-year.  As of October 31, 2009,

 
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the Company operated 27 Movado Boutiques and 31 outlet stores.  As of October 31, 2008, the Company operated 29 Movado Boutiques and 32 outlet stores.

Gross Profit.   Gross profit for the three months ended October 31, 2009 was $60.3 million or 46.8% of net sales as compared to $85.4 million or 62.9% of net sales for the three months ended October 31, 2008.  The gross profit and the gross margin percentage were negatively impacted during the three months ended October 31, 2009 by the sales of excess discontinued inventory of $8.4 million.  Excluding these sales, the gross profit was below prior year by $22.7 million and the gross margin percentage was 52.0%. The Company is presenting gross margin excluding sales of excess discontinued inventory because the Company believes that it is useful to eliminate the effect of this unusual item in order to improve the comparability of the Company’s results for the periods presented.  The decrease in gross profit of $22.7 million was primarily attributable to the lower sales volume as well as an overall decrease in the brand and business gross margin percentage.  The gross margin percentage was unfavorably impacted by approximately 380 basis points resulting from a shift in channel and product mix as a result of the global economic recession.  In addition, both the gross profit as well as the gross margin percentage were unfavorably impacted by currency and overhead absorption. As a result of the weaker U.S. dollar compared to the prior year period, fewer net favorable currency benefits were recorded year-over-year related to the Company’s natural hedge.  This was primarily attributable to reductions of inventory purchases in Switzerland and resulted in a 210 basis point decline in gross margin percentage.  Also as a result of the weaker U.S. dollar, gross margin deteriorated 150 basis points due to losses on the un-hedged portion of the Company’s Swiss franc liabilities, predominantly in the U.S.  The unfavorable overhead absorption is primarily attributed to abnormally low production levels associated with the decline in sales volume which unfavorably impacted the gross margin percentage by approximately 210 basis points.

Selling, General and Administrative  (“SG&A”). SG&A expenses for the three months ended October 31, 2009 were $57.4 million as compared to $70.8 million for the three months ended October 31, 2008, representing a decrease of $13.4 million or 18.9%.  The decrease in SG&A expenses was as a result of the Company’s initiatives to streamline operations and reduce expenses, which included lower marketing expenses for the three months ended October 31, 2009 of $9.9 million, lower payroll and related expenses of $3.9 million which were primarily the result of headcount reductions and lower expenses in the retail segment of $1.5 million due in part to the closing of three stores.  SG&A expenses in the prior year period included $3.4 million of severance related costs associated with the implementation of the Company’s initiatives to streamline operations and reduce expenses. The expense savings were partially offset by a lower benefit recorded for performance based compensation of $4.5 million when compared to the prior year period.  Due to the challenging global economy, the benefits recorded in both periods are primarily the result of the reversal of previously recorded compensation expense.  Additionally, as a result of the weaker U.S. dollar compared to the prior year period and the translation of the Company’s foreign subsidiaries’ results, the effect of foreign currency unfavorably impacted SG&A expenses for the three months ended October 31, 2009 by $0.6 million.

Wholesale Operating Income.   Operating income of $4.2 million and $16.2 million was recorded in the wholesale segment for the three months ended October 31, 2009 and 2008, respectively.  The $12.0 million decrease in profit was the net result of a decrease in gross profit of $23.8 million partially offset by a decrease in SG&A expenses of $11.8 million.  The decrease in gross profit of $23.8 million was primarily attributed to the decrease in sales year-over-year resulting from the ongoing difficult global economic environment as well as the decrease in gross margin percentage year-over-year.  The decrease in SG&A expenses of $11.8 million was driven by lower marketing expenses of $9.8 million and lower payroll and related expenses of $3.9 million which were primarily the result of headcount reductions.  SG&A expenses in the prior year period included $3.4 million of severance related costs associated with the implementation of the Company’s initiatives to streamline operations and reduce expenses. The expense savings were partially offset by a lower benefit recorded for performance based compensation of $4.5 million when compared to the prior year period.  Due to the challenging global economy, the benefits recorded in both periods are primarily the result of the reversal of previously recorded compensation expense.  Additionally, as a result of the weaker U.S. dollar compared to the prior year period and the translation of the Company’s foreign subsidiaries’ results, the effect of foreign currency unfavorably impacted SG&A expenses for the three months ended October 31, 2009 by $0.6 million.

 
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Retail Operating Loss.   Operating losses of $1.3 million and $1.5 million were recorded in the retail segment for the three months ended October 31, 2009 and 2008, respectively.  The $0.2 million decrease in loss was the net result of a decrease in gross profit of $1.4 million more than offset by a decrease in SG&A expenses of $1.6 million.  The decrease in gross profit was primarily attributable to the decrease in gross profit percentage year-over-year resulting from in-store promotions in effect during the current year period.  The decrease in SG&A expenses was primarily the result of the Company’s initiatives to streamline operations and reduce expenses and the closing of three stores that were open during the prior year period.

Interest Expense .  Interest expense for the three months ended October 31, 2009 and 2008 was $1.1 million and $0.7 million, respectively.  Interest expense increased due to a higher average borrowing rate partially offset by lower average borrowings year-over-year.
 
Interest Income .  Interest income was $0.1 million and $0.4 million for the three months ended October 31, 2009 and 2008, respectively.  The lower interest income is primarily attributed to less cash invested year-over-year.

Income Taxes .  The Company recorded a tax expense of $22.5 million for the three months ended October 31, 2009.  The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates as well as expected future income.  The realization of deferred tax assets, however, depends on the Company’s ability to generate future income and the weight of all available evidence, including losses in recent years.  In the third quarter of fiscal 2010, the Company determined that it was appropriate to record a full valuation allowance against its net deferred tax assets in the U.S., primarily due to the Company’s U.S. loss position in recent years.  Under current circumstances, expected future income is not sufficient to overcome such negative evidence, and although the Company may ultimately utilize the underlying tax benefits within the statutory limits, the Company recognized a non-cash deferred tax expense of $20.8 million.  Management will continue to evaluate the appropriate level of allowance on all deferred tax assets, considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.  In addition, in the third quarter of fiscal 2010, a non-cash provision of $2.2 million was recorded for net federal income tax on the future remittance of approximately $10.0 million current year earnings of a foreign subsidiary.  No provision has been made for the remaining undistributed earnings of foreign subsidiaries, as those earnings are considered permanently reinvested.  The effective tax rate excluding these and other certain non-cash adjustments was -14.0%. 

The Company recorded a tax benefit of $1.4 million for the three months ended October 31, 2008, which reflected the expected utilization of a Swiss net operating loss carryforward acquired with the Ebel brand in fiscal 2005 resulting in a net benefit of approximately $3.7 million.  The effective tax rate excluding these and other certain non-cash adjustments was 13.6%.

Net (Loss) Income.   For the three months ended October 31, 2009, the Company recorded a net loss of $20.9 million as compared to net income of $15.7 million for the three months ended October 31, 2008.












 
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Results of operations for the nine months ended October 31, 2009 as compared to the nine months ended October 31, 2008

Net Sales: Comparative net sales by business segment were as follows (in thousands):

   
Nine Months Ended October 31,
 
   
2009
   
2008
 
             
Wholesale:
           
United States
  $ 117,493     $ 145,860  
International
    114,903       163,913  
Total Wholesale
    232,396       309,773  
                 
Retail
    53,846       57,115  
                 
Net Sales
  $ 286,242     $ 366,888  

Net sales for the nine months ended October 31, 2009 were $286.2 million, below prior year by $80.6 million or 22.0%.  Excluding $13.6 million of liquidation of excess discontinued inventory in the current year period, net sales were $272.6 million, or below the prior year by 25.7%.  As a result of the stronger U.S. dollar compared to the prior year period and the translation of the international subsidiaries’ financial results, the effect of foreign currency unfavorably impacted net sales in the nine months ended October 31, 2009 by $5.3 million.

Net sales in the wholesale segment were $232.4 million, below prior year by $77.4 million or 25.0%.  Excluding $13.6 million of liquidation of excess discontinued inventory in the current year period, net sales in the wholesale segment were $218.8 million, or below the prior year by 29.4%.  The decrease in wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult global economic environment as lower sales were recorded in all watch categories when compared to the prior year period.

Net sales in the U.S. wholesale segment were $117.5 million, below prior year by $28.4 million or 19.4%.  Excluding $13.6 million of liquidation of excess discontinued inventory in the current year period, net sales in the U.S. wholesale segment were $103.9 million, or below prior year by 28.8%.   The decrease in U.S. wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult U.S. economic environment as lower sales were recorded in all watch categories when compared to the prior year period.

Net sales in the international wholesale segment were $114.9 million, below prior year by $49.0 million or 29.9%.  The decrease in international wholesale net sales was primarily attributable to the unfavorable impact of the ongoing difficult global economic environment as lower sales were recorded in all watch categories when compared to the prior year period.  As a result of the stronger U.S. dollar compared to the prior year period and the translation of the international subsidiaries’ financial results, the effect of foreign currency unfavorably impacted net sales in the nine months ended October 31, 2009 by $5.3 million.

Net sales in the retail segment were $53.8 million, below prior year by $3.3 million or 5.7%.  The decrease in sales was the result of lower sales in the Movado Boutiques, primarily attributable to the ongoing difficult U.S. economic environment.  Net sales in the Company’s outlet stores were relatively flat year-over-year.

Gross Profit.   Gross profit for the nine months ended October 31, 2009 was $147.7 million or 51.6% of net sales as compared to $232.9 million or 63.5% of net sales for the nine months ended October 31, 2008.  The gross profit and the gross margin percentage were negatively impacted during the nine months ended October 31, 2009 by the sales of

 
24

 

excess discontinued inventory of $13.6 million.  Excluding these sales, the gross profit was below prior year by $82.2 million and the gross margin percentage was 55.3%.  The decrease in gross profit of $82.2 million was primarily attributable to the lower sales volume as well as an overall decrease in the brand and business gross margin percentage.  The gross margin percentage was unfavorably impacted by approximately 380 basis points resulting from a shift in channel and product mix as a result of the global economic recession.  In addition, both the gross profit as well as the gross margin percentage were unfavorably impacted by currency and overhead absorption. As a result of the weaker U.S. dollar compared to the prior year period, fewer net favorable currency benefits were recorded year-over-year related to the Company’s natural hedge.  This was primarily attributable to reductions of inventory purchases in Switzerland and resulted in a 240 basis point decline in gross margin percentage.  Also as a result of the weaker U.S. dollar, gross margin deteriorated 70 basis points due to losses on the un-hedged portion of the Company’s Swiss franc liabilities, predominantly in the U.S.  The unfavorable overhead absorption is primarily attributed to abnormally low production levels associated with the decline in sales volume which unfavorably impacted the gross margin percentage by approximately 100 basis points.

Selling, General and Administrative  (“SG&A”). SG&A expenses for the nine months ended October 31, 2009 were $155.1 million as compared to $205.6 million for the nine months ended October 31, 2008, representing a decrease of $50.5 million or 24.6%.  The decrease in SG&A expenses was a result of the Company’s initiatives to streamline operations and reduce expenses, which included lower marketing expenses for the nine months ended October 31, 2009 of $23.6 million, lower payroll and related expenses of $14.6 million which were primarily the result of headcount reductions, lower expenses in the retail segment of $4.7 million due in part to the closing of three stores and lower travel and related expenses of $2.7 million.  SG&A expenses in the prior year period included $5.6 million of severance related costs associated with the implementation of the Company’s initiatives to streamline operations and reduce expenses.  The expense savings were partially offset by a net benefit recorded for performance based compensation of $2.2 million when compared to the prior year period.  Due to the challenging global economy, the benefit recorded in the prior year period was primarily the result of the reversal of previously recorded compensation expense.  Additionally, as a result of the stronger U.S. dollar compared to the prior year period and the translation of the Company’s foreign subsidiaries’ results, the effect of foreign currency favorably impacted SG&A expenses for the nine months ended October 31, 2009 by $1.5 million.

Wholesale Operating Income / (Loss).   Operating loss of $4.2 million was recorded in the wholesale segment for the nine months ended October 31, 2009 compared to operating income of $31.6 million recorded for the nine months ended October 31, 2008.  The $35.8 million decrease in profit was the net result of a decrease in gross profit of $80.4 million partially offset by a decrease in SG&A expenses of $44.6 million.  The decrease in gross profit of $80.4 million was primarily attributed to the decrease in sales year-over-year resulting from the ongoing difficult global economic environment as well as the decrease in gross margin percentage year-over-year.  The decrease in SG&A expenses of $44.6 million was driven by lower marketing expenses of $22.4 million, lower payroll and related expenses of $14.6 million which were primarily the result of headcount reductions and lower travel and related expenses of $2.7 million.  SG&A expenses in the prior year period included $5.6 million of severance related costs associated with the implementation of the Company’s initiatives to streamline operations and reduce expenses.  The expense savings were partially offset by a net benefit recorded for performance based compensation of $2.2 million when compared to the prior year period.  Due to the challenging global economy, the benefit recorded in the prior year period was primarily the result of the reversal of previously recorded compensation expense.  Additionally, as a result of the stronger U.S. dollar compared to the prior year period and the translation of the Company’s foreign subsidiaries’ results, the effect of foreign currency favorably impacted SG&A expenses for the nine months ended October 31, 2009 by $1.5 million.

Retail Operating Loss.   Operating losses of $3.2 million and $4.2 million were recorded in the retail segment for the nine months ended October 31, 2009 and 2008, respectively.  The $1.0 million decrease in the loss was the net result of a decrease in gross profit of $4.8 million more than offset by a decrease in SG&A expenses of $5.8 million.  The decrease in gross profit was primarily attributable to the decrease in gross profit percentage year-over-year resulting from in-store promotions in effect during the current year period.  The decrease in SG&A expenses was primarily the

 
25

 

result of the Company’s initiatives to streamline operations and reduce expenses and the closing of three stores that were open during the prior year period.

Interest Expense .  Interest expense for the nine months ended October 31, 2009 and 2008 was $3.8 million and $2.2 million, respectively.  Interest expense in the current period includes expenses and fees associated with the refinancing and repayment of the Company’s former credit and note agreements which included a non-cash pre-tax charge of $0.2 million related to the accelerated recognition of deferred financing costs and a pre-tax charge of $1.1 million for fees due to the former lenders.  Excluding these expenses and fees, interest expense for the nine months ended October 31, 2009 was $2.5 million, or $0.3 million above the prior year.  The increase in interest expense is primarily due to an increase in recognized deferred financing costs associated with the Company’s new line of credit.  
 
Interest Income .  Interest income was $0.1 million and $1.9 million for the nine months ended October 31, 2009 and 2008, respectively.  The lower interest income is primarily attributed to less cash invested year-over-year.

Income Taxes .  The Company recorded tax expense of $19.7 million for the nine months ended October 31, 2009.  The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates as well as expected future income.  The realization of deferred tax assets, however, depends on the Company’s ability to generate future income and the weight of all available evidence, including losses in recent years.  In the third quarter of fiscal 2010, the Company determined that it was appropriate to record a full valuation allowance against its net deferred tax assets in the U.S., primarily due to the Company’s U.S. loss position in recent years.  Under current circumstances, expected future income is not sufficient to overcome such negative evidence, and although the Company may ultimately utilize the underlying tax benefits within the statutory limits, the Company recognized a non-cash deferred tax expense of $20.8 million.  Management will continue to evaluate the appropriate level of allowance on all deferred tax assets, considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.  In addition, in the third quarter of fiscal 2010, a non-cash provision of $2.2 million was recorded for net federal income tax on the future remittance of approximately $10.0 million current year earnings of a foreign subsidiary.  No provision has been made for the remaining undistributed earnings of foreign subsidiaries, as those earnings are considered permanently reinvested.   The effective tax rate excluding these non-cash charges and other certain non-cash adjustments was 31.0%. 

The Company recorded tax expense of $1.8 million for the nine months ended October 31, 2008, which reflected the expected utilization of a Swiss net operating loss carryforward acquired with the Ebel brand in fiscal 2005 resulting in a net benefit of approximately $3.7 million.  The effective tax rate excluding these and other certain non-cash adjustments was 18.0%.

Net Income / (Loss).   For the nine months ended October 31, 2009, the Company recorded a net loss of $31.1 million as compared to net income of $25.1 million for the nine months ended October 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities was $1.8 million and $33.2 million for the nine months ended October 31, 2009 and 2008, respectively.  The cash used in operating activities for the nine months ended October 31, 2009 was primarily the result of the net loss of $30.8 million offset by non-cash charges of $38.2 million.  Additionally, cash used in operating activities included increases in accounts receivables of $25.8 million due to the seasonality of the business, offset by a planned reduction of inventory of $16.0 million.  The cash used in operating activities for the nine months ended October 31, 2008 was primarily the result of an inventory build of $43.4 million.

Cash used in investing activities amounted to $3.8 million and $17.6 million for the nine months ended October 31, 2009 and 2008, respectively.  The cash used during both periods consisted of tooling and design expenditures and capital expenditures of computer hardware and software.  The acquisition of computer hardware and software in both

 
26

 

periods is primarily related to the development and implementation of the new SAP enterprise resource planning system.  Capital expenditures in the prior year period also included spending related to the expansion and renovation of retail stores and construction of booths used at the Baselworld watch and jewelry show.  The decrease in expenditures year-over-year is due to a planned reduction of capital spending resulting from the completion of the SAP implementation and current economic conditions.

Cash used in financing activities amounted to $38.3 million and $34.5 million for the nine months ended October 31, 2009 and 2008, respectively.  Cash used in financing activities for the current period was primarily used to pay down long-term debt, to pay financing fees related to the new loan agreement and to pay dividends that were declared in the fourth quarter of the prior year.  Cash used in financing activities for the prior period was primarily used to repurchase stock and to pay out dividends, partially offset by net proceeds from long-term debt.

On June 5, 2009, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and Movado LLC (together with the Company, the “Borrowers”), each a wholly-owned domestic subsidiary of the Company, entered into a Loan and Security Agreement (the “Original Loan Agreement”) with Bank of America, N.A. as agent and lender thereunder.  The Original Loan Agreement provided for a $50.0 million asset based senior secured revolving credit facility, including a $15.0 million letter of credit subfacility, that matures on June 5, 2012.

On July 17, 2009, the Borrowers entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Bank of America, N.A. and Bank Leumi USA, as lenders, and Bank of America, N.A., as agent (in such capacity, the “Agent”), which amended and restated the Original Loan Agreement.  The Amended Loan Agreement added Bank Leumi USA as a lender thereunder and, to accommodate Bank Leumi USA holding up to $15.0 million of the Borrowers’ obligations thereunder, increased the size of the Borrowers’ asset based senior secured revolving credit facility (the “Facility”) from $50.0 million to $55.0 million, including a $15.0 million letter of credit subfacility.  The maturity date of the Facility is June 5, 2012.

Availability is determined by reference to a borrowing base which is based on the sum of a percentage of eligible accounts receivable and eligible inventory of the Borrowers.  $10.0 million in availability is blocked until the date (the “Block Release Date”) on which the Borrowers have achieved for a four fiscal quarter period a consolidated fixed charge coverage ratio of at least 1.25 to 1.0 and have domestic EBITDA greater than $10.0 million.  The availability block must remain in place for at least one year. The amount of the availability block will be reduced by the amount by which the borrowing base exceeds $55.0 million, up to a maximum reduction of $5.0 million.  Availability under the Facility may be further reduced by certain reserves established by the Agent in its good faith credit judgment.

The initial applicable margin for LIBOR rate loans is 4.25% and for base rate loans is 3.25%. After July 17, 2010, the applicable margins decrease or increase by 0.25% per annum from the initial applicable margins depending on whether average availability for the most recently completed fiscal quarter is either greater than $12.5 million, or is $5.0 million or less, respectively.  The Company has also agreed to pay certain fees and expenses and provide certain indemnities, all of which are customary for such financings.

Prior to the Block Release Date, if borrowing availability is less than $10.0 million (this threshold may be reduced to the extent the borrowing base exceeds $55.0 million, up to a maximum $5.0 million reduction), Borrowers will be subject to a minimum EBITDA covenant.  After the Block Release Date, Borrowers will be subject to a minimum EBITDA covenant if borrowing availability is less than $15.0 million.  As of October 31, 2009, the Borrowers were not subject to the minimum EBITDA covenant.
 
In addition, after the Block Release Date, if borrowing availability is less than $15.0 million, Borrowers will be subject to a minimum fixed charge coverage ratio.

Finally, the Borrowers’ deposit accounts will be subject to cash dominion prior to the Block Release Date if borrowing availability is less than $7.5 million, but such threshold may be reduced to the extent the borrowing base

 
27

 

exceeds $55.0 million, up to a maximum $5.0 million reduction.  After the Block Release Date, cash dominion will be imposed if borrowing availability is less than $15.0 million.  As of October 31, 2009, the Borrowers were not subject to cash dominion nor do the Borrowers expect to be subject to such a requirement in the foreseeable future.

The Amended Loan Agreement contains affirmative and negative covenants binding on the Borrowers and their subsidiaries that are customary for asset based facilities, including restrictions and limitations on the incurrence of debt for borrowed money and liens, dispositions of assets of the Borrowers, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments, prepayments of subordinated and certain other debt, mergers, consolidations, liquidations and dissolutions, and transactions with affiliates.

The Amended Loan Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, failure of any representation or warranty to be true in any material respect when made or deemed made, violation of covenants, cross default, material judgments, material ERISA liability, bankruptcy events, material loss of collateral in excess of insured amounts, asserted or actual revocation or invalidity of the loan documents, change of control and events or circumstances having a material adverse effect.

The borrowings under the Facility are joint and several obligations of the Borrowers and also cross-guaranteed by each Borrower.  In addition, the Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the Borrowers’ U.S. assets other than certain excluded assets.

On June 5, 2009, $40.0 million in loans were drawn under the Facility, which were used, in part, to repay amounts outstanding under the Company’s former U.S. credit facility with JPMorgan Chase Bank, N.A. (“JPM Chase”) (the “Former US Facility”), which was terminated.  In addition, approximately $1.5 million in letters of credit were issued, which were used to backstop letters of credit and other obligations outstanding in connection with the Former US Facility.  As of October 31, 2009, total availability under the Facility, giving effect to the availability block, the $20.0 million outstanding under the Facility and the letters of credit, was $28.2 million.

A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank.  These lines of credit totaled 8.0 million Swiss francs, with dollar equivalents of $7.9 million and $6.9 million at October 31, 2009 and 2008, respectively.  As of October 31, 2009, there were 5.0 million Swiss francs, with dollar equivalents of $4.9 million borrowed against these lines.  As of October 31, 2009, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.7 million in various foreign currencies.  

On April 9, 2009, the Company announced that its Board of Directors has decided to discontinue the quarterly cash dividend.  This decision was based on the Company’s desire to retain capital during the current challenging economic environment.  Under the Amended Loan Agreement, dividends are prohibited until certain financial performance measures are achieved.  The Company paid dividends of $0.05 per share or approximately $1.2 million for the nine months ended October 31, 2009, which were declared in the prior year and $0.24 per share or approximately $5.9 million for the nine months ended October 31, 2008.

Cash at October 31, 2009 amounted to $49.5 million compared to $85.1 million at October 31, 2008.  The decrease in cash is primarily the result of net cash used to pay down long-term debt.

Management believes that the cash on hand in addition to the expected cash flow from operations and the Company’s short-term borrowing capacity will be sufficient to meet its working capital needs for at least the next 12 months.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet financing or unconsolidated special-purpose entities.

 
28

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency and Commodity Price Risk

A significant portion of the Company’s purchases are denominated in Swiss francs.  The Company reduces its exposure to the Swiss franc exchange rate risk through a hedging program.  Under the hedging program, the Company manages most of its foreign currency exposures on a consolidated basis, which allows it to net certain exposures and take advantage of natural offsets.  The Company uses various derivative financial instruments to further reduce the net exposures to currency fluctuations, predominately forward and option contracts.  These derivatives either (a) are used to hedge the Company’s Swiss franc liabilities and are recorded at fair value with the changes in fair value reflected in earnings or (b) are documented as cash flow hedges with the gains and losses on this latter hedging activity first reflected in other comprehensive income, and then later classified into earnings in accordance with accounting guidance related to accounting for derivative instruments and hedging activities.  In both cases, the earnings impact is partially offset by the effects of currency movements on the underlying hedged transactions.  If the Company did not engage in a hedging program, any change in the Swiss franc to local currency would have an equal effect on the Company’s cost of sales.  In addition, the Company hedges its Swiss franc payable exposure with forward contracts.  As of October 31, 2009, the Company’s entire net forward contracts hedging portfolio consisted of 56.0 million Swiss francs equivalent for various expiry dates ranging through March 23, 2010.  If the Company were to settle its Swiss franc forward contracts at October 31, 2009, the net result would have been a gain of $1.1 million, net of tax of $0.7 million.  As of October 31, 2009, the Company had no Swiss franc option contracts related to cash flow hedges.

The Company’s Board of Directors authorized the hedging of the Company’s Swiss franc denominated investment in its wholly-owned Swiss subsidiaries using purchase options under certain limitations. These hedges are treated as net investment hedges under the relevant accounting guidance regarding derivative instruments.  As of October 31, 2009, the Company did not hold a purchased option hedge portfolio related to net investment hedging.

Commodity Risk

Additionally, the Company has the ability under the hedging program to reduce its exposure to fluctuations in commodity prices, primarily related to gold used in the manufacturing of the Company’s watches. Under this hedging program, the Company can purchase various commodity derivative instruments, primarily future contracts. These derivatives are documented as qualified cash flow hedges, and gains and losses on these derivative instruments are first reflected in other comprehensive income, and later reclassified into earnings, partially offset by the effects of gold market price changes on the underlying actual gold purchases.  The Company did not hold any future contracts in its gold hedge portfolio related to cash flow hedges as of October 31, 2009, thus any changes in the gold price will impact the Company’s cost of sales.

Debt and Interest Rate Risk

In addition, the Company has certain debt obligations with variable interest rates, which are based on LIBOR plus a fixed additional interest rate.  The Company does not hedge these interest rate risks.  The Company believes that a 1% change in interest rates would affect the Company’s net income by approximately $0.2 million for the year.

 
29

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as amended. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this report.

The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective at that reasonable assurance level.  However, it should be noted that a control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that its objectives will be met and may not prevent all errors or instances of fraud.

Changes in Internal Control Over Financial Reporting

During the first quarter of fiscal 2010, the Company implemented an ERP system in all of its wholesale businesses to support the Company’s business plan.  Implementing an ERP system on a global basis involves significant changes in business processes and extensive personnel training.  The Company believes it has taken the necessary steps to monitor and maintain its internal control baseline upon go-live, deploying qualified resources to mitigate internal control risks and performing pre-implementation testing and verification to ensure data integrity.

Moreover, the Company believes its process owners understand the controls they are expected to perform as part of the utilization of the new system.


 
30

 

PART II - OTHER INFORMATION

Item 1.                  Legal Proceedings

The Company is involved in pending legal proceedings and claims in the ordinary course of business.  Although the outcome of such matters cannot be determined with certainty, the Company’s general counsel and management believe that the final outcome would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Reference is made to the information disclosed under Item 1 — “Legal Proceedings” in the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2009. The following is a summary of recent litigation developments.
 
The Company participated in mediation proceedings with respect to the case of Bertha V. Norman, et al. v. Movado Company Store, United States District Court, Central District of California, 2008-cv-6691 and agreed to settle the case. The settlement, which was preliminarily approved by the Court, provides for the Company to pay a stipulated amount representing plaintiffs’ attorney’s fees and costs and compensation for class members who timely submit claim forms. The Company has previously booked a reserve which it believes is adequate to cover the entire settlement amount.

Item 1A.                 Risk Factors

As of October 31, 2009, there have been no material changes to any of the risk factors previously reported in the Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds

On December 4, 2007, the Board of Directors authorized a program to repurchase up to one million shares of the Company’s Common Stock.  Shares of Common Stock were repurchased from time to time as market conditions warranted either through open market transactions, block purchases, private transactions or other means.  The objective of the program was to reduce or eliminate earnings per share dilution caused by the shares of Common Stock issued upon the exercise of stock options and in connection with other equity based compensation plans.  As of April 14, 2008, the Company had completed the one million share repurchase in the first quarter of fiscal 2009, at a total cost of approximately $19.4 million, or $19.41 per share.

On April 15, 2008, the Board of Directors announced a new authorization to repurchase up to an additional one million shares of the Company’s Common Stock.  Under this authorization, the Company has the option to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs.  The Company entered into a Rule 10b5-1 plan to facilitate repurchases of its shares under this authorization.  A Rule 10b5-1 plan permits a company to repurchase shares at times when it might otherwise be prevented from doing so, provided the plan is adopted when the company is not aware of material non-public information.  The Company may suspend or discontinue the repurchase of stock at any time.  Under this share repurchase program, the Company had repurchased a total of 937,360 shares of Common Stock in the open market during the first and second quarters of fiscal year 2009 at a total cost of approximately $19.5 million or $20.79 per share.  During the nine months ended October 31, 2009, the Company has not repurchased shares of Common Stock.

An aggregate of 344,614 shares have been repurchased during the nine months ended October 31, 2009 as a result of the surrender of shares in connection with the vesting of certain restricted stock awards and exercise of certain stock options.  At the election of an employee, shares having an aggregate value on the vesting date equal to the employee’s withholding tax obligation may be surrendered to the Company.

 
31

 

The following table summarizes information about the Company’s purchases for the period ended October 31, 2009 of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:

Issuer Repurchase of Equity Securities
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
February 1, 2009 - February 28, 2009
    2,835     $ 7.29       -       62,640  
March 1,  2009 - March 31, 2009
    2,848     $ 8.24       -       62,640  
April 1, 2009 - April 30, 2009
    -       -       -       62,640  
May 1, 2009 - May 31, 2009
    -       -       -       62,640  
June 1, 2009 - June 30, 2009
    308     $ 9.39       -       62,640  
July 1, 2009 - July 31, 2009
    -       -       -       62,640  
August 1, 2009 - August 31, 2009
    -       -       -       62,640  
September 1, 2009 - September 30, 2009
    338,623     $ 13.74       -       62,640  
October 1, 2009 - October 31, 2009
    -       -       -       62,640  
Total
    344,614     $ 13.64       -       62,640  




















 
32

 

 Item 6.                      Exhibits

 
 10.1  Amended and Restated License Agreement among Tommy Hilfiger Licensing LLC, Movado Group, Inc. and Swissam Products Limited, dated as of September 16, 2009.**

31.1  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2  
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






 
  ** Confidential portions of Exhibit 10.1 have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.

 
33

 


SIGNATURE


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 thereunto duly authorized.


                                 MOVADO GROUP, INC.
                                                       (Registrant )

Dated:  December 9, 2009
By:
/s/ Sallie A. DeMarsilis
   
Sallie A. DeMarsilis
   
Senior Vice President,
   
Chief Financial Officer and
   
Principal Accounting Officer
     
     
     
     
     
     
     
     
     
     























 
34

 


 
 

 

EXHIBIT 10.1**












AMENDED AND RESTATED
LICENSE AGREEMENT

BETWEEN

TOMMY HILFIGER LICENSING LLC

(“LICENSOR”)

AND

MOVADO GROUP, INC AND SWISSAM PRODUCTS LIMITED

(“LICENSEE”)








** CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED FROM PAGES   3, 6, 8, 10, 15, 17-24, 29, 33 and 35 AND FROM EXHIBITS C, D, F, G, H, I AND J AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) PUSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (“1934 ACT”).













 
 

 

TABLE OF CONTENTS

LICENSE AGREEMENT                                                                 1
PREMISES                                                       1
ARTICLE 1. DEFINITIONS                                                                       1
1.1           Affiliate.……………………………………………………………………………….…..1
1.2           Agreement…………………………………………………………………………………1
1.3           Annual Period……………………………………………………………………………..1
1.4           Close-Outs…………………………………………………………………………………2
1.5           Close Out Customer……………………………………………………………………….2
1.6           Distributor………………………………………………………………………………… 2
1.7           Franchisee………………………………………………………………………………… 2
1.8           Gross Sales………………………………………………………………………………... 2
1.9           Guaranteed Minimum Royalty………….………………………………………………...2
1.10           Inventory……………………………………………………………………………….…2
1.11           Inventory Schedule………………………………………………………………………2
1.12           Labels……………………………………………………………………………………...2
1.13           Licensed Products………………………………………………………………………  2
1.14           Minimum Sales Level.……………………………………………………………………2
1.15           Net Sales…………………………………………………………………………………..2
1.16           Off Price Sales…………………………………………………………………………….3
1.17           Percentage Royalty……………………………………………………………………….3
1.18           Program Sales……………………………………………………………………………..3
1.19           Seasonal Collection……………………………………………………………………….3
1.20           Seconds……………………………………………………………………………………3
1.21           Subcontractor……………………………………………………………………………...3
1.22           Supplier…………………………………………………………………………………….3
1.23           Term………………………………………………………………………………………..4
1.24           Territory…………………………………………………………………………………....4
1.25           Third Party Manufacturer………………………………………………………………...5
1.26           Tommy Hilfiger Stores……………………………………………………………………5
1.27           Tommy Hilfiger Websites………………………………………………………………..5
1.28           Trade Secrets……………………………………………………………………………...5
1.29           Trademarks………………………………………………………………………………..5

ARTICLE 2. GRANT                                                                  5
2.1           License…………………………………………………………………………………….....5
2.2           Exclusivity; Competitors…………………………………………………………………....5
2.3           Reservations………………………………………………………………………………....5
2.4           Distribution of Jewelry Products…………………………………………………………..6

 
 

 
ARTICLE 3. TERM OF THE AGREEMENT                                                                                       7
3.1           Term………………………………………………………………………………………......7
3.2           Extension…………………………………………………………………………………......7

ARTICLE 4. ORGANIZATION                                                                                                            7
4.1           Organization…………………………………………………………………………...…….7

ARTICLE 5. APPROVALS                                                                                                                    8
5.1           Approvals…………………………………………………………………………………....8

ARTICLE 6. DESIGN AND MANUFACTURING                                                                          9
6.1           Seasonal Design, Time and Action Calendar…………………………………………..9
6.2           Overall Commitment to Quality…………………………………………………………..9
6.3           Samples of Manufactured Products……………………………………………………..9
6.4           Non-Conforming Products……………………………………………………………......9
6.5           Withdrawal of Approval……………………………………………..………………..….10
6.6           Assistance by Licensor………..………………………………………………………....10
6.7           Ownership of Designs…………………………………………………………………….11
6.8           Cost of Designs, Samples………………………………………………………………...11
6.9           Code of Conduct…………………………………………………………………………..11
6.10           Monitoring Program……………………………………………………………………...12
6.11           Third Party Manufacturing Agreement………………………………………………...12
6.12           Information About Third Party Manufacturers, ………………………………………12
6.13           Inspection of Facilities…………………………………………………………………...13
6.14           Compliance with Applicable Laws- Generally.…………………………………...…….13
6.15           Notice on Invoices………………………………………………………………….…….14
6.16           Meetings……………………………………………………………………………..…….14
6.17           Anti-Counterfeiting………………………………………………………………….……14

ARTICLE 7. BRAND DEVELOPMENT, SALES AND MARKETING                                           14
7.1           Best Efforts……………………………………………………………………………….....14
7.2           Sales and Deliveries…………………………………………………………………….......15
7.3           Reporting………………………………………………………………………………….....15
7.4           Sales/Marketing Plans  ........………………………………………………………….....…15
7.5           Minimum Sales Levels………………………………………………………………….......15
7.6           Certain Sales Excluded…………………………………………………………………......15
7.7           Approved Customers……………………………………………………………………....16
7.8           Prohibited Sales………………………………………………………………………….....16
7.9           Showrooms and In-Store Shops………………………………………………………….17
7.10           Products for Licensor’s Use……………………………………………………………..17
7.11           Purchases By Licensor…………………………………………………………………...17
7.12           Purchases By Outlet Stores Owned or Operated by Licensor or its Affiliates……..18
 
 
 

 
7.13           Purchases By Tommy Hilfiger Stores, Websites and Franchisees…………………..18
7.14           Disposal of Off-Price Products…………………………………………………………..18
7.15           Penalties for Unapproved and Prohibited Sales……………………………………….19

ARTICLE 8. ADVERTISING                                                                                                                20
8.1           Guaranteed Minimum and Brand Advertising Payments………………………………20
8.2           Percentage Advertising Payment………………………………………………………...20
8.3           Media Plan and Licensor’s Advertising Spending……………………………………..21
8.4           Approval of Labels and Licensee’s Advertising……………………………………….22
8.5           Launch…………………………………………………………………………………...….22
8.6           Branded Shows………………………………………………………………………….....22
8.7           Trade Shows……………………………………………………………………………......23
8.8           Public Announcements…………………………………………………………………....23

ARTICLE 9. ROYALTIES AND RELATED FEES                                                                            23
9.1           Guaranteed Minimum Royalty…………………………………………………………....23
9.2           Percentage Royalty……………………………………………………………………..…23
9.3           Royalty Statements………………………………………………………………………...23
9.4           Merchandise Coordinator Program………………………………………………………24
9.5           No Set-Off………………………………………………………………………………......24

ARTICLE 10. MANNER OF PAYMENT, INTEREST, BOOKS AND RECORDS, INSPECTION 24
10.1           Manner of Payment……………………………………………………………………….24
10.2           Interest on Late Payments………………………………………………………………..24
10.3           Taxes……………………………………………………………………………………......25
10.4           Books and Records………………………………………………………………………..25
10.5           Underpayments…………………………………………………………………………....25
10.6           Financial Statements……………………………………………………………………....26

ARTICLE 11. REPRESENTATIONS AND WARRANTIES                                                              26
11.1           Representations and Warranties………………………………………………………….26
11.2           Representations by Licensor……………………………………………………………..26
11.3           Representations by Licensee……………………………………………………………..26

ARTICLE 12. CONFIDENTIALITY AND HIRING OF EMPLOYEES                                               27
12.1           Confidentiality…………………………………………………………………………........27
12.2           Hiring of  Employees……………………………………………………………………......27

ARTICLE 13. TRADEMARKS AND COPYRIGHTS                                                                           27
13.1           Rights to the Trademarks……………………………………………………………….......27
13.2           Protecting the Trademarks…………………………………………………………….........28
13.3           Compliance with Notice and Other Requirements……………………………………......28
 
 
 

 
13.4           Ownership of Copyrights…………………………………………………………….…......28
13.5 Infringement……………………………………………………………………………...............28
13.6           Counterfeit Protection…………………………………………………………………….....28
13.7           Use of Other Trademark…………………………………………………………………......29
13.8           Use of Trademarks on Invoices, etc.……………………………………………………....29
13.9           Monitoring……………………………………………………………………………......….29

ARTICLE 14. INSOLVENCY                                                                                                                  29
14.1           Effect of Proceeding in Bankruptcy……………………………………………………....29
14.2           Rights Personal………………………………………………………………………….....30
14.3           Trustee in Bankruptcy ……………………………………………………………………30

ARTICLE 15. EXPIRATION AND TERMINATION                                                                        30
15.1           Other Rights Unaffected…………………………………………………………….…....30
15.2           Termination without Right to Cure………………………………………………………30
15.3           Termination with Right to Cure……………………………………………………….….31
15.4           Effect of Expiration or Termination………………………………………………….…..32
15.5           Freedom to License………………………………………………………………….……33
15.6           Royalty Payments on Termination…………………………………………………..….33

ARTICLE 16. RELATIONSHIP BETWEEN THE PARTIES                                                          34
16.1           No Agency……………………………………………………………………………….34

ARTICLE 17. CUSTOMS                                                                                                                    34
17.1           Compliance…………………………………………………………………………..……34
17.2           Notices to Licensor………………………………………………………………………34

ARTICLE 18. INDEMNIFICATION AND INSURANCE                                                                 34
18.1           Indemnification by Licensee……………………………………………………………..34
18.2           Notice of Suit or Claim………………………………………………………………….....35
18.3           Indemnification by Licensor……………………………………………………….……..35
18.4           Insurance.………………………………………………………………………………..35

ARTICLE 19. NOTICES                                                                                                                    36
19.1           Manner of Notice……………………………………………………………….……...36

ARTICLE 20. MISCELLANEOUS                                                                                                    37
20.1           Benefit……………………………………………………………………………………37
20.2           Entire Agreement; Amendment…………………………………………………….….37
20.3           Non-Waiver……………………………………………………………………..….……37
20.4           No Assignment Without Consent……………………………………………..……...37
20.5           Assignment by Licensor……………………………………………………………….38
20.6           Severability………………………………………………………………………………38
 
 
 

 
20.7           Governing Law…………………………………………………………………………..38
20.8           Jurisdiction……………………………………………………………………………….38
20.9           Exhibits…………………………………………………………………………………....38
20.10           Headings………………………………………………………………………………...38
20.11           Counterparts…………………………………………………………………...…....…..38
20.12           Force Majeure; Delay…………………………………………………………………..39
20.13           Survival………………………………………………………………………………….39



EXHIBIT A                      LICENSED PRODUCTS
EXHIBIT B                      TRADEMARKS
EXHIBIT C                      ORGANIZATION CHART
EXHIBIT D                      DESIGN, TIME AND ACTION CALENDAR
EXHIBIT E                      SUPPLIER CODE OF CONDUCT
EXHIBIT F                      MINIMUM SALES LEVELS
EXHIBIT G                      GUARANTEED MINIMUM ROYALTY/ EXTENSION TERM
EXHIBIT H                      COMPETITIVE BRANDS
EXHIBIT I                      APPROVED CUSTOMERS IN JAPAN
EXHIBIT J                      INITIAL BUSINESS PLAN

 
 

 
LICENSE AGREEMENT

THIS AMENDED AND RESTATED LICENSE AGREEMENT is entered into as of the 16
 day of Sept, 2009, by and between TOMMY HILFIGER LICENSING LLC, a Delaware limited liability company, having an address at 200 Liberty Way, Cranbury, New Jersey 08512 (“Licensor”) and MOVADO GROUP, INC., a New York corporation, having its offices at 650 From Road, Paramus, New Jersey 07652 (“MGI”) and SWISSAM PRODUCTS LIMITED, a Hong Kong corporation, having its offices at 5th Floor, Alexander House, 18 Charter Road, Hong Kong  (“SPL,” and together with MGI, "Licensee"), with reference to the following premises.
PREMISES

A.           Licensor’s Trademarks (as defined below) are famous and valuable, and are associated with substantial goodwill in connection with apparel and related products.

B.           Licensee recognizes the fame, value of, and goodwill associated with the Trademarks and that all rights to the Trademarks, and the goodwill associated therewith, belong exclusively to Licensor.

C.           Licensor, MGI and Movado Watch Company, SA (a wholly owned subsidiary of MGI, “MWC”)  have previously entered into a license agreement dated June 3, 1999 (as heretofore amended, the “Existing License Agreement”) to use the Trademarks, on and in connection with the manufacture, importation, distribution, promotion, advertising and sale of the Licensed Products (as defined below) in the Territory (as defined below); and MWC has assigned all of its interest in the Existing License Agreement to SPL.

D.           Licensor and Licensee desire to amend and restate the Existing License Agreement subject to the terms and conditions set forth below.

E.           In consideration of these premises and the mutual covenants herein expressed, and for other good consideration, which the parties hereby acknowledge, the parties hereby agree as follows.

ARTICLE 1.                                DEFINITIONS

1.1 “ Affiliate
means , with respect to either party, a person or business entity, whether a corporation, partnership, joint venture or otherwise, which now or hereafter controls, or is controlled, directly or indirectly by such party, or is under common control with such party.

1.2 “ Agreement
 means this agreement.

1.3 “ Annual Period
means the twelve-month period beginning on April 1 and ending on March 31.





 
1

 


1.4 “ Close-Outs
means first quality Licensed Products that under applicable industry standards are not sold to regular customers, although they were originally intended for sale to such customers (such as   overruns and sales of excess merchandise).  Close-Out sales shall not include Program Sales.

1.5 “ Close-Out Customer ” means a purchaser of Close-Outs that regularly and primarily is engaged in the resale of Close-Outs

1.6 “ Distributor ” means a person or entity appointed by Licensee to purchase Licensed Products from Licensee for purposes of reselling the same to approved customers (as set forth in Paragraph 7.7 hereof) in a defined geographic territory, which appointment shall be subject to the approval by Licensor, such approval not to be unreasonably withheld, delayed or conditioned.

1.7 “ Franchisee ” means the operator of a store which is not owned or affiliated with Licensor and that bears the name “Tommy Hilfiger”, “Hilfiger” or any derivative thereof, authorized by Licensor to sell the Licensed Products from such store to end-customers in a territory.

1.8 “ Gross Sales
means the invoiced amount for Licensed Products shipped by Licensee, before any deductions for allowances, discounts and returns (as are referred to in Paragraph 1.15), insurance and freight.

1.9 “ Guaranteed Minimum Royalty
means the minimum royalty that Licensee shall pay in each Annual Period, as set forth in Paragraph 9.1.

1.10 “ Inventory
means Licensee’s inventory of Licensed Products and of related work in progress.

1.11 “ Inventory Schedule
means a complete and accurate schedule of Inventory.

1.12 “ Label s
means all labels, tags, packaging materials, tickets, advertising and promotional materials and all other forms of identification that bear the Trademarks, affixed to or accompanying the Licensed Products at the point of sale.

1.13 “ Licensed Products ” means
only those products listed in Exhibit A attached hereto that bear one or more of the Trademarks and are approved by Licensor in accordance with the provisions of this Agreement. Licensee acknowledges that the application of the definition of Licensed Products to a particular item may be unclear.  If there is a dispute over whether a particular item qualifies as a Licensed Product, Licensor’s reasonable written determination shall be conclusive and binding.

1.14 “ Minimum Sales Level
means the minimum Net Sales (as defined below) of Licensed Products that Licensee is required to achieve during each Annual Period, as set forth in Paragraph 7.5.

1.15 “ Net Sales
  means the Gross Sales of Licensed Products, including but not limited to, Seconds and Close-Outs, but not including samples, less only: (a) returns (or destruction in



 
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place) that Licensee actually authorizes and, for returns, actually receives, (b) allowances (defined as credits to a customer after delivery, including credits for returns,   promotions and markdowns) that Licensee actually grants in writing, and (c) trade discounts (defined as reductions in the list wholesale selling price that are customary in the trade) that Licensee actually grants in writing prior to delivery; and (d) taxes, freight and insurance to the extent the same are separately stated on Licensee’s invoices.  No other deductions from Gross Sales shall be taken in computing Net Sales , including, but not limited to, deductions for special promotions, advertising, warehouse or distribution expenses, or for uncollectible accounts. For the purpose of computing of Net Sales, the foregoing permitted deductions shall not exceed    *
percent of the Gross Sales of Licensed Products shipped in any Annual Period.

1.16 “ Off-Price Sales
means Net Sales (other than sales to Distributors, Approved Corporate Accounts, Licensor, Affiliates of Licensor, Tommy Hilfiger Stores, Tommy Hilfiger Websites and Franchisees) of Seconds (if applicable), Close-Outs, Program Sales (if applicable), and all other sales of Licensed Products at a discount of more than   *   percent off of the
standard wholesale price.

1.17 “ Percentage Royalty
means the amount of money that Licensee shall pay to Licensor in consideration for the grant of this license, as set forth in Paragraph 9.2.  The Percentage Royalty shall be based on the bona fide prices that Licensee charges for Licensed Products to independent retailers or to independent Distributors, as the case may be, in arms’ length transactions. For the avoidance of doubt, if Licensee sells Licensed Products to an Affiliate of Licensee operating as a retailer, the Percentage Royalty shall be based on such bona fide wholesale prices charged by Licensee to independent retailers, and if Licensee sells Licensed Products to an Affiliate of Licensee operating as a Distributor, the Percentage Royalty shall be based on such bona fide prices charged by Licensee to independent Distributors, irrespective, in either case, of Licensee’s internal accounting treatment of such sales.

1.18   Program Sales
means sales to a Close-Out Customer of Licensed Products which are manufactured specifically for sale to such Close-Out Customer after at least six (6) months have passed since the initial introduction of such Licensed Products at market .

1. 19 Seasonal Collection
means a collection of Licensed Products that Licensee shall present to the market in accordance with Paragraph 6.1.

1. 20 Seconds
  means damaged, imperfect, defective or otherwise non-first quality Licensed Products. Seconds sales may not exceed the stated percentages as set forth in Paragraph 7.14(e) below.

1. 21 Subcontractor
 means an entity or an individual hired by a Third Party Manufacturer  (other than employees of such Third Party Manufacturer) to perform manufacturing in relation to this Agreement.

1. 22 Supplier
means an individual or entity that produces components for the Licensed Products, and provides such components to a manufacturer in order to assemble the finished Licensed Products, provided that such individual or entity does not contribute further to the

*CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT

 
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manufacture of the Licensed Products.

1. 23 Term
means the duration of this Agreement, as set forth in Paragraph 3.1, including, if not expressly excluded, all Extensions as defined in Paragraph 3.2, if any.

1. 24 Territory
means the entire world, excluding Japan (except as to those specific approved customers listed on Exhibit I annexed hereto).  At times this Agreement shall refer to specific regions (“Regions”) defined below:

(a)
Western Hemisphere means the Region including the United States (including its territories and possessions as of the date of this Agreement), Canada, the Caribbean Islands, duty free shops (such as, but not limited to, DFS) worldwide, United States military bases worldwide, Mexico and, commencing as of April 1, 2005,  Latin America.

(b)
Europe means the Region including the following areas (“Areas”):

(i)   North Europe means the area including Germany, Austria, Switzerland, Benelux, France, Denmark, Sweden, Iceland, Norway and Finland;

(ii)   South Europe means the Area including Spain, Portugal, Greece, Turkey, Italy, Malta and the Middle East (comprising Egypt, Kuwait, Israel, United Arab Emirates, Syria, Saudi Arabia, Morocco and Lebanon);

(iii)   United Kingdom means the Area including England, Ireland, Northern   Ireland, Scotland and Wales.

(iv)   Eastern Europe means Poland, Bulgaria, Romania, Russia (and the countries of the former Soviet Union), Slovenia, Slovakia, Croatia, Serbia, the Czech Republic, and Hungary.

 
(c)
Pan Pacific means the Region including Hong Kong, Taiwan, Southeast Asia and Australia (specifically not including Japan or Korea).

(d)
Latin America means the Region including the following Areas:

(i)   South America means the Area including Paraguay, Colombia, Brazil, Chile, Peru, Argentina, Bolivia and Uruguay, but specifically excluding Venezuela and;

(ii)   Central America means the Area including Panama, Nicaragua, Honduras, El Salvador, Ecuador, Guatemala and Costa Rica.

(e)
Korea means the Republic of Korea

(f)
China means the People’s Republic of China and all of its administrative regions

 
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             (except as otherwise included in another Region)

1. 25 Third Party Manufacturer
means an entity or an individual which or whom Licensee either hires or pays to manufacture the Licensed Products.

1. 26 Tommy Hilfiger Stores
means retail and outlet stores, including flagship stores, within or outside the Territory, owned or operated by Licensor or its Affiliates that bear the name “Tommy Hilfiger”, “Hilfiger” or any derivative thereof as determined by Licensor.

1. 27 Tommy Hilfiger Websites
means any internet websites owned or operated by Licensor or its Affiliates through which products bearing the Trademarks are sold and/or marketed to consumers and/or the trade.

1. 28 Trade Secrets ” means any and all information that derives to its owner independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use, and that is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

1. 29 Trademarks ” means only the trademarks set forth in Exhibit B attached hereto, the direct derivatives and variants thereof, and any trademarks used or Licensed by Licensor for use on products with the Trademarks.

ARTICLE 2.                                GRANT

2.1 License
.  Licensor grants to Licensee an exclusive non-assignable license during the Term, subject to all of the obligations and conditions contained in this Agreement, to use the Trademarks in connection with (a) the manufacture of Licensed Products anywhere in the world, and (b) marketing, advertising, sale and distribution at wholesale of Licensed Products by MGI in the United States (including its territories and possessions) and by SPL in the remainder of the geographic areas comprising the Territory.

2.2 Exclusivity; Competitors .
  Licensor agrees that in the event it desires to enter into a license arrangement for the distribution of the Licensed Products in any country other than those included in the Territory, it shall send a notice to Licensee of such intention.  Licensee shall have the right to submit a business plan to Licensor outlining its proposal for obtaining such a license, which Licensor shall consider reasonably and in good faith, provided , however , that Licensor’s decision whether to grant such license shall be final and binding and, provided , further that nothing stated herein shall be construed as an obligation for Licensor to grant Licensee any additional license for countries other than those included in the Territory.

2.3 Reservations
.  This Agreement does not constitute a grant of any rights other than those expressly set forth herein.  In particular, Licensor does not grant to Licensee:

(a)           the right to use the name “TOMMY”, “HILFIGER”, or “TH” individually, or logos representing said names, except to the extent that any such name or logo is included within the Trademarks;

 
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(b)           the right to use any derivative of, or modification to, the Trademarks;

(c)           the right to form a business entity whose name includes the terms “Tommy”, “Hilfiger”, or “TH”;

(d)           an assignment of any right, title or interest in or to the Trademarks; or

(e)           the right to use the Trademarks on invoices, order forms, stationery and related business purposes without Licensor’s prior written approval.

Licensor, and its other licensees and sublicensees, have the right to (i) manufacture and sell products of any and all types and descriptions other than the Licensed Products inside or outside of the Territory, or (ii) to manufacture Licensed Products inside or outside of the Territory for sale outside of the Territory.

Nothing contained in this Agreement shall prohibit Licensor or any Affiliate of Licensor from offering for sale in Tommy Hilfiger Stores and/or on Tommy Hilfiger Websites watches or jewelry that are not Licensed Products.

Except as otherwise provided for herein, no license is granted hereunder for the manufacture, sale or distribution of Licensed Products to be used for publicity purposes, in combination sales, premiums or giveaways, or to be disposed of under or in connection with similar methods of merchandising, such license being specifically reserved for Licensor.  The foregoing provision shall not prohibit Licensee from promoting or advertising the sale of the Licensed Products.

2.4 Distribution of Jewelry Products .  Anything herein to the contrary notwithstanding, Licensee shall launch the sale of jewelry products under one or more of the Trademarks (“Jewelry Products”) consistent with the current business plan (the initial business plan is attached hereto at Exhibit J ) (including sales in commercially reasonable quantities of Jewelry Products to Tommy Hilfiger Stores) (i) in Europe                  *                 ; (ii) in Pan Pacific no later than           *                             and (iii) in Latin America no later than April 1, 2012. Without limiting the generality of the foregoing, (i) Licensee shall launch the sale of Jewelry Products in a particular country where other Tommy Hilfiger products are sold within twelve (12) months of Licensor’s specific written request to so launch the sale of Jewelry Products in such country, provided that Licensor will not request any such launch in any country included as part of Europe, Pan Pacific or Latin America earlier than the respective date set forth above for such Region, and (ii) any launch of the sale of Jewelry Products by Licensee  hereunder shall be subject to Licensor’s prior written approval of a business plan submitted by Licensee to Licensor which sets forth Licensee’s sales, marketing and advertising plans for such sales in the relevant Region or country. Licensor’s approval of any such business plan shall not be unreasonably withheld, delayed or conditioned. Beginning at the time of the initial launch of Jewelry Products and continuing thereafter, Movado shall sell Jewelry Products to Tommy Hilfiger Stores anywhere in the world that wish to purchase them.  If Licensee fails to launch the sale of Jewelry Products on or before the date set forth above for a particular Region or Licensee fails to launch the sale of Jewelry Products in a particular country within

*CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT


 
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twelve (12) months of Licensor’s request to do so, as required by this Paragraph 2.4 and such failure is not the result of any action or inaction on the part of Licensor contrary to the terms of this Agreement  or any event of force majeure, then Licensor may terminate this Agreement as to such Region or country, as the case may be, with respect to Jewelry Products only, within ninety (90) days after written notice to Licensee if within said ninety (90) days Licensor shall not have remedied such failure, in which case Licensee shall lose its right to sell and distribute Jewelry Products in such Region or country.

ARTICLE 3.                                TERM OF THE AGREEMENT

3.1 Term
.  The initial Term of this Agreement shall commence on April 1, 2009   and expire on March 31, 2014, unless sooner terminated in accordance with the provisions of this Agreement.  If as of January 1, 2012, Licensor believes that higher Minimum Sales Levels are justified for the Annual Periods April 1, 2012 – March 31, 2013 and April 1, 2013 – March 31, 2014, the parties shall discuss raising those Minimum Sales Levels.

3.2 Extension
.  This Agreement shall be extended for an additional five (5) year renewal period commencing on April 1, 2014 and ending on March 31, 2019 (the “Extension Term”), provided that Licensee:

(a)           makes a request for Extension in writing at least twelve (12) months, but no more than fifteen (15) months,  before the expiration of the applicable Term or Extension Term; and

(b)           at the time it requests any Extension and as of the end of the initial Term, is in compliance with the terms and conditions of this Agreement;

(c)           submits a business plan for the Extension Term that Licensor approves at least six (6) months prior to expiration of the Term; and

(d)           has achieved Minimum Sales Levels in at least two (2) Annual Periods prior to the April 1, 2013 – March 31, 2014 Annual Period and, as of the date the business plan for the Extension Term is approved, has projected and committed to achieving the applicable Minimum Sales Level for the balance of the then expiring Term .

Licensee acknowledges that the twelve (12) month advance notice is necessary to maintain the continuity of Licensor’s licensing and marketing programs and the goodwill associated with the Trademarks.  Time is of the essence in this regard and Licensee’s failure to make its request in time shall constitute a conclusive decision by Licensee not to seek an Extension Term.  Upon such failure, Licensor has the right, without notice to Licensee, to immediately replace Licensee as of the end of the Term as provided for in Paragraph 15.5 hereunder.

ARTICLE 4.                                ORGANIZATION

4.1 Organization
.  Licensee shall, at its sole cost and expense, employ the following persons or persons with similar titles and responsibility, who will, except as specifically indicated, work exclusively with Licensor’s representatives on Licensee’s business arising under this Agreement


 
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and will report directly to the President of Licensee or his or her designee:

Region                                             Position


                             *                                              *





 

Furthermore, at any time during the Term or any Extension Term, Licensor may reasonably require that Licensee hire a separate Global Director of Marketing, apart from the President, in which event the parties will discuss such request in good faith.  All of these individuals will be hired with the prior approval of Licensor and shall be relieved of their duties under this Agreement at the request of Licensor.  In addition, Licensee shall maintain a sales force dedicated exclusively to the sale of Licensed Products. The sales force shall not be deemed to include merchandise coordinator’s or account representatives.   Exhibit C attached hereto sets forth Licensee’s organization chart of said personnel.  Licensee shall maintain a separate division of its company dedicated exclusively to the sale of Licensed Products.  At such time that Net Sales of Jewelry Products equal or exceed          *        during any Annual Period the parties shall enter into good faith discussions regarding the creation by Licensee of separate divisions for watches and Jewelry Products.  Unless otherwise agreed by Licensor Licensee shall maintain throughout the Term (i) a separate division based in Switzerland for Europe; (ii) a separate division based in Hong Kong for Pan Pacific and (iii) a separate division based in a location to be approved by Licensor for Latin America.

ARTICLE 5.                                APPROVALS

5.1 Approvals
.  Licensor shall retain overall creative control for the brand, Trademarks, Licensed Products, and related advertising hereunder. Licensee shall present to Licensor in writing all plans, products, proposals, customers, advertising, and other materials and items requiring Licensor’s approval under this Agreement.  Except as otherwise stated in this Agreement, all approvals of Licensor shall be in its sole and subjective discretion.  A submission for approval under this Paragraph 5.1, or under any other provision of this Agreement, shall be deemed disapproved unless Licensor delivers a notice of approval within twenty (20) days after receipt of the request from Licensee, or such other period of time as may otherwise be agreed to by the parties.  Licensor will use reasonable efforts to provide an explanation for its disapproval in a timely manner, but no such explanation shall be deemed to waive, estopp or otherwise diminish Licensor’s right to decide future requests for approvals or reconsideration in its sole discretion.  Without limitation to the foregoing, Licensor has no obligation to approve, review or consider any item that does not strictly comply with submission procedures announced by Licensor.  Approval by Licensor shall not be deemed to be a determination that the approved matter complies with all applicable regulations and


*CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT

 
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laws.  Licensee may not exhibit, display, manufacture, sell, use, distribute or advertise any disapproved item.  In the event that it is necessary for Licensor to perform on-site approvals, Licensee shall pay any and all reasonable expenses, including travel, incurred by Licensor with respect to such on-site approvals.

ARTICLE 6.                                DESIGN AND MANUFACTURING

6.1 Seasonal Design, Time and Action Calendar
.  Attached hereto as Exhibit D is Licensee’s design, time and action calendar for the Term of the Agreement.  Each Annual Period, Licensee shall present to the market at least four (4) Seasonal Collections – Fall, Holiday, Spring, and Summer.  On or about each January 15 th , Licensee shall present a design, time and action calendar for the next succeeding July through December.  On or about each July 15 th , Licensee shall present a design, time and action calendar for the next succeeding January through June.

6.2 Overall Commitment to Quality
. Licensee shall maintain the distinctiveness of the Trademarks and the image and high quality of the goods bearing the Trademarks. The Licensed Products shall at all times be at least commensurate with the reputation, image and prestige of the Trademarks and be of high quality as to workmanship, construction, appearance, fabrication, design and materials used therein and generally associated with the Licensor's and its other licensee's goods   bearing the Trademarks   (collectively “Quality”), and shall be at least equal in Quality to the samples of Licensed Products submitted by Licensee and approved in writing in advance by Licensor pursuant to Paragraph 6.3 hereof.

6.3 Samples of Manufactured Products
. Before Licensee may exhibit, display or distribute any Licensed Products in any Seasonal Collection, Licensee shall submit samples of each of said Licensed Products and the Labels thereon to Licensor for its prior written approval, utilizing any submission form as reasonably provided by Licensor.  Any approval given hereunder shall apply only to that Seasonal Collection for which it is submitted to Licensor. In addition, any such approvals shall authorize Licensee to make only such quantities of the approved item as Licensee reasonably expects to sell to its regular customers (excluding customers approved for sales of Close-Outs) and to Licensor, Licensor’s Affiliates and Distributors.  Licensee shall submit to Licensor additional samples of Licensed Products upon Licensor’s reasonable request.  Licensee shall provide all samples to Licensor at Licensee’s sole cost and expense.  Once samples have been approved, Licensee may manufacture only in accordance with such approved samples and shall not make any material changes for manufacture without Licensor’s prior written approval.  No Licensed Products (including samples) may be exhibited, displayed, distributed and/or sold by Licensee pursuant to this Agreement unless such Licensed Products are in substantial conformity with, and at least equal in, Quality to the samples previously approved by Licensor in accordance with this Paragraph 6.3.

6.4 Non-Conforming Products
.  In the event that any Licensed Product is, in the judgment of Licensor, not being manufactured and distributed in accordance with the previously approved Quality, Licensor shall notify Licensee and Licensee shall promptly repair or change such Licensed Product to conform thereto.  If after Licensor’s request a Licensed Product as repaired or changed does not strictly conform and conformity cannot be obtained after one (1) resubmission, Licensee may sell the item but only after removing from the item the Trademarks and Labels or

 
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may sell the same as a clearly marked Second or irregular.  Notwithstanding anything in this Paragraph 6.4 to the contrary, sales of all such products using any of Licensor's exclusive designs, whether or not bearing Labels or the Trademarks, shall nonetheless be subject to royalty payments pursuant to Article 9.  In the event that Licensor finds any Licensed Products in the marketplace that, in Licensor's judgment, are inconsistent with approved Quality for such Licensed Products at the time of their sale, then Licensor shall notify Licensee thereof and promptly provide such information with respect thereto as Licensee shall reasonably request.  In the event that, after receiving all such information, Licensee fails within ten (10) days to either correct such inconsistencies or remove such Licensed Products from the market, then Licensor may, at Licensee’s expense, purchase such Licensed Products and bill such costs to Licensee.  Licensee shall pay all royalties due on sales of nonconforming goods.  Licensor may require Licensee to recall any Licensed Products not consistent with approved Quality.

6.5 Withdrawal of Approval
.  If at any time any Licensed Product ceases to be acceptable to Licensor, Licensor shall have the right in the exercise of its sole discretion to withdraw approval of such Licensed Product, a “Family” of which (meaning all men’s and women’s models) in any Annual Period (following the first full Annual Period in which such Family is first introduced) sells less than               *             not including Seconds and Close-Outs, in the aggregate.  Notwithstanding the foregoing, Licensor acknowledges that certain Jewelry Product Families may not be forecasted to sell           *      and that Licensee’s failure to sell          *         of such a Jewelry Product Family shall not constitute a basis for withdrawal of approval. Upon withdrawal of approval, Licensee shall cease the use of the Trademarks in connection with the manufacture, distribution, promotion, advertising, and use of such Licensed Product(s).  Notice of such election by Licensor to withdraw approval shall not relieve Licensee from its obligation to pay royalties on sales of such product(s) made by Licensee prior to the date of disapproval or thereafter as permitted.  Licensee may, however, complete work in progress for three (3) months from notice of withdrawal of approval, sell all existing Inventory of such Licensed Products and utilize materials on hand provided that it submits proof of such work in progress and inventory of such discontinued Licensed Product to Licensor.  All such discontinued Licensed Products shall be sold or otherwise disposed of in the manner set forth in Paragraph 15.4 (h) within twelve (12) months of receipt of notice of withdrawal of approval.

6.6 Assistance by Licensor
.  Licensor shall provide creative concepts and fashion direction for each Seasonal Collection. Licensor has ultimate design and creative approval rights, and written approval is required at key dates as indicated in the design, time and action calendar. At least four (4) times during each Annual Period, Licensee may, at its expense, visit Licensor’s offices, factories, showroom, and other places of business, and attend Licensor’s sales meetings to obtain additional know-how and assistance with respect to Licensed Products.  The scheduling of such visits shall be at times mutually convenient to the parties hereto.  If Licensee requests Mr. Tommy Hilfiger or any other member(s) of Licensor’s staff to make a personal appearance, to attend any function, to visit Licensee’s manufacturing plants or facilities or to attend any design meetings, all of the foregoing shall be subject to scheduling availability, if any, and Licensee shall pay all reasonable expenses in connection therewith, including appropriate airfare, lodgings, meals and local transportation consistent with the travel policy of Licensor, understanding and agreeing that if Licensee requests Mr. Tommy Hilfiger to make such an appearance, Licensee shall pay all expenses in connection therewith, including appropriate

*CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT

 
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airfare, lodgings, meals and local transportation consistent with Mr. Tommy Hilfiger’s typical travel arrangements (e.g., private aircraft transportation).  Licensor shall at least four (4) times during each Annual Period, upon request by Licensee, make available to Licensee certain samples, designs, colors, samples of materials, Labels and artwork, the cost of which shall be borne by Licensee at the cost incurred by Licensor to provide the same. In addition to the foregoing, for marketing purposes, Licensor shall, upon request, make available to Licensee such of the following that are available to Licensor: (a) reports on marketing policy of Licensor; (b) reports on color, style and fabric trends; (c) at Licensee’s cost, samples of advertising materials; (d) display ideas; and (e) Labels.

6.7 Ownership of Designs
.  All right, title and interest, including copyright and goodwill, in and to all unique and legally protectable samples, sketches, designs, and other materials, whether created hereunder by Licensor, by Licensee, or by third parties (and, if created by Licensee or by any third party, used on or as part of or in connection with Licensed Products), including any modifications or improvements thereto, are the exclusive property of Licensor or its Affiliates; and this Agreement constitutes an assignment by Licensee to Licensor of such rights, to the extent they are not already the property of Licensor, and are licensed hereunder solely and exclusively for use in connection with the manufacture and distribution of Licensed Products in the Territory.   Provided, however, that notwithstanding anything to the contrary contained herein, Licensor shall not have any exclusive right, title or interest in or to any such samples, sketches, designs or other materials that were previously used by Licensee or by any third party on or as part of watches or clocks other than the Licensed Products.  Licensor may use and permit others to use said designs and other materials in any manner it desires (other than on Licensed Products in the Territory during the Term), provided that such use does not conflict with any rights that Licensor is granting to Licensee hereunder.  Licensee specifically acknowledges that such designs and other materials may be used by Licensor and other licensees on Licensed Products in jurisdictions outside the Territory and on products other than Licensed Products anywhere in the world.  Licensee shall place appropriate notices, reflecting ownership of such design rights by Licensor, on all Licensed Products, Labels and advertising and promotional materials if requested by Licensor in writing on a case by case basis and if Licensee reasonably determines that such placement is practicable.  Neither Licensee nor any Affiliate or any other person or entity with whom Licensee has a contractual relationship or who is otherwise under Licensee’s control, shall do or allow to be done anything that may adversely affect any of Licensor’s design rights.  Licensee shall disclose and freely make available to Licensor any and all developments or improvements it may make relating to Licensed Products and to their manufacture, promotion and sales, including, without limitation, developments and improvements in any machine, process or product design, that may be disclosed or suggested by Licensor or regarding any patent or trademark that Licensee is entitled to utilize.

6.8 Cost of Designs , Samples
.  Licensee is solely responsible for all product development and associated expenses, including costs associated with the preparation and submission of designs to Licensor and all reasonable travel expenses incurred by Licensor in the event Licensor travels to Licensee’s factories or other facilities as part of the design process.

6.9 Code of Conduct
.  Attached hereto as Exhibit E is Licensor’s Supplier Code of Conduct (“Code”), which applies to any entity manufacturing products bearing the Trademarks or the components thereof, including Licensed Products.  Licensee shall use its best efforts to ensure that



 
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Licensee and all Third Party Manufacturers, Subcontractors and Suppliers comply with the terms of the Code and shall evidence such compliance by:

(a)           prior to the commencement of the manufacturing of Licensed Products, Licensee and all Third Party Manufacturers, Subcontractors and Suppliers providing written acknowledgment of its receipt of and adherence to the Code, it being understood that neither Licensee nor any Third Party Manufacturer, Subcontractor or Supplier need re-acknowledge its receipt and adherence to the Code if it has so previously acknowledged; and

(b)            displaying and having all Third Party Manufacturers, Subcontractors and Suppliers display the Code, in a clearly visible location in Licensee’s manufacturing facilities (if applicable) and in the manufacturing facilities of Licensee’s Third Party Manufacturers, Subcontractors and Suppliers, at all times during the Term and any Extension Term(s) of this Agreement.

6.10 Monitoring Program
.  Licensee acknowledges that prior to the commencement of the manufacturing of Licensed Products, it shall have in effect, to the satisfaction of Licensor, a program of monitoring manufacturing facilities, whether operated by Licensee, by Third Party Manufacturers, Subcontractors or Suppliers, that is sufficient to ensure their compliance with the Code and all applicable laws and regulations.  Such compliance shall be evidenced by Licensee executing and abiding by a Certification in such form as may be provided by Licensor from time to time

6.11 Third Party Manufacturing Agreement
.  Within thirty (30) days after establishing a new arrangement with a Third Party Manufacturer or Subcontractor, Licensee shall inspect e