Mk II Restructuring

Industry shifts There are two major industry currents that are impacting us right now. The first is ETA's efforts to remove themselves as the movement supplier of necessity for most of the Swiss industry. In my opinion it will not be a matter of "if" but a matter of "when" this will take place. The foundation for their exit has already been laid by the verticalization trend and companies like Sellita and Soprod. Assuming ETA is successful in its efforts my belief is that the transition will take quite some time. At the moment we are close to finalizing our first order with one of two alternative suppliers I have been talking to over the last few years. I should note that we are still receiving orders from ETA and will be placing our orders for 2012 in the next few weeks. The spigot is still open, just no one knows for how long.

Production capacity is the second intermediate term issue impacting the industry. The downturn in late 2008 was so sudden and extreme a lot of companies either folded, downsized, or radically restructured. The end result is that every point in the supply chain, with the exception of movement supply, is being choked by a shortage of skilled labor. I have counted myself lucky that all of our key suppliers are still standing (knock on wood). The reality is though that the Kingston, for example, is taking longer than expected for a number of small but not insignificant reasons related to this issue.

Mk II: Restructuring the business

There are several reasons for the strategic review that will be concluding in December and enacted at the end of January 2011:

* Customer service: I have made continual efforts to improve customer service over the last few years but the reality is that improvements have been hard to sustain.

* Operational efficiencies: One my major assumptions is proving to be wrong. I had assumed that I would be able to make enough improvements to operational efficiency so that I would be able to allocate more time to taking care of customers and the other administrative issues that I have to attend to. The reality is that I have nearly completed all of the operational improvements that I identified. While some of those added efficiencies will only begin to have a positive effect early next year it was obvious to me a few months ago that the cumulative effect would not be large enough.

* Watch Offering: Many of you may not realize that about 3 years ago I made the decision to build my own watch collection. Contrary to the perception of any marketing genius, we have spent the last few years building a supply chain and a collection of watches to sell and almost no time selling our watches. After 3 long years we finally have a complete offering that offers a critical mass for the company but I do not have enough time to allocate to Mk II's marketing needs.

To help me re-organize the business I brought in a friend of mine that is a successful senior executive to help me think through Mk II's future. Here are the conclusions:

* We need to sell more watches based on the anticipated changes that ETA is lobbying for. * I work too hard because I have under-estimated the "cost" of my work. There is a good reason for this though. When your building a company by pulling on its own boot-straps you basically have to do everything. The company though is now too big to continue to grow this way. We have to adjust our pricing to reflect the total time required to build our watches. * Our procedures and processes have to be updated. Most of this is back-office stuff that I have to do to make my job easier to manage the new structure.

This what these conclusions will mean to our customers and fans:

* Adding original designs to the watch collection: This process has already begun. * Custom Option: This will be reserved for the Professional Series (price will also be being going up significantly on the custom option for those watches) * We will shift to doing limited series versions of the Specialist Series in place of offering a custom option for this collection. * Prices increases: Prices will be increasing across the entire collection starting January 31, 2011. This is primarily due to the devaluation of the dollar, in addition to the adjustments required by the new strategy.

Expected benefits to our clients and fans:

* Shorter lead times: We will be shortening lead times for custom watches to 6 weeks and to keep the backlog to 6 weeks by restricting ordering when there are delays * Improvement to customer service: This should improve by the fact that the new strategy should give me more time. * We will continue to do homage watches but they will be largely done within the parameters of the Specialist Series. The Project 300 will be the noticeable exception but likely to be a very rare exception. * The value proposition will not change radically but it will change

The changes will take place on January 31, 2011. Until then the custom options and and the prices will stay the same. The one exception will be the Paradive where the pre-order price of $1,150 will be increasing to the standard MSRP of $1,395 on December 1, 2010. I wanted to announce these changes well in advance of the January 31st deadline to allow all of our fans to take advantage of the current pricing. If we see a un-manageable surge in custom watch orders we will begin restricting ordering ahead of January 31.

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