SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-1282-3
The Forschner Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2797726
(State of incorporation) (I.R.S. Employer Identification No.)
One Research Drive, Shelton, Connecticut 06484
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 929-6391
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of Issuer's Common Stock, $.10 par value, outstanding
on April 30, 1996, was 8,203,360 shares.
<PAGE>
THE FORSCHNER GROUP, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995. 3 - 4
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995. 5
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 1996 and
1995. 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995. 7
Notes to Consolidated Financial Statements 8 - 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10 - 11
Part II: OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
Signatures 13
The Exhibit Index appears on page 12.
</TABLE>
2
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
At March 31, At December 31,
1996 1995
<S> <C> <C>
(unaudited)
Current assets:
Cash and short-term investments .......... $ 2,596,145 $ 608,757
Accounts receivable, less
allowance for doubtful accounts
of $975,000 for both periods ............ 20,868,470 31,970,449
Inventories .............................. 45,749,414 36,733,146
Deferred income tax benefits ............. 2,395,858 2,395,858
Prepaid and other ........................ 3,083,303 2,647,121
------------- -------------
Total current assets .................. 74,693,190 74,355,331
------------- -------------
Deferred income tax benefits ................ 771,371 771,371
Property, plant and equipment, at cost:
Leasehold improvements ................... 874,707 818,446
Equipment ................................ 6,458,202 6,199,914
Furniture and fixtures ................... 1,492,049 1,473,188
------------- -------------
8,824,958 8,491,548
Less-accumulated depreciation ............ (4,788,981) (4,385,683)
------------- -------------
4,035,977 4,105,865
------------- -------------
Investment in preferred stock, at cost ...... 7,002,990 7,002,990
Investments in common stock and note receivable
of unconsolidated affiliates .............. 3,017,930 2,591,415
Foreign distribution rights, net of
accumulated amortization of $2,014,710
and $1,843,812, respectively .............. 4,728,140 4,900,396
Other assets, net of accumulated
amortization of $3,382,249 and
$3,166,339, respectively .................. 7,800,754 7,502,884
------------- -------------
Total Assets ................................ $ 102,050,352 $ 101,230,252
============= =============
</TABLE>
3
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
At March 31, At December 31,
1996 1995
<S> <C> <C>
(unaudited)
Current liabilities:
Accounts payable ......................... $ 10,277,947 $ 6,479,200
Accrued liabilities ...................... 6,428,958 8,697,994
Income taxes payable ..................... -- 1,114,389
------------- -------------
Total current liabilities .............. 16,706,905 16,291,583
------------- -------------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.10 per
share: shares authorized -
2,000,000; no shares issued ........... -- --
Common stock, par value $.10 per
share: shares authorized -
12,000,000; shares issued -
8,814,468 and 8,800,718, respectively . 881,447 880,072
Additional paid-in capital ............... 46,069,490 45,897,740
Unrealized gain on marketable securities . 474,965 --
Foreign currency translation adjustment .. (7,554) (9,216)
Retained earnings ........................ 43,038,566 43,283,540
------------- -------------
90,456,914 90,052,136
Less-cost of common stock in
treasury; 614,108 shares .............. (5,113,467) (5,113,467)
------------- -------------
Total stockholders' equity .................. 85,343,447 84,938,669
------------- -------------
Total Liabilities and Stockholders' Equity .. $ 102,050,352 $ 101,230,252
============= =============
</TABLE>
4
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
------------ ------------
<S> <C> <C>
Net sales .................................... $ 26,079,513 $ 29,369,721
Cost of sales ................................ 17,486,756 18,669,127
------------ ------------
Gross profit ................................. 8,592,757 10,700,594
Selling, general and administrative expenses.. 9,172,165 9,121,037
------------ ------------
Operating income (loss) ...................... (579,408) 1,579,557
Interest expense ............................. 29,538 --
Interest income .............................. 77,713 250,866
Equity interest in unconsolidated affiliates.. -- 362,466
Other income (expense), net .................. 116,259 1,943
------------ ------------
Total interest and other income (expense), net 164,434 615,275
------------ ------------
Income (loss) before income taxes ............ (414,974) 2,194,832
Income tax provision (benefit) ............... (170,000) 924,050
------------ ------------
Net income (loss) ............................ ($244,974) $1,270,782
============ ============
Net income (loss) per share .................. ($0.03) $0.15
============ ============
Weighted average number of
shares outstanding ........................ 8,263,614 8,246,759
============ ============
</TABLE>
5
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Unrealized Foreign
Par Value $.10 Additional gain on Currency
------------------ Paid-In Marketable Translation Retained Treasury
Shares Amount Capital Securities Adjustment Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C>
------ ------ ---------- ----------- ------------ ---------- ---------
BALANCE
December 31, 1994 8,796,968 $879,697 $45,866,814 -- $(28,085) $40,170,324 $(5,113,467)
Net income for
three months ended
March 31, 1995
(unaudited) . -- -- -- -- -- 1,270,782 --
Stock options and
warrants exercised 2,500 250 22,862 -- -- -- --
Foreign currency
translation adjustment . -- -- -- -- 1,527 -- --
----------- ---------- ------------ ---------- ----------- ------------ ------------
BALANCE, March 31,
1995 (unaudited) ...... 8,799,468 $879,947 $45,889,676 -- $(26,558) $41,441,106 $(5,113,467)
=========== ========== ============ ========== =========== ============ ============
BALANCE
December 31, 1995 ...... 8,800,718 $880,072 $45,897,740 -- $(9,216) $43,283,540 $(5,113,467)
Net (loss) for three
months ended
March 31, 1996
(unaudited).. -- -- -- -- -- (244,974) --
Stock options exercised . 13,750 1,375 171,750 -- -- -- --
Unrealized gain on
marketable securities.......-- -- -- 474,965 -- -- --
Foreign currency
translation adjustment ... -- -- -- -- 1,662 -- --
----------- ---------- ------------ ---------- ----------- ------------ ------------
BALANCE, March 31,
1996 (unaudited) ....... 8,814,468 $881,447 $46,069,490 $474,965 $(7,554) $43,038,566 $(5,113,467)
=========== ========== ============ ========== =========== ============ ============
</TABLE>
6
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................... $ (244,974) $ 1,270,782
Adjustments to reconcile net income (loss) to cash
provided from (used for) operating activities:
Depreciation and amortization ................. 801,681 837,003
Equity interest in unconsolidated
affiliates, net of goodwill amortization ... -- (362,466)
Deferred income taxes ......................... -- 46,555
Gain on sale of partial investment in stock ... (11,050) --
------------ ------------
545,657 1,791,874
Changes in other current assets and liabilities:
Accounts Receivable........................ 11,105,878 11,274,946
Inventories ............................... (9,013,529) (5,958,363)
Prepaid and other ......................... (436,182) (1,099,484)
Accounts payable .......................... 3,799,678 (4,522,038)
Accrued liabilities ...................... (2,271,187) (1,157,661)
Income taxes payable ...................... (1,114,389) (834,444)
------------ ------------
Net cash provided from (used for) operating
activities .......................... 2,615,926 (505,170)
------------ ------------
Cash flows from investing activities:
Capital expenditures....................... (332,630) (496,149)
Proceeds from sales of property, plant & equipment -- 10,206
Additions to other assets ................. (523,997) (738,536)
Investments in common stock ............... -- (2,909,546)
Proceeds from sale of investments in common stock 59,500 --
------------ ------------
Net cash (used for) investing activities ... (797,127) (4,134,025)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options ........ 173,125 23,112
------------ ------------
Net cash provided from financing activities .. 173,125 23,112
------------ ------------
Effect of exchange rate changes on cash ......... (4,536) (31,956)
------------ ------------
Net increase (decrease) in cash and short-term investments 1,987,388 (4,648,039)
Cash and short-term investments, beginning of period .. 608,757 18,019,797
------------ ------------
Cash and short-term investments, end of period . $ 2,596,145 $ 13,371,758
============ ============
Cash paid during the period:
Interest .......................................... $ 29,538 $ --
============ ============
Income taxes ................................... $ 1,466,177 $ 1,616,456
============ ============
</TABLE>
7
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and 1995
(unaudited)
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included in this Form 10-Q have been
prepared by The Forschner Group, Inc. ("Forschner", the "Company") without
audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's report on Form 10-K for
the year ended December 31, 1995. In the opinion of management of the Company,
the interim financial statements included herein reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of 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. Due to the seasonal nature of the Company's business, the
results of operations for the interim periods presented are not necessarily
indicative of the operating results for the full year.
INVENTORIES
Domestic inventories are stated at the lower of cost (determined by the
last-in, first-out (LIFO) method) or market. Foreign inventories are valued at
the lower of cost or market determined by the FIFO method. Inventories
principally consist of finished goods and packaging material.
INVESTMENTS
Investments are comprised of the following as of March 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Investment in preferred units, at cost (A) $7,002,990 $7,002,990
Investment in common stock and note
receivable, at cost (B) .................. 800,000 800,000
------------ ------------
Total investments, at cost ........................ $7,802,990 $7,802,990
============ ============
Investment in unconsolidated affiliate (C) $2,217,930 $1,791,415
</TABLE>
(A) Represents Forschner's investment in Victory Capital LLC, a privately held
corporation. Forschner's preferred units capital account is allocated preferred
amounts under certain circumstances in years in which Victory has profit.
Forschner is accounting for this investment on the cost basis.
8
<PAGE>
(B) Represents Forschner's investment in a private affiliated start-up entity
that is in the business of designing, manufacturing and marketing fine jewelry.
The common stock and note receivable have been recorded at cost. Due to the
start-up nature of this business and to the lack of an established market for
the common stock, the valuation of this investment is subject to uncertainty.
The amount the Company will ultimately realize from this investment may
materially differ from the carrying value.
(C) Represents Forschner's investment in SweetWater, Inc ("SweetWater").
Effective January 1, 1996, Forschner decreased its percentage ownership of
SweetWater to below 20%. In accordance with generally accepted accounting
principles, as of March 31, 1996, this investment was accounted for at fair
value, with Forschner recording unrealized gains (losses) as a component of
stockholders' equity.
SIGNIFICANT CUSTOMER
Special promotional programs with a single customer of the Corporate
Markets Division accounted for 0% and 26% of total sales for the quarter ended
March 31, 1996 and 1995, respectively. The Company is not participating in a
program with this customer currently, nor are any programs currently scheduled
with this customer.
INCOME TAXES
Income taxes are provided at the projected annual effective tax rate. The
income tax provisions (benefits) for the interim 1996 and 1995 periods exceed
the federal statutory rate of 34% due primarily to state income taxes (net of
federal benefit).
EARNINGS PER COMMON SHARE
The weighted average number of shares of common stock outstanding include
the dilutive effect of stock options outstanding. The fully diluted earnings per
share amount for both periods is the same as primary earnings per share.
9
<PAGE>
THE FORSCHNER GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 1996 were $26.1 million
compared with $29.4 million for the same period in 1995, representing a decrease
of $3.3 million or 11.2%. Special promotional programs with a single customer of
the Corporate Markets Division accounted for 0% and 26% of sales for the first
quarter of 1996 and 1995, respectively. Sales to this customer ended in March
1995, and no further programs currently are scheduled with this customer.
Including the impact of sales to this customer, the Company recorded higher
sales in Swiss Army Brand Knives and cutlery, while sales of Swiss Army Brand
Watches decreased from that in the same period of 1995. Excluding the special
promotional program, sales increased by $4.5 million or 20.8%. Excluding results
of this special promotional program, sales of Swiss Army Brand Watches , Swiss
Army Brand Knives, and cutlery increased from that in the same period of 1995.
Gross profit of $8.6 million for the quarter ended March 31, 1996
decreased $2.1 million or 19.6% from 1995. The gross profit margin for the first
quarter of 1996 of 32.9% was lower than the margin of 36.4% reported for the
same period in 1995, primarily due to the decrease in the value of the U.S.
dollar versus the Swiss franc. Forschner's gross profit margin is a function of
both product mix and Swiss franc exchange rates. Since Forschner imports
virtually all of its products from Switzerland, its costs are affected by both
the spot rate of exchange and by its foreign currency hedging program. The
Company enters into foreign currency contracts and options to hedge the exposure
associated with foreign currency fluctuations. However, such hedging activity
cannot eliminate the long-term adverse impact on the Company's competitive
position and results of operations that would result from a sustained decrease
in the value of the dollar versus the Swiss franc. These hedging transactions,
which are meant to reduce foreign currency risk, also reduce the beneficial
effects to the Company if the dollar increases relative to the Swiss franc. The
Company plans to continue to engage in hedging transactions; however, it is
uncertain as to what extent to which such hedging transactions will reduce the
effect of adverse currency fluctuations.
Selling, general and administrative expenses for the three months ended
March 31, 1996 of $9.2 million were $0.1 million or 1.1% higher than the amount
for the comparable period in 1995. As a percentage of net sales, selling general
and administrative expenses increased from 31.1% in 1995 to 35.2% in 1996. The
percentage increase is due mostly to higher sales in the first quarter of 1995
due to the special promotional program.
Interest expense of $29,000 for the three months ended March 31, 1996
versus $0 in the same period for the prior year reflects interest expense
associated with a deferred payment from the Company's largest supplier.
Interest income was $78,000 for the three months ended March 31, 1996
versus $251,000 in the same period for the prior year, reflecting lower invested
cash balances.
Equity interest in unconsolidated affiliates was $0 for the three months
ended March 31, 1996 versus $362,000 in the same period for the prior year due
to the one-time favorable impact of the Company
10
<PAGE>
recognizing its equity interest in two equity investments in 1995. The equity
method of accounting is not applicable in 1996 as one investment was sold in
1995, and the Company's ownership of the second investment is less than 20% of
the outstanding stock, requiring accounting at fair value.
Other income (expense), net of $116,000 for the three months ended March
31, 1996 versus $2,000 in the same period for the prior year, is due to the
favorable settlement of a legal matter.
As a result of these changes, income (loss) before income taxes for the
three months ended March 31, 1996 was $(415,000) versus $2.2 million for the
same period in the prior year, a decrease of $2.6 million or 119%.
Income tax expense (benefit) was provided at an effective rate of 41% and
42% in 1996 and 1995, respectively.
As a result, net income (loss) for the three months ended March 31, 1996
was $(245,000) compared with $1.3 million, a decrease of $1.6 million or 119%.
Net income per share for the three months ended March 31, 1996 was
$(0.03) compared with $0.15 for the same period in 1995, a decrease of 120%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, Forschner had working capital of $58.0 million
compared with $58.1 million as of December 31, 1995, a decrease of $0.1 million.
Sources of working capital included depreciation and amortization of $0.8
million. Significant uses of working capital included a $0.5 million increase in
other assets and capital expenditures of $0.3 million. The Company currently has
no material commitments for capital expenditures.
Cash provided from operating activities was approximately $2.6 million in
the quarter ended March 31, 1996 compared with cash used of $0.5 million in the
comparable period in 1995. The improvement resulted primarily from an increase
in accounts payable in the first quarter of 1996 and a smaller increase in
prepaid and other assets in 1996 than in 1995. Partially offsetting this impact
was a larger buildup in inventories in 1996 than in 1995, a larger reduction of
accrued liabilities in 1996 than in the prior year and a net loss in the three
months ended March 31, 1996 versus the same period in 1995.
Forschner meets its short-term liquidity needs with cash generated from
operations, and, when necessary, bank borrowings under its revolving credit
agreement. As of March 31, 1996, Forschner had no outstanding borrowings under
its revolving line of credit, leaving an aggregate unused line of $20 million
between two financial institutions. Of the $20 million aggregate line of credit,
the expiration date for a $15 million facility has been extended from April 30,
1996 to July 31, 1996, during which time the Company intends to negotiate a
longer term extension of a larger facility under similar terms and with options
for reduced pricing. Forschner's short-term liquidity is affected by seasonal
changes in inventory levels, payment terms and seasonality of sales. The
Company's current liquidity levels and financial resources are sufficient to
meet its operating needs.
11
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(10) Watch design and consulting agreement dated as of January 2,
1995 between The Forschner Group, Inc., Polenberg, Inc. and
Myron Polenberg.
(11) Statement regarding computation of per share earnings is not
required because the relevant computation can be clearly
determined from the material contained in the Financial
Statements included herein.
(15) Not Applicable
(18) Not Applicable
(19) Not Applicable
(22) Not Applicable
(23) Not Applicable
(24) Not Applicable
(25) Not Applicable
(27) Financial data schedule
b.) There were no reports or exhibits on Form 8-K for the three months
ended March 31, 1996.
12
<PAGE>
Pursuant to the requirements to the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FORSCHNER GROUP, INC.
(Registrant)
Date: May 9, 1996 By /s/ Thomas D. Cunningham
---------------------------
Name: Thomas D. Cunningham
Title: Executive Vice President,
Chief Financial Officer, Director
By /s/ Thomas M. Lupinski
Name: Thomas M. Lupinski
Title: Senior Vice President,
Controller
13
<PAGE>
WATCH DESIGN AND CONSULTING AGREEMENT
This WATCH DESIGN AND CONSULTING AGREEMENT (this
"Agreement") is made as of the 2nd day of January 1995, by and
among THE FORSCHNER GROUP, INC., a Delaware corporation
("Forschner"), POLENBERG, INC. (the "Corporation") and MR. MYRON
POLENBERG ("Mr. Polenberg").
W I T N E S S E T H:
WHEREAS, Forschner wishes to engage the services of the
Corporation throughout the Term (as defined below) as a watch
designer to create and develop new Models (as defined below) of
watches and perform certain other services, all pursuant to the
terms set forth herein; and
WHEREAS, Forschner desires that Mr. Polenberg serve on
Forschner's Marketing Committee throughout the Term as requested;
and
WHEREAS, upon the terms and conditions hereinafter set
forth, the Corporation desires to accept such engagement and Mr.
Polenberg agrees to serve on such committee and comply with
certain other provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual
covenants, conditions and agreements herein set forth, the
ZH-54280.13
-1-
<PAGE>
parties hereto agree as follows:
1. Engagement. Subject to the terms and conditions
of this Agreement, Forschner hereby engages the services of the
Corporation throughout the Term as a watch designer, and the
Corporation hereby accepts such engagement. The parties hereto
agree that the services to be provided by the Corporation
hereunder shall be performed primarily and substantially by Mr.
Polenberg (who shall perform all design services hereunder)
through the Corporation and Mr. Polenberg agrees that he will
cause the Corporation to perform all of its obligations under
this Agreement. In addition, Mr. Polenberg shall throughout the
Term serve on Forschner's Marketing Committee if and as
requested.
2. Term. The term of this Agreement shall commence
as of January 2, 1995 and shall terminate on December 31, 1999,
unless and until earlier terminated by either the Corporation or
Forschner at any time upon ninety (90) days' written notice to
the other or as extended by the mutual written agreement of the
parties (the "Term"). Upon the expiration of the Term, no party
shall have any obligation to any other party hereto, except that
(x) the obligations of Forschner set forth in Sections 4 and 11
shall continue in accordance with the terms thereof, (y) the
obligations of each of the Corporation and Mr. Polenberg under Sections 5(a),
5(b) and 6 hereof shall similarly continue and (z) the provisions of
Sections 8 through 10 and 12 through 18 shall survive the termination of
this Agreement.
3. Duties. (a) During the Term, the Corporation
shall serve as a watch designer for Forschner to (i) create and
develop new Models (as defined below) of Swiss Army(TM) Brand,
Victorinox(TM), and Project II brand watches, it being agreed that
the obligations under this Section 3(a)(i) shall apply to any
additional brands resulting from a change in the name of any of
the foregoing brands, and (ii) perform the following additional
services: services relating to the production of sell sheets,
the first national advertisement, the trade ad slicks and the
instructional manual for such new Models, all in the manner
customarily performed by either the Corporation or Mr. Polenberg
for Forschner in the past. For purposes of this Agreement,
"Project II brand" watches shall refer to the new brand of
watches currently being developed by Forschner and designated as
Project II, including all variations thereto.
(b) The status of the Corporation under this Agreement
shall be that of an independent contractor and this Agreement
shall not create the relationship of partnership, agency or a
joint venture. No party hereto shall have the authority to bind
any other party hereto in any way, except that Mr. Polenberg
shall have authority to bind the Corporation in all matters in
respect hereto.
4. Compensation and Reimbursement. (a) As the sole
compensation for the services to be provided hereunder, the
Corporation shall receive (net of any withholding and other taxes
if, contrary to the present belief of the parties, applicable law
imposes an obligation on Forschner to deduct such amounts, it
hereby agreed that any income or similar taxes payable in respect
of compensation payable hereunder shall be the responsibility of
the Corporation):
(i) throughout the Term, a royalty (the "Minimum
Royalty") at the annual rate of $300,000, payable monthly; and
(ii) a royalty (the "Percentage Royalty"), payable
within forty-five (45) days after the end of each calendar
quarter and calculated on a Model (as defined below) by Model
basis, equal to the Net Wholesale Price (as defined below)
received by Forschner on sales of the Covered Models (as defined
below) during such quarter multiplied by the Royalty Percentage
(as defined below) applicable to such sales; provided; however;
no Percentage Royalty shall be due or payable hereunder in
respect of any given calendar year during the Term until the
Percentage Royalty for such calendar year exceeds $300,000 and
then only to the extent that the Percentage Royalty for such year
exceeds $300,000, provided, further, that if any year during the
Term is less that a full year, such $300,000 limitation shall be
pro-rated based upon the fraction the numerator of which shall be
the number of days in such year that fall within the Term and the
denominator of which shall be 360. For periods falling outside
of the Term for which no Minimum Royalty is paid, the foregoing
$300,000 limitation will not apply. The Percentage Royalty shall
be payable in accordance herewith until such time as there are no
longer any Covered Models.
(b) For purposes of this Agreement:
(i) "Model" shall mean any watch design designated as
such by Forschner to the trade; provided, however, Models which
have a substantially identical face and case, or which differ
solely as to the color of the face of the watch, metallic content
or type of watch band shall, for purposes of this Agreement, be
deemed one and the same Model. Any Model which undergoes a name
change shall not result in a new Model;
(ii) "Covered Models" shall mean (A) all Models of
Swiss Army(TM) Brand, Victorinox(TM) and Project II brand watches
designed by the Corporation during the Term, (B) all Models of
other brand watches with respect to which the Corporation had
primary design responsibility and which Models Forschner sells at
wholesale, and (C) the Models itemized on Exhibit A hereto;
provided; however; any Model which would otherwise qualify as a
Covered Model shall cease to be a Covered Model seven and one-
half (7-1/2) years after the First Date of Sale of such Model;
(iii) "First Date of Sale" shall mean, with respect to
any Model, the first day on which Forschner sells a single item
of such Model to any third party (exclusive of sales between
parents and subsidiary, but including sales in respect of any
special promotional program);
(iv) "Royalty Percentage" shall mean, with respect to
any Covered Model:
(A) one percent (1%) for that portion of Net
Cumulative Sales of such Model up to $10,000,000;
(B) one and one-half percent (1.5%) for that
portion of Net Cumulative Sales of such Model above
$10,000,000 but less than $30,000,000; and
(C) two percent (2%) for that portion of Net
Cumulative Sales of such Model above $30,000,000;
(v) "Net Cumulative Sales" shall mean, with respect to
any Covered Model, the aggregate Net Wholesale Price received by
Forschner on sales of such Model during the period beginning on
the First Date of Sale and ending on the date such Model ceases
to be a Covered Model; and
(vi) "Net Wholesale Price" shall mean, with respect to
sales of any Covered Model, the gross sales price actually
received by Forschner on such sales minus (A) returns and
allowances actually granted to the extent included in the net
wholesale price and not previously deducted therefrom, (B) any
license royalties or other fees charged to Forschner by the owner
of any trademark or other intellectual property right utilized by
Forschner and applicable to such sales, and (C) all sales and
similar taxes paid to any authority and shipping, insurance and
similar charges to the extent separately billed or stated on the
applicable invoice.
(c) Forschner shall reimburse the Corporation (i) in
accordance with and at the levels stated in Forschner's policies
as adopted and amended from time to time, for all properly
documented travel costs reasonably incurred by the Corporation or
Mr. Polenberg in the performance of the duties hereunder;
provided, however, that such amounts shall be reimbursed only to
the extent of the actual out-of-pocket costs paid by the
Corporation or Mr. Polenberg with respect thereto, without mark-
up or any other additions thereto, and (ii) to the extent
Forschner agrees thereto in writing in advance, for any
additional actual out-of-pocket costs incurred by the Corporation
or Mr. Polenberg in the performance of the duties hereunder;
provided, however, reasonable out-of-pocket costs for courier
services and international telephone calls incurred in the
performance of services hereunder shall not require the prior
approval of Forschner. Notwithstanding the foregoing, the
parties hereto agree that for purposes of clause (i) of this
subsection (c), the reimbursement obligation for actually
incurred airfare shall be limited to and the Corporation and Mr.
Polenberg may incur: for all domestic flights within the United
States, the cost of a coach ticket, and, for all international
flights where the total scheduled flying time exceeds five hours,
the cost of a business class ticket.
(d) Forschner shall provide the Corporation at its
request and at no cost, twenty-five (25) watches of each Model
designed by the Corporation and produced during the Term.
5. Confidentiality and Non-Competition. (a) Mr.
Polenberg and the Corporation each hereby agree that it is
reasonable and necessary for the protection of Forschner that
each such party agree, and accordingly Mr. Polenberg and the
Corporation each hereby agree, that he or it will not at any
time, directly or indirectly, use any information or documents
(collectively, "Information") received from Forschner or its
officers, directors, agents, affiliates or representatives (the
"Forschner Representatives") or learned in the course of the
Corporation's retention hereunder for any purpose nor disclose
any Information to any person, except (i) for Information which
becomes generally available to the public, other than through
actions attributable to Mr. Polenberg or the Corporation or any
of his or its employees, associates, officers, directors, agents
or representatives, as applicable (collectively, the "Polenberg
Representatives"), (ii) for Information in the Corporation's or
Mr. Polenberg's possession prior to his or its exposure to such
Information by or through Forschner or the Forschner
Representatives, (iii) for Information which the Corporation or
Mr. Polenberg obtains from a source other than Forschner or the
Forschner Representatives, provided such source is not or was not
under a duty to Forschner (or such Forschner Representative) to
keep such Information confidential, (iv) to any Polenberg
Representative as shall be required for the performance of
services hereunder or the review of reports and records pursuant
to Section 11(b) hereto, or (v) in connection with any
administrative or judicial proceeding relating to the enforcement
of this Agreement; provided the party proposing to make such
disclosure gives Forschner prompt notice thereof prior to any
such disclosure so that it may seek an appropriate protective
order. The Corporation and Mr. Polenberg shall each take
appropriate steps to insure that the Polenberg Representatives
comply with the nondisclosure obligations contained in this
Section 5 as if such representatives were directly obligated
hereunder.
(b) In the event Mr. Polenberg, the Corporation or any
of the Polenberg Representatives (a "Disclosing Party") are
requested or required by statute, regulation or order of any
court or by rule or order of any governmental agency (an "Order")
to disclose any Information, the disclosure of which would
otherwise be prohibited by this Agreement, such Disclosing Party
shall supply Forschner with prompt notice of such request(s) so
that Forschner may seek an appropriate protective order. It is
further agreed that, if in the absence of a protective order, the
Disclosing Party is nonetheless advised by its counsel that
disclosure of the Information is compelled by such Order, or if
such Disclosing Party would otherwise stand liable for contempt
or suffer other censure or penalty as a result of such
nondisclosure, the Disclosing Party may disclose such Information
without liability hereunder, provided, however, such disclosure
shall be made only to the extent and in the manner required by
such Order or as necessary to avoid such contempt, other censure
or penalty.
(c) Mr. Polenberg and the Corporation each agree that
during the Term, he and it will not, directly or indirectly,
whether as an individual, corporation, shareholder, officer,
director, partner, employee, consultant, independent contractor
or otherwise, engage in the watch design business or otherwise
design or participate in the designing of any timepiece, except
as requested by Forschner hereunder or with Forschner's prior
written consent.
6. Designs. Mr. Polenberg and the Corporation each
agree that any watch designs (the "Designs") which are currently
in the development stage, in the process of being developed, or
have been developed or implemented by the Corporation or
Mr.Polenberg, Forschner or any affiliate thereof, whether or not
directly related to the Corporation's or Mr. Polenberg's services
to Forschner and whether or not giving rise to a patent or
trademark right, are and shall be the sole and exclusive property
of Forschner. Mr. Polenberg and the Corporation each also agree
that any Designs developed or worked on by him or it during the
Term and offered to Forschner or utilized by Forschner in any way
shall be the sole and exclusive property of Forschner. During
the Term and thereafter, Mr. Polenberg and the Corporation shall,
at Forschner's expense, take such actions, including without
limitation the execution of patent documents, as Forschner shall
reasonably request to vest or evidence the ownership of such
intellectual property in Forschner and he and it will not himself
or itself use or take any action to assist others to use such
intellectual property except in furtherance of his or its duties
hereunder. Notwithstanding any of the foregoing to the contrary,
if Mr. Polenberg or the Corporation presents any such Design to
Forschner in writing and Forschner fails to utilize such Design
in any way for a period of two years after such offer is made in
writing, the restrictions of this Section 6 shall cease to apply
to that Design beginning six months after the end of the Term or
the expiration of such two year period, whichever is later.
7. Representations and Warranties of the Parties.
(a) The Corporation and Mr. Polenberg each hereby represents and
warrants to Forschner as follows:
(i) Organization and Qualification. The Corporation
is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation and has
all corporate power and authority to own and lease its properties
and to conduct its business as presently conducted. The
Corporation is duly qualified to transact business as a foreign
corporation in each jurisdiction in the United States in which
the conduct of its business as presently conducted or its ownership
or leasing of property makes such qualification
necessary and the failure so to qualify would have a materially
adverse effect on the business or financial condition of the
Corporation; and
(ii) Authorization and Validity of this Agreement. The
execution, delivery and performance by the Corporation of this
Agreement are within the Corporation's corporate power, have been
duly authorized by all necessary corporate action, do not require
approval of any governmental body, agency or official and do not,
and will not, conflict with, violate or contravene, or constitute
a default under, any applicable law or regulation, the
Certificate of Incorporation or By-Laws of the Corporation or any
material agreement, judgment, injunction, order, decree or
instrument binding upon the Corporation, or result in the
creation or imposition of any material lien, claim or encumbrance
on any asset of the Corporation. This Agreement is a valid and
binding legal obligation of the Corporation, enforceable against
it in accordance with its terms, except to the extent that
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally and by general equitable principles (regardless of
whether enforcement is sought in equity or at law).
(b) Forschner hereby represents and warrants to the
Corporation and Mr. Polenberg as follows:
(i) Organization and Qualification. Forschner is a
corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation and has all
corporate power and authority to own and lease its properties and
to conduct its business as presently conducted. Forschner is
duly qualified to transact business as a foreign corporation in
each jurisdiction in the United States in which the conduct of
its business as presently conducted or its ownership or leasing
of property makes such qualification necessary and the failure so
to qualify would have a materially adverse effect on the business
or financial condition of Forschner; and
(ii) Authorization and Validity of this Agreement. The
execution, delivery and performance by Forschner of this
Agreement are within Forschner's corporate power, have been duly
authorized by all necessary corporate action, do not require
approval of any governmental body, agency or official and do not,
and will not, conflict with, violate or contravene, or constitute
a default under, any applicable law or regulation, the
Certificate of Incorporation or By-Laws of Forschner or any
material agreement, judgment, injunction, order, decree or
instrument binding upon Forschner, or result in the creation or
imposition of any material lien, claim or encumbrance on any
asset of Forschner. This Agreement is a valid and binding legal
obligation of Forschner, enforceable against it in accordance
with its terms, except to the extent that enforcement may be
limited by applicable bankruptcy, insolvency, reorganization or
other similar laws affecting creditors' rights generally and by
general equitable principles (regardless of whether enforcement
is sought in equity or at law).
8. Assignment. This Agreement shall bind and enure
to the benefit of the parties and their respective successors and
assigns, except that neither the rights nor the obligations of
either the Corporation or Mr. Polenberg hereunder may be
assigned.
9. Entire Agreement; Amendment. This Agreement
constitutes the entire agreement between the parties relating to
the subject matter hereof. To the extent Forschner and the
Corporation desire that the Corporation or Mr. Polenberg perform
services other than those provided for hereunder, such as
performing design work on or preparing sell sheets or other
materials in respect of watches existing on the date hereof for
which compensation would not otherwise be payable hereunder or
for third parties in cooperation with Forschner, or designing
displays, annual reports, or sell sheets for products other than
those which the Corporation designed hereunder, neither the
Corporation nor Mr. Polenberg need perform such services unless
the parties consummate an agreement with respect to such
services. This Agreement cannot be altered or amended except by
a writing duly executed by all parties to this Agreement.
10. Notices. All notices or other communications
referred to or permitted to be sent hereunder shall be in writing
and shall be duly given if sent postage prepaid by certified or
registered mail, return receipt requested, as follows:
a) If to Mr. Polenberg or the Corporation to:
Polenberg, Inc.
c/o Mr. Myron Polenberg
484 W. 43rd Street
Apartment 32M
New York, New York 10036
b) If to Forschner to:
The Forschner Group, Inc.
One Research Drive
Shelton, Connecticut 06484
Attention: Executive Vice President and
Chief Financial Officer
Any party may change its address for the sending of
notices to such party by delivering a written notice to the other
parties hereto in accordance with the provisions of this Section.
11. Reports; Access to Books and Records. (a) Until
such time as Forschner has no obligation to make any payments
under Section 4(a)(ii), Forschner shall furnish to the
Corporation, on a confidential basis within forty-five (45) days
after the end of each calendar quarter (except that the first
such statement need not be given until thirty (30) days after the
date of the execution of this Agreement and need only cover the
first two calendar quarters of 1995), a complete and accurate
statement setting forth in reasonable detail the calculation of
the Percentage Royalty for such quarter or period covered by such
statement or, if no such royalty is due, the calculation to that
effect. In the event that any inconsistencies or mistakes are
discovered in such reports or payments, they shall be rectified
promptly and an appropriate payment or credit shall be made or
given by Forschner or the Corporation, as the case may be.
(b) Forschner shall keep, maintain, and preserve until
two (2) years following such time as it has no further obligation
to make any payments under Section 4(a)(ii), complete and
accurate books and records pertaining to the various items
necessary or required in order to calculate the amounts to be
paid to the Corporation hereunder, including records of sales and
shipments by Forschner of its watches and records of returns.
Notwithstanding the foregoing, Forschner shall be permitted, at
its discretion, to dispose of all books and records applicable to
any period two years after the period in question. The
Corporation and the Polenberg Representatives shall have the
right, but only for the purpose of confirming Forschner's
performance under this Agreement, to examine and make extracts
from all such records (which records shall be made available in a
form reasonably practicable for such examination), including all
invoices, during business hours and upon reasonable notice to
Forschner. The parties agree that any documents or other
information obtained by either Mr. Polenberg, the Corporation or
any Polenberg Representative pursuant to this Section shall be
Information for purposes of Section 5 and governed thereby.
12. Joint and Several Obligations. The obligations of
Mr. Polenberg and the Corporation under Sections 5 and 6 shall be
joint and several.
13. Governing Law. This Agreement shall in all
respects be governed by and construed in accordance with the laws
of the State of New York applicable to contracts made and to be
performed entirely within such state, and that the courts of such
state shall be the exclusive courts of jurisdiction and venue for
any litigation, special proceedings, or other proceedings as
between the parties that may be brought, or arise out of, in
connection with or by reason of this Agreement.
14. Arbitration. Should the parties hereto disagree
concerning their respective obligations under this Agreement, or
any other aspect of this Agreement, the parties hereto agree to
submit their differences to determination and award pursuant to
the rules of the American Arbitration Association with
arbitration to occur in the County of New York, State of New
York. The award of the arbitrator pursuant to such arbitration
shall be final, conclusive, non-appealable and binding upon the
parties for all purposes and may be enforced only in any of the
federal or state courts sitting in the County of New York, State
of New York.
15. Legal Fees and Costs. In the event any party
brings an action and/or incurs expenses to enforce or interpret
any provision of this Agreement, the prevailing party or parties
in such action will be entitled to recover from the nonprevailing
party or parties such expenses including, without limitation,
reasonable attorney's fees, cost, and necessary disbursements, in
addition to any other relief to which such party or parties shall
be entitled.
16. Severability. The unenforceability or invalidity
of any provision of this Agreement shall not affect the
enforceability or validity of this Agreement in any other
respect.
17. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be an original and
all of which together shall constitute one and the same
instrument.
18. Miscellaneous. The headings contained herein are
for convenience of reference only, are not a part of this
Agreement and shall not limit or otherwise affect the meaning
hereof. Whenever the context requires, references in this
Agreement to the singular shall include the plural and, likewise,
the plural shall include the singular, and words denoting gender
shall include the masculine, feminine and neuter.
IN WITNESS WHEREOF, the Corporation, Mr. Polenberg and
Forschner have duly executed this Agreement as of the date first
above written.
THE FORSCHNER GROUP, INC.
By:
Name:
Title:
POLENBERG, INC.
By:
Name:
Title:
MYRON POLENBERG
ZH-54280.13
-2-
<PAGE>
EXHIBIT A
Victorinox
All Victorinox(TM) watches
Swiss Army(TM) Brand
Striker
Salamander
Tattoo
Mausor
Black Synthetic Chronograph
Officers Rotating Bezel
- - --------
With respect to any Model listed on this Exhibit which
undergoes a name change, the resulting Model shall be
deemed a part of this Exhibit.
ZH-54280.13
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000731947
<NAME> THE FORSCHNER GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,596
<SECURITIES> 0
<RECEIVABLES> 21,843
<ALLOWANCES> 975
<INVENTORY> 45,749
<CURRENT-ASSETS> 74,693
<PP&E> 8,825
<DEPRECIATION> 4,789
<TOTAL-ASSETS> 102,050
<CURRENT-LIABILITIES> 16,707
<BONDS> 0
0
0
<COMMON> 881
<OTHER-SE> 84,462
<TOTAL-LIABILITY-AND-EQUITY> 102,050
<SALES> 26,079
<TOTAL-REVENUES> 26,079
<CGS> 17,487
<TOTAL-COSTS> 9,172
<OTHER-EXPENSES> 116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (49)
<INCOME-PRETAX> (415)
<INCOME-TAX> (170)
<INCOME-CONTINUING> (245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (245)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
