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The following is an excerpt from a 10-K SEC Filing, filed by MOVADO GROUP INC on 4/9/2009.
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MOVADO GROUP INC - 10-K - 20090409 - NOTES_TO_FINANCIAL_STATEMENT
NOTES TO MOVADO GROUP, INC.’S CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Movado Group, Inc. (the "Company") designs, sources, markets and distributes quality watches with prominent brands in almost every price category comprising the watch industry. In fiscal 2009, the Company marketed nine distinctive brands of watches: Movado, Ebel, Concord, ESQ, Coach, HUGO BOSS, Juicy Couture, Tommy Hilfiger and Lacoste, which compete in most segments of the watch market.

Movado, Ebel and Concord watches are generally manufactured in Switzerland by independent third party assemblers with some in-house assembly in Bienne and La Chaux-de-Fonds, Switzerland.  Movado, Ebel and Concord watches are manufactured using Swiss movements and other components obtained from third party suppliers.  Coach, ESQ, Tommy Hilfiger, Juicy Couture, HUGO BOSS and Lacoste watches are manufactured by independent contractors. Coach and ESQ watches are manufactured using Swiss movements and other components purchased from third party suppliers. Tommy Hilfiger, Juicy Couture, HUGO BOSS and Lacoste watches are manufactured using movements and other components purchased from third party suppliers.

In addition to its sales to trade customers and independent distributors, through a wholly-owned domestic subsidiary, the Company sells select models of Movado watches, as well as proprietary Movado-branded jewelry and clocks directly to consumers in its Movado Boutiques and operates outlet stores throughout the United States, through which it sells discontinued models and factory seconds.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries.  Intercompany transactions and balances have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The Company uses estimates when accounting for sales discounts, rebates, allowances and incentives, warranty, income taxes, depreciation, amortization, contingencies, impairments and asset and liability valuations.

Reclassification

Certain reclassifications were made to prior years’ financial statement amounts and related note disclosures to conform to the fiscal 2009 presentation.

 
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Translation of Foreign Currency Financial Statements and Foreign Currency Transactions

The financial statements of the Company's international subsidiaries have been translated into United States dollars by translating balance sheet accounts at year-end exchange rates and statement of operations accounts at average exchange rates for the year.  Foreign currency transaction gains and losses are charged or credited to earnings as incurred. Foreign currency translation gains and losses are reflected in the equity section of the Company's consolidated balance sheet in Accumulated Other Comprehensive Income.  The balance of the foreign currency translation adjustment, included in Accumulated Other Comprehensive Income, was $42.3 million and $62.0 million as of January 31, 2009 and 2008, respectively.

Cash and Cash Equivalents

Cash equivalents are considered all highly liquid investments with original maturities at date of purchase of three months or less.

Trade Receivables

Trade receivables as shown on the consolidated balance sheet are net of allowances.  The allowance for doubtful accounts is determined through an analysis of the aging of accounts receivable, assessments of collectability based on historic trends, the financial condition of the Company’s customers and an evaluation of economic conditions.  The Company writes off uncollectible trade receivables once collection efforts have been exhausted and third parties confirm the balance is not recoverable.

The Company's trade customers include department stores, jewelry store chains and independent jewelers. All of the Company’s watch brands, except ESQ, are also marketed outside the U.S. through a network of independent distributors. Accounts receivable are stated net of doubtful accounts, returns and allowances of $19.6 million, $36.3 million and $26.1 million at January 31, 2009, 2008 and 2007, respectively.  In the fourth quarter of fiscal 2008, the Company recorded a one-time charge of $15.0 million related to estimated sales returns associated with the closing of certain wholesale doors in the U.S.

The Company's concentrations of credit risk arise primarily from accounts receivable related to trade customers during the peak selling seasons. The Company has significant accounts receivable balances due from major national chain and department stores. The Company's results of operations could be materially adversely affected in the event any of these customers or a group of these customers defaulted on all or a significant portion of their obligations to the Company as a result of financial difficulties. As of January 31, 2009, except for those accounts provided for in the reserve for doubtful accounts, the Company knew of no situations with any of the Company’s major customers which would indicate any such customer’s inability to make its required payments.

Inventories

The Company values its inventory at the lower of cost or market.  The Company’s U.S. inventory is valued using the first-in, first-out (FIFO) method.  The cost of finished goods and component inventories, held by international subsidiaries, are determined using average cost. The Company’s management regularly reviews its sales to customers and customers’ sell through at retail to determine excess or obsolete inventory.  Inventory classified as discontinued and, together with the related

 
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component parts which can be assembled into saleable finished goods, is sold primarily through the Company’s outlet stores. When management determines that finished product is unsaleable or when it is impractical to build the remaining components into watches for sale, a reserve is established for the cost of those products and components to value the inventory at the lower of cost or market.  During the fiscal year ended January 31, 2009, the Company went through a process of scrapping unsaleable inventory and components which were reserved for and recorded as cost of sales in previous fiscal years.  Additionally in fiscal year 2009, the Company conducted its ongoing review of unsaleable inventory and associated components resulting in no material changes to existing reserves.  During the fiscal years ended January 31, 2008 and 2007, the Company conducted an in depth review of all its discontinued components and watches.  In doing so, the Company made an economic decision to convert these excess quantities of discontinued inventory into cash.  As a result, the Company engaged in a liquidation through an independent third party to sell the excess product for cash.  In addition, where it was not deemed economically feasible to invest the time, effort and/or cost, the Company initiated efforts to cleanse the inventory and scrap the product.  The Company’s estimates, based on which it establishes its inventory reserves, could vary significantly, either favorably or unfavorably, from actual requirements depending on future economic conditions, customer inventory levels, expected usage or competitive conditions.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation.  Depreciation of buildings is amortized using the straight-line method based on the useful life of 40 years.  Depreciation of furniture and equipment is provided using the straight-line method based on the estimated useful lives of assets, which range from four to ten years. Computer software is amortized using the straight-line method over the useful life of five to ten years.  Leasehold improvements are amortized using the straight-line method over the lesser of the term of the lease or the estimated useful life of the leasehold improvement.  Design fees and tooling costs are amortized using the straight-line method based on the useful life of three years.  Upon the disposition of property, plant and equipment, the accumulated depreciation is deducted from the original cost and any gain or loss is reflected in current earnings.

Long-Lived Assets

The Company periodically reviews the estimated useful lives of its depreciable assets based on factors including historical experience, the expected beneficial service period of the asset, the quality and durability of the asset and the Company’s maintenance policy including periodic upgrades. Changes in useful lives are made on a prospective basis unless factors indicate the carrying amounts of the assets may not be recoverable and an impairment write-down is necessary.

The Company performs an impairment review of its long-lived assets once events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. When such a determination has been made, management compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between asset carrying values and the fair value of the long-lived assets.

During the fourth quarter of fiscal 2009, the Company determined that the carrying value of its long-lived assets with respect to five Movado Boutique retail locations was not recoverable. The impairment review was performed pursuant to SFAS No. 144 because of the economic downturn in the U.S. that had

 
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a negative effect on the Company’s fourth quarter ended January 31, 2009, the retail segments largest quarter of the year in terms of sales and profitability.  The deteriorating economy negatively affected the Boutiques’ sales volumes. As a result, the Company recorded a non-cash pre-tax impairment charge of $4.5 million consisting of property, plant and equipment.  The charge was calculated as the difference between the assets’ carrying values and their estimated fair value.  For the purposes of this calculation, fair value was determined using a discounted cash flow calculation.  The impairment charge is included in the selling, general and administrative expenses in the fiscal 2009 Consolidated Statements of Income.

Deferred Rent Obligations and Contributions from Landlords

The Company accounts for rent expense under non-cancelable operating leases with scheduled rent increases on a straight-line basis over the lease term.  The excess of straight-line rent expense over scheduled payments is recorded as a deferred liability.  In addition, the Company receives build out contributions from landlords primarily as an incentive for the Company to lease retail store space from the landlords.  This is also recorded as a deferred liability.  Such amounts are amortized as a reduction of rent expense over the life of the related lease.

Capitalized Software Costs

The Company capitalizes certain computer software costs after technological feasibility has been established. The costs are amortized utilizing the straight-line method over the economic lives of the related products ranging from five to seven years.  Additionally, the Company is in the process of implementing SAP, a business enterprise solution as the core enterprise system.  As of January 31, 2009 and January 31, 2008, $19.7 million and $10.5 million of costs related to SAP have been capitalized, respectively.  When the SAP system goes live, it will begin to be amortized over a period of 10 years, utilizing the straight-line method.

Intangibles

Intangible assets consist primarily of trademarks and are recorded at cost.  Trademarks are amortized over ten years. The Company periodically reviews intangible assets to evaluate whether events or changes have occurred that would suggest an impairment of carrying value.  An impairment would be recognized when expected undiscounted future operating cash flows are lower than the carrying value.  At January 31, 2009 and 2008, intangible assets at cost were $10.3 million and $11.3 million, respectively, and related accumulated amortization of intangibles was $6.3 million and $6.9 million, respectively. Amortization expense for fiscal 2009, 2008 and 2007 was $1.0 million, $0.8 million and $0.7 million, respectively.

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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", (“SFAS No. 133”) as amended and interpreted, which establishes accounting and reporting standards for derivative instruments and hedging activities.  It 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

 
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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 account 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 SFAS No. 133 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.

The Company’s risk management policy includes net investment hedging of the Company’s Swiss franc-denominated investment in its wholly-owned subsidiaries located in Switzerland using purchased foreign currency options under certain limitations. When entered into for this purpose, the Company designates and documents the derivative instrument as a net investment 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 net investment hedge are recorded in other comprehensive income in the same manner as the cumulative translation adjustment of the Company’s Swiss franc-denominated investment. The Company formally assesses, both at the inception and at each financial quarter thereafter, the effectiveness of the derivative instrument hedging the net investment.

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.

Revenue Recognition

In the wholesale segment, the Company recognizes its revenues upon transfer of title and risk of loss in accordance with its FOB shipping point terms of sale and after the sales price is fixed and determinable and collectability is reasonably assured.  In the retail segment, transfer of title and risk of loss occurs at the time of register receipt.  The Company records estimates for sales returns, volume-based programs and sales and cash discount allowances as a reduction of revenue in the same period that the sales are recorded.  These estimates are based upon historical analysis, customer agreements and/or currently known factors that arise in the normal course of business.  In the fourth quarter of fiscal 2008, the Company recorded a one-time accrual of $15.0 million related to estimated future sales returns associated with the streamlining of the Movado brand wholesale distribution in the U.S. for the planned

 
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reduction of approximately 1,400 wholesale customer doors.  These sales returns were completed during fiscal 2009.

Cost of Sales

Costs of sales of the Company’s products consist primarily of component costs, assembly costs and unit overhead costs associated with the Company’s supply chain operations in Switzerland and Asia.  The Company’s supply chain operations consist of logistics management of assembly operations and product sourcing in Switzerland and Asia and minor assembly in Switzerland.

Selling, General and Administrative Expenses

The Company’s SG&A expenses consist primarily of marketing, selling, distribution and general and administrative expenses.  During the second half of fiscal year 2009, the Company announced initiatives designed to streamline operations, reduce expenses, and improve efficiencies and effectiveness across the Company’s global organization.     In fiscal year 2009, the Company recorded a total pre-tax charge of $11.1 million related to the completion of these programs and a restructuring of certain benefit arrangements.   Additionally, the Company recorded a non-cash pretax impairment charge of $4.5 million consisting of property, plant and equipment, related to five Movado Boutiques.

Annual marketing expenditures are based principally on overall strategic considerations relative to maintaining or increasing market share in markets that management considers to be crucial to the Company’s continued success as well as on general economic conditions in the various markets around the world in which the Company sells its products.

Selling expenses consist primarily of salaries, sales commissions, sales force travel and related expenses, expenses associated with Baselworld, the annual watch and jewelry trade show and other industry trade shows and operating costs incurred in connection with the Company’s retail business. Sales commissions vary with overall sales levels. Retail selling expenses consist primarily of payroll related and store occupancy costs.

Distribution expenses consist primarily of salaries of distribution staff, rental and other occupancy costs, security, depreciation and amortization of furniture and leasehold improvements and shipping supplies.

General and administrative expenses consist primarily of salaries and other employee compensation, employee benefit plan costs, office rent, management information systems costs, professional fees, bad debts, depreciation and amortization of furniture and leasehold improvements, patent and trademark expenses and various other general corporate expenses.

Warranty Costs

All watches sold by the Company come with limited warranties covering the movement against defects in material and workmanship for periods ranging from two to three years from the date of purchase, with the exception of Tommy Hilfiger watches, for which the warranty period is ten years.  In addition, the warranty period is five years for the gold plating for Movado watch cases and bracelets.  When changes in warranty costs are experienced, the Company will adjust the warranty accrual as required.

 
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Warranty liability for the fiscal years ended January 31, 2009, 2008 and 2007 was as follows (in thousands):

   
2009
   
2008
   
2007
 
                   
Balance, beginning of year
  $ 2,193     $ 1,954     $ 2,185  
Provision charged to operations
    1,864       2,193       1,954  
Settlements made
    (2,193 )     (1,954 )     (2,185 )
                         
Balance, end of year
  $ 1,864     $ 2,193     $ 1,954  

Pre-opening Costs

Costs associated with the opening of new boutique and outlet stores, including pre-opening rent, are expensed in the period incurred.

Marketing

The Company expenses the production costs of an advertising campaign at the commencement date of the advertising campaign.  Included in marketing expenses are costs associated with co-operative advertising, media advertising, production costs and costs of point-of-sale materials and displays.  These costs are recorded as SG&A expenses.  The Company participates in cooperative advertising programs on a voluntary basis and receives a “separately identifiable benefit in exchange for the consideration”.  Since the amount of consideration paid to the retailer does not exceed the fair value of the benefit received by the Company, these costs are recorded as SG&A expenses as opposed to being recorded as a reduction of revenue.  Marketing expense for fiscal 2009, 2008 and 2007 amounted to $80.3 million, $86.2 million and $79.4 million, respectively.

Included in the other current assets in the consolidated balance sheets as of January 31, 2009 and 2008 are prepaid advertising costs of $2.0 million and $2.6 million, respectively.  These prepaid costs represent advertising costs paid to licensors in advance, pursuant to the Company’s licensing agreements and sponsorships.

Shipping and Handling Costs

Amounts charged to customers and costs incurred by the Company related to shipping and handling are included in net sales and cost of goods sold, respectively.  The amounts recorded for the fiscal years ended January 31, 2009, 2008 and 2007 were insignificant.

Income Taxes

The Company follows SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and tax rates, in each jurisdiction the Company operates, and applies to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that

 
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includes the enactment date. In addition, the amounts of any future tax benefits are reduced by a valuation allowance to the extent such benefits are not expected to be realized on a more-likely-than-not basis. The Company calculates estimated income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for both book and tax purposes.

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on February 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109.  FIN 48 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.  The Company previously recognized income tax positions based on management’s estimate of whether it was reasonably possible that a liability had been incurred for unrecognized tax benefits by applying SFAS No. 5, Accounting for Contingencies.  The provisions of FIN 48 became effective for the Company on February 1, 2007.

Earnings Per Share

The Company presents net income per share on a basic and diluted basis.  Basic earnings per share is computed using weighted-average shares outstanding during the period.  Diluted earnings per share is 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 were 24,782,000, 26,049,000 and 25,670,000 for fiscal 2009, 2008 and 2007, respectively.  For diluted earnings per share, these amounts were increased by 772,000, 1,244,000 and 1,124,000 in fiscal 2009, 2008 and 2007, respectively, due to potentially dilutive common stock equivalents issuable under the Company’s stock compensation plans.

For the year ended January 31, 2009, approximately 75,000 of potentially dilutive common stock equivalents were excluded from the computation of dilutive earnings per share because their effect would have been antidilutive.  There were no antidilutive shares for the year-ended January 31, 2008.

Stock-Based Compensation

On February 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), electing to use the modified prospective application transition method, and accordingly, prior period financial statements have not been restated.   Under this method, the fair value of all employee stock options granted after adoption and the unvested portion of previously granted awards must be recognized in the Consolidated Statements of Income.  Prior to February 1, 2006, employee stock option grants were accounted for under the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock at grant date over the amount an employee must pay to acquire the stock.  Accordingly, compensation expense had not been recognized for employee stock options granted at or above fair value.  Prior to February 1, 2006, compensation expense for restricted stock grants was reduced as actual forfeitures of the awards occurred.  SFAS No. 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest and thus, current period compensation

 
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expense for both stock options and restricted stock have been adjusted for estimated forfeitures.  See Note 12 to the Company’s Consolidated Financial Statements for further information regarding stock-based compensation.

Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.”  SFAS No. 141(R) states that all business combinations (whether full, partial or step acquisitions) will result in all assets and liabilities of an acquired business being recorded at their acquisition date fair values.  Earn-outs and other forms of contingent consideration and certain acquired contingencies will also be recorded at fair value at the acquisition date.  SFAS No. 141(R) also states acquisition costs will generally be expensed as incurred; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense; and restructuring costs will be expensed in periods after the acquisition date.  This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company will apply the provisions of this standard to any acquisitions that it completes on or after February 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  This statement amends ARB No. 51   to   establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in the consolidated balance sheets.  This statement also provides guidance on a subsidiary deconsolidation as well as stating that entities need to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company is currently evaluating the impact of SFAS No. 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”.  This statement requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires cross-referencing within the footnotes.  This statement also suggests disclosing the fair values of derivative instruments and their gains and losses in a tabular format.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently evaluating the impact of SFAS No. 161 on the Company’s consolidated financial statements.

 
 
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NOTE 2 – INVENTORIES, NET

Inventories, net at January 31, consisted of the following (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
 
Finished goods
  $ 146,073     $ 117,027  
Component parts
    81,423       76,222  
Work-in-process
    1,388       11,880  
    $ 228,884     $ 205,129  

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at January 31, at cost, consisted of the following (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
 
Land and buildings
  $ 3,995     $ 4,285  
Furniture and equipment
    60,592       62,434  
Computer software
    37,953       41,529  
Leasehold improvements
    40,660       42,930  
Design fees and tooling costs
    10,010       10,690  
      153,210       161,868  
Less: accumulated depreciation
    86,461       93,355  
    $ 66,749     $ 68,513  

Depreciation and amortization expense related to property, plant and equipment for fiscal 2009, 2008 and 2007 was $17.2 million, $15.8 million and $15.7 million, respectively, which includes computer software amortization expense for fiscal 2009, 2008 and 2007 of $1.0 million, $2.0 million and $3.7 million, respectively.  Additionally, the Company recorded a non-cash pre-tax impairment charge of $4.5 million consisting of property, plant and equipment, related to five Movado Boutique locations.

NOTE 4 – SENIOR DEBT, PROPOSED AND COMMITTED LINES OF CREDIT

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 (the “1998 Note Purchase Agreement”), between the Company and The Prudential Insurance Company of America (“Prudential”).  These notes bear interest of 6.90% per annum, mature on October 30, 2010 and are subject to annual repayments of $5.0 million commencing October 31, 2006.  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 its Series A Senior Notes under an amendment to the 1998 Note Purchase Agreement (as amended, the “First Amended 1998 Note Purchase Agreement”) with Prudential and an affiliate of Prudential.  No

 
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additional senior promissory notes are issuable by the Company pursuant to the First Amended 1998 Note Purchase Agreement. Certain provisions and covenants were modified to be aligned with covenants in the Company’s other credit agreements.  These included the interest coverage ratio, elimination of the maintenance of consolidated net worth and the addition of a debt coverage ratio.  At January 31, 2009, $10.0 million of the Series A Senior Notes were issued and outstanding.

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 will mature on October 8, 2011 and are 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.  The Second Amended 2001 Note Purchase Agreement permits the Company to issue senior promissory notes for purchase by Prudential and the Purchasers, in an aggregate principal amount of up to $70.0 million inclusive of the Senior Series A-2004 Notes described above, until June 5, 2011, with maturities up to 12 years from their original date of issuance. The remaining aggregate principal amount of senior promissory notes issuable by the Company that may be purchased by Prudential and the Purchasers pursuant to the Second Amended 2001 Note Purchase Agreement is $55.0 million. Certain provisions and covenants were modified to be aligned with covenants in the Company’s other credit agreements.  These included the interest coverage ratio, elimination of the maintenance of consolidated net worth and addition of a debt coverage ratio. As of January 31, 2009, $15.0 million of the Senior Series A-2004 Notes were issued and outstanding.

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  JPMorgan Chase Bank, N.A. (“Chase”), JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank and Citibank, N.A. (as amended, the "Swiss Credit Agreement"), provides for a revolving credit facility of 33.0 million Swiss francs and matures on December 15, 2010.  The obligations of the Company’s Swiss subsidiaries under this credit agreement are guaranteed by the Company under a Parent Guarantee, dated as of December 15, 2005, in favor of the lenders.  The Swiss Credit Agreement contains financial covenants, including an interest coverage ratio, average debt coverage ratio and limitations on capital expenditures and certain non-financial covenants that restrict 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 bear interest at a rate equal to LIBOR (as defined in the Swiss Credit Agreement) plus a

 
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margin ranging from .50% per annum to .875% per annum (depending upon a leverage ratio).  As of January 31, 2009, there were no outstanding borrowings under this revolving credit facility.

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 JPMorgan Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank, Bank Leumi and Citibank, N.A. (as amended, the "US Credit Agreement"), provides 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 US Credit Agreement will mature on December 15, 2010.  The obligations of MGI Luxury Group S.A. and Movado Watch Company SA are guaranteed by the Company under a Parent Guarantee, dated as of December 15, 2005, in favor of the lenders. The obligations of the Company are guaranteed by certain domestic subsidiaries of the Company under subsidiary guarantees, in favor of the lenders.  The US Credit Agreement contains financial covenants, including an interest coverage ratio, average debt coverage ratio and limitations on capital expenditures and certain non-financial covenants that restrict 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 US Credit Agreement bear interest, at the Company’s option, at a rate equal to the adjusted LIBOR (as defined in the 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 US Credit Agreement).  As of January 31, 2009, $40.0 million was outstanding under this revolving credit facility.

For the fiscal years ending January 31, 2009 and 2008, the calculation of the financial covenants for the Series A Senior Notes, Senior Series A-2004 Notes, the Swiss Credit Agreement and US Credit Agreement (together the "Debt Facilities”) were as follows (dollars in thousands):

   
Required
   
Required
   
Actual
   
Actual
 
   
Senior
   
Credit
   
January 31,
   
January 31,
 
Covenant
 
Notes
   
Facilities
   
2009
   
2008
 
                         
Interest Coverage Ratio
 
Min. 3.50x
   
Min. 3.50x
      2.45 x     16.09 x
Average Debt Coverage Ratio
 
Max. 3.25x
   
Max. 3.25x
      2.72 x     0.93 x
Capital Expenditures Limit
    n/a     $ 42,608     $ 22,681     $ 27,392  
Priority Debt Limit
  $ 79,095       n/a     $ 40,000     $ 25,907  
Lien Limit
  $ 79,095       n/a     $ -     $ -  

As of January 31, 2009, the Company was in compliance with all non-financial covenants under the Debt Facilities.  Due to the reported financial results for fiscal 2009, the Company was in compliance with all financial covenants with the exception of the interest coverage ratio covenant under these Debt Facilities.  The current results included certain charges for severance related costs associated with the Company’s expense reduction initiatives and a restructuring of certain benefit arrangements of $11.1 million and for asset impairments of $4.5 million.  The Company believes that it would have been in compliance with all covenants if these charges, which it deems to be non-recurring in nature, were excluded from the covenant calculations.   As a result of the Company’s projections in light of the global economic downturn, without an amendment or waiver, the Company believes that it will continue to be in non-compliance with the interest coverage ratio covenant, and potentially additional financial

 
 
F-20

 
 
covenants under the Debt Facilities, for the upcoming reporting periods in fiscal year 2010.  The Company has not requested a waiver as it is currently in negotiations for a new credit facility discussed in more detail below.  Additionally, the Company has received a commitment, subject to certain limitations described more fully below, for a three year $50 million asset-based credit facility from Bank of America to provide available liquidity if a new credit facility is not consummated.
 
As a result of the Company’s non-compliance with the interest coverage ratio covenant, amounts owed under the Debt Facilities have been reclassified to current liabilities.  Additionally, the Company is prohibited from borrowing any additional funds under the Debt Facilities and the amounts owed as of January 31, 2009 may be declared immediately due and payable by the lenders.  The lenders have not taken any action in respect to this default, but they may do so in the future.  Should the debt be declared immediately due and payable by the lenders, the Company would be able to satisfy such obligations through obtaining alternative financing, cash on hand and conversion of working capital to cash.
 
The components of debt as of January 31, were as follows (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
 
             
Swiss Revolving Credit Facility
  $ -     $ 25,895  
U.S. Revolving Credit Facility
    40,000       -  
Series A Senior Notes
    10,000       15,000  
Senior Series A-2004 Notes
    15,000       20,000  
      65,000       60,895  
Less: current portion
    65,000       10,000  
Long-term debt
  $ -     $ 50,895  

The Company pays a facility fee on the unused portion of the committed lines of the Swiss Credit Agreement and the US Credit Agreement.  The unused portion of the committed lines was $78.5 million at January 31, 2009, however, as noted above, the Company is unable to access such amounts due to its non-compliance with the interest coverage ratio covenants under the Debt Facilities.

Aggregate maximum and average monthly outstanding borrowings against the Company's lines of credit, including uncommitted lines of credit, and related weighted-average interest rates during fiscal 2009 and 2008 were as follows (dollars in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
 
             
Maximum borrowings
  $ 44,800     $ 40,900  
Average monthly borrowings
  $ 27,800     $ 32,200  
Weighted-average interest rate
    3.0 %     2.9 %


 
F-21

 
 
Weighted-average interest rates were computed based on average month-end outstanding borrowings and applicable average month-end interest rates.  For information about the Company’s uncommitted lines of credit, see Note 5 – Uncommitted Lines of Credit.
 
Through the date of this filing, the Company is in negotiations with banking institutions for a new three year asset-based revolving credit facility for an amount up to $110 million (the “New Facility”).   Consummation of the New Facility is subject to (a) syndication, (b) completion of due diligence by the banking institutions, and (c) the satisfaction of a number of additional customary conditions precedent, certain of which are at the sole discretion of the banking institution.  The New Facility will likely include limited financial covenants that are effective only if a minimum availability threshold is not maintained.  The New Facility will be collateralized by substantially all of the assets of Movado Group, Inc. and its U.S. subsidiaries, including accounts receivable and inventory, and 65% of the capital stock of first-tier foreign subsidiaries.  The New Facility will contain various restrictions including limitations on additional debt, the payment of dividends and repurchasing stock.  The Company expects that the fees and the interest rates under the New Facility, if consummated, will increase to current market rates.  The Company anticipates that the New Facility will be finalized in May of 2009 and will have a term of three years, expiring in May 2012.

As previously mentioned, to provide for available liquidity in the event that the New Facility is not consummated, the Company has received a commitment for a three year $50 million asset-based credit facility from Bank of America.  The commitment is subject to the completion of due diligence by Bank of America and the satisfaction of a number of additional customary conditions precedent, certain of which are at the sole discretion of Bank of America.   In the event the New Facility is consummated, this commitment will be canceled.

The Company anticipates that the New Facility or the $50 million asset-based credit facility, if consummated, would replace the Debt Facilities .  In the event the New Facility or the $50 million asset-based credit facility is not consummated, the Company’s financial condition and results of operations may be materially adversely affected.  
 
NOTE 5 – UNCOMMITTED LINES OF CREDIT

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.  Pursuant to the line of credit letter agreement, Bank of America will consider requests for short-term loans and documentary letters of credit for the importation of merchandise inventory, the aggregate amount of which at any time outstanding shall not exceed $20.0 million. The Company's obligations under the agreement are guaranteed by its subsidiaries, Movado Retail Group, Inc. and Movado LLC.  Pursuant to the amended and restated promissory note, the Company promised to pay Bank of America $20.0 million, or such lesser amount as may then be the unpaid balance of all loans made by Bank of America to the Company thereunder, in immediately available funds upon the maturity date of June 16, 2009. The Company has the right to prepay all or part of any outstanding amounts under the amended and restated promissory note without penalty at any time prior to the maturity date. The amended and restated promissory note bears interest at an annual rate equal to either (i) a floating rate equal to the prime rate or (ii) such fixed rate as may be agreed upon by the Company and Bank of America for an interest period which is also then agreed upon. The amended and restated promissory note contains various representations and warranties and events of default that
 
 
F-22

 
 
are customary for instruments of that type.  As of January 31, 2009, there were no outstanding borrowings against this line.
 
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 Chase.  Pursuant to the promissory note, the Company promised to pay 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 Chase to the Company thereunder, upon the maturity date of July 31, 2009. The Company has the right to prepay all or part of any outstanding amounts under the promissory note without penalty at any time prior to the maturity date. The promissory note bears 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 Chase from time to time on any single commercial borrowing. The promissory note contains various events of default that are customary for instruments of that type. In addition, it is 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 US Credit Agreement.  Chase issued 11 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 for Canadian payroll to the Royal Bank of Canada totaling $1.2 million with expiration dates through March 18, 2010. As of January 31, 2009, there were no outstanding borrowings against this promissory note.

A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank. Available credit under these lines totaled 8.0 million Swiss francs, with dollar equivalents of $6.9 million and $7.4 million at January 31, 2009 and 2008, respectively.  As of January 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 $1.3 million in various foreign currencies.  As of January 31, 2009, there were no outstanding borrowings against these lines.

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

As of January 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 $1.5 million in net gains, net of tax of $1.0 million, compared to $3.8 million in net gains at January 31, 2008, net of tax of $2.5 million and $0.1 million in net losses at January 31, 2007, net of tax benefit of $0.1 million. The Company estimates that a substantial portion of the deferred net gains at January 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 is hedging its exposure to the fluctuation in future cash flows for forecasted transactions is 24 months. For the years ended January 31, 2009, 2008 and 2007, the Company reclassified from AOCI to earnings $2.4 million of net gains, net of tax of $1.6 million, $0.6 million in net gains, net of tax of $0.4 million, and $0.1 million in net losses, net of tax benefit of $0.1 million, respectively.

During fiscal 2009, 2008 and 2007, 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. 

 
F-23

 
 
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.


The balance of the net loss included in the cumulative foreign currency translation adjustment associated with derivatives documented as net investment hedges was $1.5 million, net of a tax benefit of $0.9 million as of January 31, 2009, 2008 and 2007.  Under SFAS No. 133, changes in fair value of these instruments are recognized in currency translation adjustment, a component of AOCI, to offset the change in the value of the net investment being hedged.

The following presents fair value and maturities of the Company’s foreign currency derivatives outstanding as of January 31, 2009 (in millions):

   
Fair Value of Liability
 
 
Maturities
         
Forward exchange contracts
  $ 1.1  
Fiscal 2010
           
 
The Company estimates the fair value of its foreign currency derivatives based on quoted market prices or pricing models using current market rates.  These derivative financial instruments are currently reflected in accrued liabilities.

NOTE 7 - FAIR VALUE MEASUREMENTS
 
As of February 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”, for financial assets and liabilities.  FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157”, delays, for one year, the effective date of SFAS No. 157 for non-financial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis.  SFAS No. 157 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.  SFAS No. 157 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.
 
 
SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort.  The Company’s adoption of SFAS No. 157 did not result in any changes to the accounting for its financial assets and liabilities.  Therefore, the primary impact to the Company upon its adoption of SFAS No. 157 was to expand its fair value measurement disclosures.
 
 
 
F-24

 

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 31, 2009 (in thousands):

   
Fair Value at January 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Available-for-sale securities
  $ 135     $ -     $ -     $ 135  
SERP assets - employer
    750       -       -       750  
SERP assets - employee
    13,429       -       -       13,429  
Total
  $ 14,314     $ -     $ -     $ 14,314  
                                 
Liabilities:
                               
Hedge derivatives
  $ -     $ 1,120     $ -     $ 1,120  
SERP liabilities - employee
    13,429       -       -       13,429  
Total
  $ 13,429     $ 1,120     $ -     $ 14,549  
 
The fair values of the Company’s available-for-sale securities are based on quoted prices.  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 8 - INCOME TAXES

The provision / (benefit) for income taxes for the fiscal years ended January 31, 2009, 2008 and 2007 consists of the following components (in thousands):

   
2009
   
2008
   
2007
 
Current:
                 
U.S. Federal
  $ (7,891 )   $ 3,414     $ 8,168  
U.S. State and Local
    249       1,681       1,147  
Non-U.S.
    4,001       5,672       4,168  
      (3,641 )     10,767       13,483  
Noncurrent:
                       
U.S. Federal
    450       (10,635 )     509  
U.S. State and Local
    -       -       (89 )
Non-U.S.
    -       (963 )     -  
      450       (11,598 )     420  
Deferred:
                       
U.S. Federal
    4,386       (5,214 )     (3,972 )
U.S. State and Local
    294       (1,307 )     (366 )
Non-U.S.
    (753 )     (2,119 )     (6,675 )
      3,927       (8,640 )     (11,013 )
Provision / (benefit)  for income taxes
  $ 736     $ (9,471 )   $ 2,890  

 
F-25

 

(Loss) / income before taxes for U.S. operations was ($29.0 million), ($4.3 million), and $12.9 million for periods ended January 31, 2009, 2008 and 2007, respectively.  Income before taxes for non-U.S. operations was $32.3 million, $56.2 million, and $39.8 million for periods ended January 31, 2009, 2008 and 2007, respectively.

Significant components of the Company's deferred income tax assets and liabilities for the fiscal year ended January 31, 2009 and 2008 consist of the following (in thousands):


   
2009 Deferred Taxes
   
2008 Deferred Taxes
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
Net operating loss carryforwards
  $ 15,948     $ -     $ 17,364     $ -  
Inventory
    4,829       -       5,957         -  
Unprocessed returns     1,366       -       5,703       -  
Receivable allowance
    2,188       493       2,396       715  
Deferred compensation
    12,853       -       10,435         -  
Unrepatriated earnings           7,135       -       -  
Hedge derivatives
    -       958       -       2,533  
Depreciation/amortization
    8,264       3,122       1,641       1,124  
Other
    2,507       30       2,392       53  
      47,955       11,738       45,888       4,425  
Valuation allowance
    (7,641 )     -       (10,689 )     -  
Total deferred tax assets and liabilities
  $ 40,314     $ 11,738     $ 35,199     $ 4,425  

As of January 31, 2009, the Company had foreign net operating loss carryforwards of approximately $32.3 million, which are available to offset taxable income in future years.  Carryforward tax losses of $15.8 million were incurred in Switzerland, primarily in the Ebel business prior to the Company’s acquisition of the Ebel business on March 1, 2004.  Effective March 1, 2004, Ebel S.A. was merged into another wholly-owned Swiss subsidiary, and a Swiss tax ruling was obtained that allows the Ebel tax losses to offset taxable income in the surviving entity.  As part of purchase accounting, the Company recorded net deferred tax assets for the Swiss tax losses and for the temporary differences between the Swiss tax basis and the assigned values of the net Ebel assets.  The Company has established a partial valuation allowance on the deferred tax assets as a result of an evaluation of expected utilization of such tax benefits within the expiry of the tax losses through fiscal 2016. The recognition of the tax benefit had been applied to reduce the carrying value of acquired intangible assets to zero during fiscal 2007; thereafter releases of the valuation allowance have been recorded as a reduction to income tax expense. The Company recognized cash tax savings of $10.0 million on the utilization of the Swiss tax losses during the year, and released an additional $4.2 million valuation allowance, primarily due to the Company’s decision to implement a tax planning strategy.

The remaining foreign tax losses of $16.5 million are primarily related to the Company’s operations in Japan, Germany, and the United Kingdom. A full valuation allowance has been established on the deferred tax assets resulting from the losses attributable to Japan due to the Company’s assessment that it is more-likely-than-not the deferred tax assets will not be utilized within the 7 year expiry period.  The Company has three subsidiaries in Germany. Two subsidiaries are inactive; as a result the Company has determined that a full valuation allowance is appropriate for the losses of these two subsidiaries, even though there is no time limitation for utilization of the losses.  The third German subsidiary is currently not profitable and further, certain expected changes in the business prevent management from

 
F-26

 

concluding it is more-likely-than-not the subsidiary will return to profitability in the future. During fiscal 2009 the Company’s United Kingdom operations returned to a loss position and the Company concluded it was more-likely-than-not the deferred tax assets would not be realized.  As a result, the Company reinstated a full valuation allowance.

As of January 31, 2009, the Company had domestic net operating loss carryforwards of approximately $20.2 million, of which $2.3 million relates to excess tax deductions associated with stock option plans which have yet to reduce income taxes payable.  Upon the utilization of these carryforwards, the associated tax benefits of approximately $0.9 million will be recorded to Additional Paid-in Capital.

At January 31, 2009, the Company’s net domestic deferred tax assets amounted to $20.8 million.  Management has considered the realizability of the deferred tax assets and has concluded that no valuation allowance should be recorded, as it is not-more-likely-than-not that some portion or all of the deferred tax assets will not be fully realized.    In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.  This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, excess of appreciated asset value over the tax basis of net assets, the duration of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.  The Company’s analysis of the need for a valuation allowance recognizes that the Company has incurred a cumulative loss for its domestic operations over its evaluation period (current year and the two previous years), including a substantial loss for fiscal 2009.  A majority of the current loss was the result of the difficult market conditions, as well as restructuring and impairment charges.  The Company believes it will be able to realize all of its deferred tax assets.  Consideration has also been given to the period over which these net deferred tax assets can be realized, and the Company’s history of not having federal tax loss carryforwards expire unused.  In addition, Management has considered a tax planning strategy that is both prudent and feasible that will be implemented in a timely manner, if necessary, which will allow the Company to recognize the future tax attributes by increasing taxable income in the United States.

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 a deferred tax asset.

 
 
F-27

 

The provision / (benefit) for income taxes differ from the amount determined by applying the U.S. federal statutory rate as follows (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
   
2007
 
                   
Provision for income taxes at the U.S. statutory rate
  $ 1,151     $ 18,188     $ 18,607  
Lower effective foreign income tax rate
    (5,458 )     (9,303 )     (5,359 )
Change in valuation allowance
    (2,611 )     (7,292 )     (11,182 )
Tax provided on repatriated earnings of foreign subsidiaries
    165       -       -  
Tax provided on unrepatriated earnings of foreign subsidiaries
    7,388       -       -  
Change in unrecognized tax benefits, net
    450       (11,598 )     -  
State and local taxes, net of federal benefit
    456       (214 )     379  
Change in investment
    (785 )     -       -  
Other, net
    (20 )     748       445  
Total provision / (benefit) for income taxes
  $ 736     $ (9,471 )   $ 2,890  

A provision of approximately $7.4 million has been made for federal income and withholding taxes, net of foreign tax credits, on the future remittance of approximately $30.0 million total undistributed retained earnings of two foreign subsidiaries.  No provision has been made for federal income or withholding taxes which may be payable on the remittance of the remaining undistributed retained earnings of foreign subsidiaries approximating $210.1 million at January 31, 2009, as those earnings are considered permanently reinvested.  It is not practical to estimate the amount of tax, if any, that may be payable on the eventual distribution of these earnings.

During the year, the effective tax rate increased to 22.38%, primarily as a result of the tax accrued on the future repatriation of foreign earnings, and a smaller net benefit compared to prior years on the release of valuation allowances on foreign tax losses. The effective tax rate excluding the benefit from the net release of valuation allowances and the tax accrued on the future repatriation of foreign earnings was -122.89%, primarily attributable to the income (loss) mix. The effective tax rate for fiscal 2008 was -18.23%, primarily as a result of the recognition of previously unrecognized tax benefits due to the settlement of the IRS audit for fiscal years 2004 through 2006, and the release of valuation allowances in whole or in part on Swiss, German and UK tax losses. The effective tax rate excluding the benefits from release of the valuation allowances and the settlement of the IRS audit was 20.62%.  The effective tax rate for fiscal 2007 was 5.44%, primarily as a result of a partial release of the valuation allowance on the Swiss tax losses.  The effective tax rate excluding the benefit from release of the valuation allowance was 23.26%.

The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on February 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.

 
F-28

 

The Internal Revenue Service (“IRS”) commenced examinations of the Company’s consolidated U.S. federal income tax returns for fiscal years 2004 through 2006 in September 2006.  The examination phase concluded in January 2008, when the Company and the IRS came to a final agreement that resulted in the effective settlement of all three years. Pursuant to the settlement, the Company agreed to a total tax assessment for the three years of $3.3 million ($4.8 million gross less $1.5 million foreign tax credits).  During the first quarter of fiscal 2009, the Company settled the liability with a cash payment.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (exclusive of interest) for January 31, 2009 and 2008 are as follows (in thousands):
   
2009
   
2008
 
Beginning balance
  $ 10,089     $ 30,052  
Additions based on tax positions related to the current year
    -       477  
Additions for tax positions of prior years
    184       1,915  
Lapse of statute of limitations
    (6 )     (1,051 )
Decreases for tax positions of prior years
    (65 )     (21,153 )
Cash settlements
    (4,761 )     (186 )
F/X fluctuations
    (22 )     35  
Ending balance
  $ 5,419     $ 10,089  

Included in the balance at January 31, 2009 is $2.8 million of unrecognized tax benefits which would impact the Company’s effective tax rate, if recognized.  Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.  As of January 31, 2009 and January 31, 2008, the Company had $1.0 million and $1.3 million of accrued interest (net of tax benefit) related to unrecognized tax benefits. During fiscal years 2009 and 2008, the Company accrued $0.3 million and $1.0 million of interest (net of tax benefit).

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  In the normal course of business, the Company is subject to examination by taxing authorities in many countries, including such major jurisdictions as Switzerland, Hong Kong, Canada and the United States.  The Company, with few exceptions, is no longer subject to income tax examinations by tax authorities in state, local and foreign taxing jurisdictions for years before the fiscal year ended January 31, 2005.

NOTE 9 - OTHER ASSETS

In fiscal 1996, the Company entered into an agreement with a trust which owned an insurance policy issued on the lives of the Company's Chairman, Mr. Gedalio Grinberg (“Mr. G. Grinberg”), and his spouse. Under this agreement, the trust assigned the insurance policy to the Company as collateral to secure repayment by the trust of interest-free loans made by the Company to the trust in amounts equal to the premiums on said insurance policy (approximately $0.7 million per annum). The agreement required the trust to repay the loans from the proceeds of the policy. At January 31, 2003, the Company had outstanding loans from the trust of $5.2 million. On April 4, 2003, the agreement was amended and restated to transfer the policy from the trust to the Company in partial repayment of the loan balance. The Company is the beneficiary of the policy insofar as upon the death of Mr. G. Grinberg and his spouse, the proceeds of the policy would first be distributed to the Company to repay the premiums paid by the Company with the remaining proceeds distributed to the trust.  On January 5, 2009, the Company

 
 
F-29

 

announced the passing of Mr. G. Grinberg.  As of January 31, 2009, total premiums paid were $10.4 million, recorded as an Other Non-Current Asset in the Company’s Consolidated Balance Sheets, and the cash surrender value of the policy was $11.6 million. 

NOTE 10 – LEASES

The Company leases office, distribution, retail and manufacturing facilities, and office equipment under operating leases, which expire at various dates through January 2019.  Certain leases include renewal options and the payment of real estate taxes and other occupancy costs.  Some leases also contain rent escalation clauses (step rents) that require additional rent amounts in the later years of the term.  Rent expense for leases with step rents is recognized on a straight-line basis over the minimum lease term.  Likewise, capital funding and other lease concessions that are occasionally provided to the Company, are recorded as deferred rent and amortized on a straight-line basis over the minimum lease term as adjustments to rent expense.  Rent expense for equipment and distribution, factory and office facilities under operating leases was approximately $17.4 million, $16.8 million and $14.4 million in fiscal 2009, 2008 and 2007, respectively.  Minimum annual rentals at January 31, 2009 under noncancelable operating leases, which do not include real estate taxes and operating costs, are as follows (in thousands):


Fiscal Year Ended January 31,
 
       
2010
  $ 15,013  
2011
    14,512  
2012
    13,747  
2013
    11,512  
2014
    8,745  
Thereafter
    22,062  
    $ 85,591  

 
NOTE 11 – COMMITMENTS AND CONTINGENCIES

At January 31, 2009, the Company had outstanding letters of credit totaling $1.2 million with expiration dates through March 18, 2010 compared to $1.2 million with expiration dates through March 18, 2009 as of January 31, 2008.  One bank in the domestic bank group has issued 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 for Canadian payroll to the Royal Bank of Canada.

As of January 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 $1.3 million in various foreign currencies compared to $2.1 million as of January 31, 2008.
 
Pursuant to the Company’s agreements with its licensors, the Company is required to pay minimum royalties and advertising.  As of January 31, 2009, the Company’s minimum commitments related to its license agreements was $93.7 million.

 
F-30

 

The Company had outstanding purchase obligations of $35.9 million with suppliers at the end of fiscal 2009 for raw materials, finished watches and packaging in the normal course of business.  These purchase obligation amounts do not represent total anticipated purchases but represent only amounts to be paid for items required to be purchased under agreements that are enforceable, legally binding and specify minimum quantity, price and term.

The Company is involved from time to time in legal claims involving trademarks and intellectual property, licensing, employee relations and other matters incidental to the Company’s business.  Although the outcome of such items 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 12 – STOCK-BASED COMPENSATION

Effective concurrently with the consummation of the Company's public offering in the fourth quarter of fiscal 1994, the Board of Directors and the shareholders of the Company approved the adoption of the Movado Group, Inc. 1993 Employee Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain officers, directors and key employees of the Company. The Employee Stock Option Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996 Stock Incentive Plan (the "Plan"). Under the Plan, as amended and restated as of April 8, 2004, the Compensation Committee of the Board of Directors, which consists of four of the Company's outside directors, has the authority to grant incentive stock options and nonqualified stock options to purchase, as well as stock appreciation rights and stock awards, up to 9,000,000 shares of common stock. Options granted to participants under the Plan generally become exercisable in equal installments over three or five years and remain exercisable until the tenth anniversary of the date of grant. The option price may not be less than the fair market value of the stock at the time the options are granted.

On February 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment”, electing to use the modified prospective application transition method, and accordingly, prior period financial statements have not been restated.  Under this method, the fair value of all stock options granted after adoption and the unvested portion of previously granted awards must be recognized in the Consolidated Statements of Income.  The Company utilizes the Black-Scholes option-pricing model to calculate the fair value of each option at the grant date which requires certain assumptions be made.  The expected life of stock option grants is determined using historical data and represents the time period which the stock option is expected to be outstanding until it is exercised.  The risk free interest rate is the yield on the grant date of U.S. Treasury constant maturities with a maturity date closest to the expected life of the stock option.  The expected stock price volatility is derived from historical volatility and calculated based on the estimated term structure of the stock option grant.  The expected dividend yield is calculated using the expected annualized dividend which remains constant during the expected term of the option.

The weighted-average assumptions used with the Black-Scholes option-pricing model for the calculation of the fair value of stock option grants during the fiscal years 2009 and 2008 were: expected term of 6.9 years for fiscal 2009 and 6.0 years for fiscal 2008; risk-free interest rate of 3.41% for fiscal 2009 and 4.32% for fiscal 2008; expected volatility of 37.83% for fiscal 2009 and 35.32% for fiscal 2008 and dividend yield of 1.45% for fiscal 2009 and 1.03% for fiscal 2008.  The weighted-average grant date fair value of options granted during the fiscal years ended January 31, 2009 and 2008 was $8.45 and $12.06, respectively.

 
F-31

 
Total compensation expense for unvested stock option grants recognized during the fiscal years ended January 31, 2009 and 2008 was approximately $0.5 million, net of a tax benefit of $0.3 million and $1.1 million, net of a tax benefit of $0.7 million, respectively.  Expense related to stock option compensation is recognized on a straight-line basis over the vesting term.  As of January 31, 2009, there was approximately $1.3 million of unrecognized compensation cost related to unvested stock options.  These costs are expected to be recognized over a weighted-average period of 1.6 years.  Total cash received for stock option exercises during the fiscal year ended January 31, 2009 amounted to approximately $2.5 million. Windfall tax benefits realized on these exercises were approximately $0.5 million.

Transactions for stock options under the Plan since fiscal 2006 are summarized as follows:

   
Outstanding
   
Weighted-Average
 
   
Options
   
Exercise Price
 
             
January 31, 2006
    3,169,613     $ 12.96  
Options granted
    144,000     $ 19.86  
Options exercised
    (430,873 )   $ 8.96  
Options cancelled
    (28,800 )   $ 13.85  
January 31, 2007
    2,853,940     $ 13.91  
Options granted
    89,500     $ 31.57  
Options exercised
    (269,319 )   $ 12.64  
Options cancelled
    (20,666 )   $ 14.18  
January 31, 2008
    2,653,455     $ 14.63  
Options granted
    109,250     $ 21.78  
Options exercised
    (229,307 )   $ 11.97  
Options cancelled
    (85,832 )   $ 12.45  
January 31, 2009
    2,447,566     $ 15.27  


The total intrinsic value of stock options exercised for the fiscal years ended January 31, 2009 and 2008 was approximately $2.4 million and $5.3 million, respectively.  The total fair value of the stock options vested for the fiscal years ended January 31, 2009 and 2008 was approximately $5.2 million and $8.7 million, respectively.

 
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The following table summarizes outstanding and exercisable stock options as of January 31, 2009:

Range of Exercise Prices
   
Number Outstanding
   
Weighted-Average Remaining Contractual Life (years)
   
Weighted-Average Exercise Price
   
Number Exercisable
   
Weighted-Average Exercise Price
 
                                             
$ 3.02       -     $ 6.01       98,740       1.3     $ 4.25       98,740     $ 4.25  
$ 6.02       -     $ 9.01       78,066       2.1     $ 7.25       78,066     $ 7.25  
$ 9.02       -     $ 12.01       490,122       1.2     $ 10.44       490,122     $ 10.44  
$ 12.02       -     $ 15.01       301,044       4.6     $ 13.69       224,382     $ 13.69  
$ 15.02       -     $ 18.01       703,417       2.7     $ 15.65       675,088     $ 15.59  
$ 18.02       -     $ 21.01       568,427       4.3     $ 18.47       532,096     $ 18.45  
$ 21.02       -     $ 24.01       108,750       9.2     $ 22.27       3,918     $ 23.55  
$ 24.02       -     $ 27.01       25,000       7.7     $ 25.85       16,667     $ 25.85  
$ 27.02       -       +       74,000       8.3     $ 32.92       31,001     $ 32.90  
                          2,447,566       3.5     $ 15.27       2,150,080     $ 14.45  

The total intrinsic value of outstanding stock options for the fiscal years ended January 31, 2009 and 2008 was approximately $0.4 million and $25.4 million, respectively.  The total intrinsic value of exercisable stock options for the fiscal years ended January 31, 2009 and 2008 was approximately $0.4 million and $23.2 million, respectively.

Under the Plan, the Company has the ability to grant restricted stock to certain employees.  Restricted stock grants generally vest three to five years from the date of grant.  Expense for these grants is recognized on a straight-line basis over the vesting period.  The fair value of restricted stock grants is equal to the closing price of the Company’s publicly-traded common stock on the grant date.

On May 31, 2006, the Compensation Committee of the Board of Directors adopted the Executive Long Term Incentive Plan (the “LTIP”) authorized by section 9 of the Plan.  The LTIP provides for the award of “Performance Share Units” that are equivalent, one for one, to shares of the Company’s common stock and that vest based on the Company’s achievement of its operating margin goal for a target fiscal year.  The number of actual shares earned by a participant is based on the Company’s actual performance at the end of the award period and can range from 0% to 150% of the participant’s target award.  Total target awards of 189,500, 119,375, and 176,200 Performance Share Units were granted by the Compensation Committee on May 31, 2006, April 30, 2007, and April 30, 2008, respectively, that vest over three and five year periods.

During fiscal 2009, as a result of the Company’s performance, it became apparent that the performance goals for certain LTIP grants would not be achieved.  This resulted in the reversal of previously accrued stock-based compensation expenses of approximately $3.2 million.  Total compensation expense for restricted stock grants and for grants of Performance Share Units under the LTIP (together “restricted stock”) recognized during the fiscal year ended January 31, 2009, including the reversal of the aforementioned LTIP grants, was a benefit of approximately $0.4 million, net of a tax of $0.2 million.  For the fiscal year ended January 31, 2008, compensation expense for restricted stock was approximately $1.9 million, net of a tax benefit of $1.2 million.  Prior to February 1, 2006, compensation expense for restricted stock grants was reduced as actual forfeitures of the awards

 
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occurred.  SFAS No. 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest and thus, current period compensation expense has been adjusted for estimated forfeitures based on historical data.  As of January 31, 2009, there was approximately $3.4 million of unrecognized compensation cost related to unvested restricted stock.  These costs are expected to be recognized over a weighted-average period of 2.8 years. 

Transactions for restricted stock under the Plan since fiscal 2006 are summarized as follows:

   
Number of Restricted Stock Units
   
Weighted- Average Grant Date Fair Value
 
             
January 31,2006
    321,090     $ 14.39  
Units granted
    255,450     $ 19.02  
Units vested
    (102,940 )   $ 10.01  
Units forfeited
    (10,255 )   $ 16.78  
January 31, 2007
    463,345     $ 17.87  
Units granted
    164,185     $ 32.06  
Units vested
    (113,410 )   $ 15.28  
Units forfeited
    (17,390 )   $ 18.84  
January 31, 2008
    496,730     $ 23.12  
Units granted
    220,521     $ 21.69  
Units vested
    (95,226 )   $ 18.74  
Units forfeited
    (55,571 )   $ 25.20  
January 31, 2009
    566,454     $ 23.09  

Restricted stock units are exercised simultaneously when they vest and are issued from the pool of authorized shares. The total intrinsic value of restricted stock units that vested during the fiscal years ended January 31, 2009 and 2008 was approximately $1.7 million and $3.5 million, respectively. The windfall tax realized on the vested restricted stock grants for fiscal year ended January 31, 2009 were $0.2 million. The weighted-average grant date fair values for restricted stock grants for the years ended January 31, 2009 and 2008 were $21.69 and $32.06, respectively.  Outstanding restricted stock units had a total intrinsic value of approximately $4.4 million and $12.0 million for fiscal years ended January 31, 2009 and 2008.

NOTE 13 – OTHER EMPLOYEE BENEFITS PLANS

The Company maintains an Employee Savings Plan under Section 401(k) of the Internal Revenue Code.  In addition, the Company maintains defined contribution employee benefit plans for its employees located in Switzerland.  Company contributions and expenses of administering the plans amounted to $2.8 million, $2.5 million and $2.4 million in fiscal 2009, 2008 and 2007, respectively.

Effective June 1, 1995, the Company adopted a defined contribution SERP. The SERP provides eligible executives with supplemental pension benefits in addition to amounts received under the Company's other retirement plan. The Company makes a matching contribution which vests equally over five years. During fiscal 2009, 2008 and 2007, the Company recorded an expense related to the SERP of $0.8 million, $0.8 million and $0.7 million, respectively.

 
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During fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not in the SERP.  Under the terms of this Stock Bonus Plan, the Company contributes a discretionary amount to the trust established under the plan.  Each plan participant vests after five years in 100% of their respective prorata portion of such contribution.  Effective for fiscal 2006, in lieu of making any further contributions to the Stock Bonus Plan, the Company increased the maximum amount of its 401(k) match.

On September 23, 1994, the Company entered into a Death and Disability Benefit Plan Agreement (the “Prior Agreement”) with the Company's Chairman, Mr. Gedalio Grinberg.  Under the terms of the agreement, in the event of Mr. G. Grinberg's death or disability, the Company was required to make an annual benefit payment of approximately $0.3 million to his spouse for the lesser of ten years or her remaining lifetime. Neither the agreement nor the benefits payable thereunder were assignable and no benefits were payable to the estates or heirs of Mr. G. Grinberg or his spouse.  On December 19, 2008, the Company entered into a Transition and Retirement Agreement (the “Agreement”) with Mr. G. Grinberg.  Upon the effective date of the Agreement, the Prior Agreement was terminated.  The Agreement stipulates that upon his retirement on January 31, 2009, Mr. G. Grinberg, or his spouse if he predeceases her, would receive a payment of $0.6 million for the year ending January 31, 2010, and annual payments of $0.5 million for each year thereafter through the life of Mr. G. Grinberg and, if he predeceases his spouse, through the life of his spouse.  On January 5, 2009, the Company announced the passing of Mr. G. Grinberg.  For the year ending January 31, 2009, the Company recorded an actuarially determined charge of $2.4 million related to the Agreement.  This charge was included as part of the $11.1 million severance related charge associated with the Company’s streamlining initiatives.  Results of operations for fiscal 2008 and 2007 include an actuarially determined charge related to the Prior Agreement of $0.3 million and $0.2 million, respectively.  As of January 31, 2009, a $4.5 million liability was recorded in the Company’s Consolidated Balance Sheets related to the Agreement, of which $0.6 million was recorded in Accrued Liabilities, and $3.9 million was recorded in Other Non-Current Liabilities.  As of January 31, 2008, a $1.8 million liability was recorded in Other Non-Current Liabilities in the Company’s Consolidated Balance Sheets related to the Prior Agreement.

NOTE 14 – COMPREHENSIVE (LOSS) / INCOME

The components of comprehensive (loss) / income for the twelve months ended January 31, 2009, 2008 and 2007 are as follows (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
   
2007
 
Net income
  $ 2,315     $ 60,805     $ 50,138  
                         
Net unrealized (loss) / gain on investments, net of tax
    (190 )     (176 )     42  
Net change in effective portion of  hedging contracts, net of tax
    (2,266 )     3,942       1,246  
Foreign currency translation adjustment (1)
    (19,692 )     29,817       3,346  
Total comprehensive (loss) / income
  $ (19,833 )   $ 94,388     $ 54,772  
(1) The currency translation adjustment is not adjusted for income taxes as they relate to permanent investments in international subsidiaries.


 
F-35

 

The components of accumulated other comprehensive income at January 31, consisted of the following (in thousands):
   
Fiscal Year Ended
 
   
January 31,
 
   
2009
   
2008
 
Net unrealized (loss) / gain on investments, net of tax
  $ (34 )   $ 156  
Net unrealized gain on hedging contracts, net of tax
    1,485       3,751  
Cumulative foreign currency translation adjustment
    42,291       61,983  
Accumulated other comprehensive income
  $ 43,742     $ 65,890  

NOTE 15 – SEGMENT INFORMATION

The Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement 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 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 as of and for the Fiscal Year Ended January 31, (in thousands):

   
Net Sales
   
Operating Income / (Loss) (1) (2)
 
   
2009
   
2008
   
2007
   
2009
   
2008
   
2007
 
Wholesale
  $ 371,349     $ 466,431     $ 445,674     $ 8,702     $ 50,210     $ 48,132  
Retail
    89,508       93,119       87,191       (5,312 )     567       4,187  
Consolidated total
  $ 460,857     $ 559,550     $ 532,865     $ 3,390     $ 50,777     $ 52,319  

   
Total Assets
   
Capital Expenditures
 
   
2009
   
2008
   
2009
   
2008
   
2007
 
Wholesale
  $ 515,517     $ 580,665     $ 20,051     $ 19,684     $ 12,757  
Retail
    48,473       65,551       2,630       7,708       7,421  
Consolidated total
  $ 563,990     $ 646,216     $ 22,681     $ 27,392     $ 20,178  

   
Depreciation and Amortization
 
   
2009
   
2008
   
2007
 
Wholesale
  $ 12,047     $ 11,466     $ 11,617  
Retail
    6,410       5,218       4,963  
Consolidated total
  $ 18,457     $ 16,684     $ 16,580  



 
F-36

 

Geographic Segment Data as of and for the Fiscal Year Ended January 31, (in thousands):

   
Net Sales (3)
   
Operating (Loss) Income (1) (2)
 
   
2009
   
2008
   
2007
   
2009
   
2008
   
2007
 
United States
  $ 255,337     $ 328,212     $ 366,656     $ (31,264 )   $ (18,066 )   $ 7,704  
International
    205,520       231,338       166,209       34,654       68,843       44,615  
Consolidated total
  $ 460,857     $ 559,550     $ 532,865     $ 3,390     $ 50,777     $ 52,319  

   
Total Assets
   
Long-Lived Assets
 
   
2009
   
2008
   
2009
   
2008
 
United States
  $ 289,567     $ 341,846     $ 50,369     $ 51,544  
International
    274,423       304,370       16,380       16,969  
Consolidated total
  $ 563,990     $ 646,216     $ 66,749     $ 68,513  

(1)  
Fiscal 2009 Wholesale Operating Income included an $11.1 million charge related to the Company’s cost savings initiatives and a restructuring of certain benefit arrangements, of which $7.4 million was recorded in the United States and $3.7 million was recorded in the International segment.
(2)  
Fiscal 2009 United States and Retail Operating Loss includes a non-cash impairment charge of $4.5 million recorded in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
(3)  
The United States and international net sales are net of intercompany sales of $253.3 million, $275.2 million and $258.3 million for the twelve months ended January 31, 2009, 2008 and 2007, respectively.

NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents unaudited selected interim operating results of the Company for fiscal 2009 and 2008 (in thousands, except per share amounts):

   
Quarter
 
   
1 st
   
2 nd
   
3 rd
   
4 th
 
Fiscal 2009
                       
Net sales
  $ 101,353     $ 129,689     $ 135,846     $ 93,969  
Gross profit
  $ 65,020     $ 83,903     $ 86,202     $ 52,507  
Net income / (loss)
  $ 1,249     $ 8,136     $ 15,729     $ (22,799 )
                                 
                                 
Net income / (loss) per share:
                               
Basic
  $ 0.05     $ 0.33     $ 0.64     $ (0.93 )
Diluted
  $ 0.05     $ 0.32     $ 0.62     $ (0.92 )
                                 
Fiscal 2008
                               
Net sales
  $ 101,363     $ 139,467     $ 180,153     $ 138,567  
Gross profit
  $ 61,652     $ 83,346     $ 109,887     $ 81,797  
Net income
  $ 2,400     $ 12,264     $ 26,528     $ 19,613  
                                 
                                 
Net income per share:
                               
Basic
  $ 0.09     $ 0.47     $ 1.02     $ 0.75  
Diluted
  $ 0.09     $ 0.45     $ 0.97     $ 0.72  
                                 
   As each quarter is calculated as a discrete period, the sum of the four quarters may not equal the calculated full year amount.  This is in accordance with prescribed reporting requirements.


 
F-37

 

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION

The following is provided as supplemental information to the consolidated statements of cash flows (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
   
2007
 
Cash paid during the year for:
                 
Interest
  $ 2,434     $ 3,407     $ 3,760  
Income taxes
  $ 13,042     $ 11,542     $ 13,751  

Additionally, as of January 15, 2009, the Company declared a $1.2 million cash dividend, which was subsequently paid in February 2009.

NOTE 18 – OTHER INCOME, NET

The components of other income, net for fiscal 2009, 2008 and 2007 are as follows (in thousands):

   
Fiscal Year Ended January 31,
 
   
2009
   
2008
   
2007
 
                   
Gain on proceeds from insurance premiums (a)
  $ 681     $ -     $ -  
Gain on sale of building (b)
    -       -       374  
Sale of artwork (c)
    -       -       848  
Sale of rights to web domain (d)
    -       -       125  
Other income, net
  $ 681     $ -     $ 1,347  

(a) The Company recorded a pre-tax gain for the fiscal year ended January 31, 2009 of $0.7 million on the collection of life insurance proceeds from policies covering the Company’s former Chairman.

(b) The Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of $0.4 million on the sale of a building acquired on March 1, 2004 in the acquisition of Ebel.  The Company received cash proceeds from the sale of $0.7 million. The building was classified as an asset held for sale in other current assets.

(c) The Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of $0.8 million on the sale of a piece of artwork acquired in February 1988.  The Company received cash proceeds from the sale of $1.0 million.  The artwork was classified as a non-current asset.

(d) The Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of $0.1 million on the sale of the rights to a web domain name.  The Company received cash from the sale of $0.1 million.  There was no cost basis on the balance sheet for the domain name.

NOTE 19 – TREASURY STOCK

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

 
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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 during the fourth quarter of fiscal 2008 and 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, as of January 31, 2009, 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.

In addition to the shares repurchased pursuant to the Company’s share repurchase programs, an aggregate of 102,662 shares have been repurchased during the twelve months ended January 31, 2009 as a result of the surrender of shares in connection with the vesting of certain restricted stock awards and the 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.

NOTE 20 – 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.  Throughout fiscal 2009, the Company recorded a total pre-tax charge of $11.1 million, of which $8.7 million related to severance related accruals and $2.4 million related to the “Transition and Retirement Agreement” with the Company's former Chairman (see Note 13 – Other Employee Benefits Plans).  These expenses were recorded in SG&A expenses in the Consolidated Statements of Income.  The Company expects that substantially all of the severance related liability will be paid during fiscal 2010.

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

   
Severance related
 
Balance at April 30, 2008
  $ -  
Provision charged
    2,192  
Balance at July 31, 2008
    2,192  
Provision charged
    3,393  
Severance paid
    (2,759 )
Balance at October 31, 2008
    2,826  
Provision charged
    3,094  
Severance paid
    (1,511 )
Balance at January 31, 2009
  $ 4,409  

 
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