SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
Swiss Army Brands, 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [x]
The aggregate market value of voting stock held by nonaffiliates of the
registrant on March 20, 2000, was approximately $21,898,000. On such date, the
closing price of registrant's common stock was $7.97 per share. Solely for
purposes of this calculation, shares beneficially owned by directors, executive
officers and stockholders of the registrant that beneficially own more than 10%
of the registrant's common stock have been excluded, except shares with respect
to which such directors and officers disclaim beneficial ownership. Such
exclusion should not be deemed a determination or admission by the registrant
that such individuals are, in fact, affiliates of the registrant.
The number of shares of registrant's common stock, $.10 par value,
outstanding on March 20, 2000 was 7,850,860 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders of registrant to be held May
18, 2000 are incorporated by reference in Part III herein.
<PAGE>
PART I
Item 1.Business.
Swiss Army Brands, Inc. ("SABI" or the "Company") is the exclusive
distributor in the United States, Canada (with one minor exception for cutlery)
and the Caribbean of the Victorinox Original Swiss Army Knife, Victorinox
SwissTool, Victorinox SwissCard and Victorinox Cutlery. SABI also markets
its own line of Swiss Army Brand Watches, Swiss Army Brand Sunglasses and
Swiss Army Brand Writing Instruments under its Swiss Army Brand worldwide. In
addition, in 1999, the Company began manufacturing and distributing Bear MGC
knives and multi-tools. The Company has been marketing Victorinox Original Swiss
Army Knives and Victorinox Cutlery for over fifty years and has been the
exclusive United States distributor of such products since 1972 under agreements
with SABI's principal supplier of pocketknives and cutlery, Victorinox Cutlery
Company ("Victorinox"), a Swiss corporation and Europe's largest cutlery
producer. SABI added Canada and the Caribbean (including Bermuda) to its
exclusive territory for Victorinox Original Swiss Army Knives in 1992 and 1993,
respectively.
In April 1999, the Company purchased substantially all of the assets and
assumed certain liabilities of Bear MGC Cutlery, Inc., which manufactured and
distributed Bear MGC knives and multi-tools. See Note 4 to the Company's
Consolidated Financial Statements included herein for further information.
The Company is engaged principally in one line of business - the
importation, manufacturing and distribution of cutlery, pocketknives,
multi-tools, watches and other consumer products. Total SABI sales for the
calendar years 1999, 1998 and 1997 were $129,452,000, $127,851,000, and
$118,744,000, respectively. Sales of Victorinox Original Swiss Army Knives,
Victorinox SwissTools, Victorinox SwissCards and Bear MGC products, accounted
for approximately 39% of SABI's 1999 sales while watches and other Swiss Army
Brand products accounted for approximately 46%. Sales of professional and
consumer cutlery accounted for approximately 15% of SABI's 1999 sales. No
customer accounted for more than 10% of net sales during any year in the
three-year period ended December 31, 1999. See Note 17 to the Company's
Consolidated Financial Statements included herein for further information.
The Company was incorporated in Delaware on December 12, 1974 as a
successor to a New York corporation. SABI's principal executive offices are
located at One Research Drive, Shelton, Connecticut 06484 and its telephone
number is (203) 929-6391. As of December 31, 1999, SABI and its subsidiaries had
219 full-time employees, including 10 in Canada and five in Switzerland.
2
<PAGE>
Products
--------
Victorinox Original Swiss Army Knives are multiblade pocketknives
containing implements capable of more functions than standard pocketknives. For
example, SABI's most popular Victorinox Original Swiss Army Knife model, the
Classic, with a suggested retail price of $16, features a blade, scissors, nail
file with screwdriver tip, toothpick and tweezers. SABI markets more than 70
different models of Victorinox Original Swiss Army Knives containing up to 35
different implements (with up to 45 separate functions), ranging from a basic
knife with a suggested retail price of $10 to the highest priced model at
approximately $70 as well as a SwissChamp Deluxe SOS kit with a suggested retail
price of approximately $160. SABI also sells multi-function lockblade knives
designed for the hunting and outdoor market. The Company also offers the
SwissCard , a credit card shaped, ten-function instrument, and the SwissTool , a
multi-tool with 23 features, including full size pliers. In 1999, the Company
added to its product line, a collection of Victorinox Lifestyle Tools; the
CyberTool, GolfTool, AutoTool and SportRatchetTool. These tools are designed for
use in specific activities.
SABI's line of Swiss Army Brand products includes 25 models of Swiss Army
Brand Watches with over 125 SKUs ranging from the Active Collection, starting
out a suggested retail price of $85, to the Professional Collection, which tops
out at a suggested retail price of $1,395. SABI's line of Swiss Army Brand
Sunglasses includes four models with suggested retail prices ranging from $60 to
$80. In addition, SABI's line of Swiss Army Brand writing instruments includes
six SKUs at a suggested retail price of $95. SABI currently obtains a majority
of its Swiss Army Brand Watches from a single Swiss supplier, which is
responsible for the final assembly of watch components manufactured by several
manufacturers. The Company believes that alternate suppliers would be available
if necessary and that the loss of its current supplier of Swiss Army Brand
Watches would not have a material adverse effect on the Company's business.
The Company also sells professional cutlery products, made of stainless
steel, primarily manufactured by Victorinox. Although the majority of SABI's
professional cutlery products are marketed under the trademarks "Forschner" and
"R.H. Forschner," the Company also has a private label business. Professional
cutlery imported from Switzerland is generally more expensive than domestic
United States products. SABI believes that it has the largest market share of
imported professional cutlery products sold in the United States and that its
share of all professional cutlery, foreign and domestic, sold in this country is
second to the dominant seller of such products. SABI believes that it has
achieved and maintained its market share due to the quality of its products and
its merchandising efforts.
The Company's line of Bear MGC knives and multi-tools include over 50
models with suggested retail prices primarily in the range of $20 to $60.
The Company distributes its products throughout the United States, Canada
and the Caribbean through independent sales representatives and its direct sales
force to over 3,800 wholesalers and retailers, including department stores,
specialty stores, high-end jewelers, sporting goods stores, cutlery shops,
catalog showrooms, mass merchandisers and mail order houses, and through
distributors to corporations and other organizations for promotional purposes,
premium, employee gift award programs and corporate identity catalogs. SABI
imprints its products primarily at its own facilities with the customer's
corporate name or logo. SABI's customers for professional cutlery include
distributors of hotel, restaurant, butcher, institutional, commercial fishing
and slaughterhouse supplies and retail cutlery stores located throughout the
United States and Canada.
3
<PAGE>
Sales of Victorinox Original Swiss Army Knives and Swiss Army Brand
products are seasonal with sales typically stronger during July through
December.
Although the Company is the largest United States seller of Swiss Army
Knives, it faces competition from Precise Imports Corp. ("Precise"), the United
States and Canadian distributor of Swiss Army Knives manufactured by Wenger S.A.
("Wenger"), the only company other than Victorinox supplying knives to the Swiss
armed forces. Precise imports a substantially smaller number of knives into the
United States than SABI. The Company also faces competition from the
manufacturers and importers of other multiblade knives and multi-tools including
importers that sell non Swiss-made pocketknives under the "Swiss Army Knife"
name.
SABI is unable to determine its competitive position with respect to the
estimated seven major competitors in the general United States pocket knife
market. SABI's direct competitors in the specialty advertising market are
manufacturers of name brand products of similar price and quality. SABI has many
competitors in the sale of watches and sunglasses at all price points. Many of
these competitors have market shares and resources substantially greater than
those of SABI.
Victorinox Travel Gear
----------------------
In March 2000, the company signed a license agreement with TRG Accessories,
LLC ("TRG"), an Untied States based company, reflecting a prior informal
arrangement between the two companies. Under the agreement TRG is to develop,
manufacture and market a line of Travel Gear under the Victorinox trademark and
logo in the United States. The collection, including luggage, backpacks and
small leather goods (wallets, PDA covers, etc.) was launched to select
department store and specialty retailers in the late 1999. The marks are
sublicensed to TRG by the Company on a royalty basis pursuant to a license
agreement between the Company and Victorinox, granting the Company the right to
utilize and sublicense the Victorinox trademarks, in conjunction with the
development and international marketing of a collection of Travel Gear.
Trademark Agreements
--------------------
In 1992, in connection with the settlement of litigation with Precise, SABI
granted Precise a perpetual worldwide royalty-free license to use the trademark
Swiss Army in connection with Swiss-made non-knife goods, other than timepieces,
sunglasses and compasses. Under this agreement, Precise acknowledged SABI's
exclusive rights to the Swiss Army trademark for non-knife products including
timepieces, compasses and sunglasses. See Item 3 for discussion of legal
proceedings between SABI and Precise.
The Company is the owner of United States and certain foreign trademark
registrations for "Swiss Army", as applied to watches and sunglasses and
actively defends its trademarks throughout the world. Although the Company's
registrations have been challenged, on the basis of the advice of its trademark
counsel, SABI expects to prevail in those proceedings. The Company is dedicated
to a vigorous enforcement of these exclusive trademark rights.
No U.S. trademark registrations have ever been issued for "Swiss Army" as
applied to multi-bladed knives. In 1994, in a case originally brought by SABI
against Arrow Trading Co., Inc. ("Arrow") in September 1992 in the District
Court for the Southern District of New York, the U.S. Court of Appeals for the
Second Circuit reversed a judgment originally issued in the Company's favor and
held that the use of "Swiss Army" on Chinese-made knives could not be enjoined
on grounds of geographic misdescriptiveness. On remand, the District Court ruled
that Arrow had violated Section 43(a) of the Lanham Act and New York common law
in connection with its sale of Chinese-made multi-bladed pocketknives which
Arrow called "Swiss Army Knives." The court found that SABI had proved its
contention that Arrow engaged in unfair competition and held that Arrow,
although free to use the phrase "Swiss Army Knife" to designate its product,
must amply distinguish it from the SABI product and prohibited Arrow from
selling any multi-function pocketknives as "Swiss Army Knives" unless the phrase
"Swiss Army Knife" is immediately preceded or followed by Arrow's name in such a
way as to clearly designate its origin and that the size of the type designating
origin be no smaller or less prominent than the type used in the phrase "Swiss
Army Knife". The Company intends to utilize all reasonable means to safeguard
the public from being misled by inferior imitation products.
4
<PAGE>
On January 17, 1995, Victorinox and Wenger confirmed and memorialized in
writing the grant of separate trademark licenses of Swiss Army as applied to
multi-function pocketknives to SABI and Precise. The license to the Company is
royalty-free and continues so long as SABI is a distributor for Victorinox.
Victorinox and Wenger have filed with the U.S. Patent and Trademark Office a
dual application for "Swiss Army" as applied to multi-bladed knives, which
application has been opposed by various third parties.
The Company is actively considering marketing other products under the
"Swiss Army" trademark or under other trademarks. However, no assurances can be
given that the Company will ever enter into these additional markets, or if
entered into, that such activities will be profitable.
If the Company's efforts to protect its trademarks prove to be
unsuccessful, the Company may incur increased competition from non-Swiss made
knives and other products sold under the "Swiss Army" name. No assurances can be
given that such competition from non-Swiss made products would not have a
material adverse effect on the business and prospects of the Company.
Swiss Confederation Trademarks
------------------------------
On December 18, 1996, the Swiss Military Department representing the Swiss
Confederation ("Swiss Confederation") and SABI entered into a trademark
agreement (the "Trademark Agreement") pursuant to which SABI was granted certain
worldwide use and sublicensing rights in connection with trademarks containing
the words "Swiss Army" registered by the Swiss Confederation in Switzerland (the
"Swiss Confederation Trademarks"). The Swiss Confederation acknowledged SABI's
exclusive right to use SABI's trademarks in the countries of their registration
or application and agreed to assist SABI in enforcing SABI's rights with respect
to its trademarks. In addition, the Swiss Confederation stated its intention to
assist Victorinox, Wenger, SABI and Precise in safeguarding their rights with
respect to "Swiss Army" as applied to knives and in preventing the use of "Swiss
Army" with respect to multi-blade pocketknives, multi-tools and other products
which are not Swiss products.
The Trademark Agreement grants SABI the right to an exclusive royalty-free
license of the Swiss Confederation Trademarks as applied to watches and
sunglasses in the United States, Canada and the Caribbean. SABI is also granted
such rights with respect to certain designated products that either it or its
licensees sell in commercial quantities in the United States, Canada and the
Caribbean within designated time periods. In the event SABI or its licensees do
not sell commercial quantities of product categories within the time periods set
by the agreement, the Swiss Confederation shall have the right, subject to
certain conditions, to license the Swiss Confederation Trademarks to a third
party and, in such event, SABI shall be obligated to offer such third party a
license of SABI's appropriate trademark.
5
<PAGE>
Outside of the United States, Canada and the Caribbean, the Trademark
Agreement provides for the grant to SABI of the right to an exclusive license,
subject to the existing legal rights of others, for watches and sunglasses at a
royalty equal to 3% of net sales. In addition, SABI has the right to a license
for certain designated products outside of the United States, Canada and the
Caribbean, also at a royalty equal to 3% of net sales, to use the Swiss
Confederation Trademarks provided that SABI commences the sale of commercial
quantities of such products within time periods prescribed by the Trademark
Agreement. The Trademark Agreement also provides that all products sold under
the license must be of a quality at least equal in workmanship and materials to
the products currently sold by SABI, Victorinox or Wenger and that in the event
SABI discontinues sales of goods in commercial quantities in any category of
goods for three consecutive years, the Swiss Confederation shall have the right
to terminate the license as to that category after giving SABI notice and an
opportunity to resume sales. Except for the foregoing limitation, the rights of
SABI with respect to the use of the Swiss Confederation Trademarks under the
Trademark Agreement are perpetual. It is anticipated that the right to utilize
the Swiss Confederation Trademarks on certain products other than timepieces and
sunglasses will be made available to Precise by SABI on terms yet to be
discussed.
Victorinox Agreements
---------------------
All of SABI's products, except for the Bear MGC products, are manufactured
by independent suppliers. SABI's principal supplier of pocketknives and cutlery
is Victorinox, which has manufactured the Original Swiss Army Knife for the
Swiss Army for more than 100 years. The loss of this supplier would have a
material adverse effect on SABI's business. SABI, Victorinox's largest single
customer, has been distributing Victorinox's products since 1937. Distribution
was on a non-exclusive basis for more than 45 years when, as a result of
understandings reached on SABI's behalf by Mr. Louis Marx, Jr. and Mr. Stanley
R. Rawn, Jr., both now SABI Directors, and Mr. Charles Elsener, Sr., Chief
Executive Officer of Victorinox, SABI became Victorinox's exclusive United
States distributor of Victorinox Original Swiss Army Knives under an agreement
dated December 12, 1983 (as subsequently amended, the "U.S. Distribution
Agreement"). In 1992 and 1993, Messrs. Marx and Rawn held extensive
conversations principally in Switzerland, with Victorinox looking to expand the
scope of SABI's exclusive territory. This resulted in SABI obtaining exclusive
distributorship rights first in Canada, and then in Bermuda and the Caribbean
areas, as well as SABI's receipt of exclusive U.S., Canadian and Caribbean
distribution rights to the Victorinox Watch, which is supplied to the Company by
Victorinox along with another Swiss manufacturer.
The U.S. Distribution Agreement, together with the Company's agreements
with respect to the rights obtained in 1992 and 1993 (together, the "Victorinox
Agreements"), provides:
o.SABI is the exclusive distributor in the United States, its
territories and possessions, Canada (with one minor exception), Bermuda and
the Caribbean (excluding Cuba so long as SABI is prohibited by United
States law from operating therein) (together, the "Territories"), of
Victorinox Original Swiss Army Knives and most other Victorinox cutlery
products and Victorinox Swiss-made watches (collectively, "Products").
o.The U.S. Distribution Agreement was renewed in 1998 through December
12, 2003 and is subject to renewal at five year intervals at SABI's option
unless, in any two consecutive years, purchases of Products by SABI fall
below the average purchases for 1981 and 1982, which was 19,766,035 Swiss
francs. SABI's distribution rights in Canada, which were renewed in 1999,
and the Caribbean were for initial terms of seven years subject to renewal
for successive five-year periods. In the event that Victorinox elects not
to renew SABI's Canada distribution rights, Victorinox will be required to
pay SABI the amount of $3,500,000.
During each calendar year, SABI must purchase from Victorinox at least
85% of the maximum quantities of each of Swiss Army Knives and cutlery
(expressed in Swiss francs) purchased in any prior year. The only remedy of
Victorinox for SABI's failure to achieve these goals would be the
termination of SABI's U.S. distribution rights. In the years 1996 through
1998, Victorinox agreed to reduce the minimum purchase requirements. The
Company met the reduced minimum purchase requirements in years 1996 through
1998. In 1999, Victorinox met the minumum purchase requirement as set forth
in the U.S. Distribution Agreement.
6
<PAGE>
o.In each calendar year Victorinox must, if requested, furnish SABI
with up to 105% of each type of product purchased during the immediately
preceding year. Victorinox has historically been able to accommodate SABI's
supply requirements even when they have exceeded such amount. However,
Victorinox's plant has a finite capacity and no assurances can be given
that Victorinox will continue to meet any increased supply requirements of
SABI.
o.Pricing provisions assure that the prices paid by SABI for products
shipped to the United States will be as low or lower than those charged to
any other Victorinox customer. In addition, SABI is granted a 4% discount
on purchases of pocketknives and a 3% discount on purchases of cutlery. For
products shipped directly to Canada and the Caribbean, the prices paid by
SABI are Victorinox's regular export prices. SABI also pays a royalty to
Victorinox of 1% of net sales of Victorinox Watches.
o.SABI will not sell any new cutlery items without the agreement of
Victorinox.
o.SABI will have complete discretion as to advertising, packaging,
pricing and other marketing matters.
In consideration of the grant of the Canadian distribution rights in 1992,
SABI issued to Victorinox 277,066 shares of common stock, par value $.10 per
share, of SABI ("Common Stock"). In consideration for the grant of the Caribbean
distribution rights in 1993, the Victorinox watch distribution rights and the
acquisition by SABI of Victorinox's 20% interest in a subsidiary of SABI, SABI
issued to Victorinox a five-year warrant to purchase 1,000,000 shares of Common
Stock at a discount from the market price on the date of exercise. Victorinox
exercised the warrant in full in April 1994 at a price per share of $9.75, a
discount of $4.25 per share from the then current market price of SABI Common
Stock. All of the shares issued upon exercise of the warrant were subsequently
sold to Brae Group, Inc. ("Brae"), a corporate stockholder of SABI that is
controlled by Louis Marx, Jr., a Director of SABI, in exchange for shares of the
common stock of that corporation.
Investments
-----------
In 1994, SABI invested a total of $7,002,990, paid in cash and in shares of
stock of a publicly traded corporation, to acquire 700,299 shares of Series A
Preferred Stock of Forschner Enterprises, Inc., a privately held corporation
which was merged into Victory Capital LLC. In 1996, Victory Capital LLC changed
its name to Hudson River Capital LLC ("Hudson River"). In 1996, SABI invested
$2,000,209, paid in cash, to acquire 190,477 Series B Preferred Units of Hudson
River. SABI's interest in Hudson River currently represents, in the aggregate,
approximately 9.6% of the equity of Hudson River. Hudson River is a private
equity firm specializing in middle market acquisitions, recapitalizations and
expansion capital investments. The preferred units of Hudson River held by SABI
carry a preference on liquidation equal to their cost and, in certain instances,
are entitled to an annual preferred return.
7
<PAGE>
In 1996, Hudson River distributed pro-rata to its members all of its
interest in Victory Ventures LLC, a private equity firm specializing in small
market venture capital investments ("Victory Ventures"). SABI received in the
distribution, and continues to hold, 890,776 Series A Preferred Units of Victory
Ventures valued at the time of the distribution at $1.23 per unit, currently
representing approximately 1.2% of the equity of Victory Ventures. The preferred
units of Victory Ventures held by SABI carry a preference on liquidation equal
to the value of the Series A Preferred Units on the date of the distribution
and, in certain instances, are entitled to an annual preferred return.
490,000 of Hudson River's common units and 2,279,763 of Hudson River's
Series B Preferred Units (currently representing, in the aggregate,
approximately 29.9% of Hudson River's outstanding equity) are held by Brae
Capital Corporation ("Brae Capital"), a wholly-owned subsidiary of Brae. Mr.
Marx is the owner of 700,000 plan units (representing approximately 7.5% of
Hudson River's outstanding equity) issued by Hudson River under its Equity
Incentive Plan, which entitle Mr. Marx to voting rights and to receive a portion
of the appreciation of Hudson River's assets after the date of grant of such
units under certain circumstances.
490,000 of Victory Ventures' common units and 6,917,035 of Victory
Ventures' Series A Preferred Units (currently representing in the aggregate,
approximately 9.6% of Victory Ventures' outstanding equity) are held by Brae
Capital. In addition, Brae Capital is the owner of 2,911,613 plan units
(representing approximately 3.8% of Victory Ventures' outstanding equity)
issued by Victory Ventures under its Equity Incentive Plan, which entitle Brae
Capital to voting rights and to receive a portion of the appreciation of Victory
Ventures' assets after the date of grant of such units, under certain
circumstances. Pursuant to an agreement between Hudson River and Brae, if
certain conditions are met, Brae is required to purchase from Hudson River at
Hudson River's cost 10%, and may purchase up to 20%, of the "equity portion"
(defined as the common and warrant portion, or the preferred and warrant portion
if no common is purchased provided that the preferred portion is participating)
of each investment made by Hudson River. Brae may allocate all or a portion of
the securities to be acquired pursuant to such agreement among the officers,
directors, employees, consultants and common equityholders of Hudson River and
such other persons who may be in a position to benefit Hudson River in such
proportions as Brae shall determine. Brae is party to a similar agreement with
Victory Ventures.
Also, Mr. Marx is a director and chairman of a private company that owns
6,841,784.4 series A preferred units of Victory Ventures (representing
approximately 8.9% of the total outstanding units), and 193,652.6 series B
preferred units of Hudson River (2.1% of the total outstanding units). Mr. Marx
does not own any units of Victory Ventures directly.
Mr. Marx, a Director of SABI, is a Co-Chairman of the Board, a director and
an equity holder of each of Hudson River and Victory Ventures, and a consultant
to Victory Ventures. Mr. Clarke H. Bailey, a Director of SABI, is a Co-Chairman
of the Board, a Director and an equityholder of Hudson River. Mr. Stanley R.
Rawn, Jr., Senior Managing Director and a Director of SABI, and Mr. Herbert M.
Friedman, Vice President and General Counsel and Director of SABI, also serve as
directors and are equityholders of each of Hudson River and Victory Ventures.
Mr. Robert S. Prather, Jr., a director of SABI, also serves as a director of
Victory Ventures, LLC.
St. John Knits, Inc. License Agreement
--------------------------------------
On May 15, 1997, SABI entered into an agreement with St. John Knits, Inc.
("St. John") providing for the grant of an exclusive license, subject to certain
terms and conditions, to SABI to market watches bearing the St. John trademark.
St. John is a leading designer, manufacturer and marketer of fine woman's
apparel. SABI introduced the St. John Timepiece Collection in November 1998.
SABI discontinued the sale of the St. John Timepiece Collection in the third
quarter of 1999.
8
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Item 2. Properties.
- ------ ----------
The executive and administrative offices of SABI occupy approximately
42,500 square feet of leased space in an office building located in Shelton,
Connecticut. SABI moved into these premises in September, 1993. The initial term
of the lease on this space expires on September 1, 2001, subject to renewal
options.
In addition, SABI leases approximately 7.4 acres in Shelton, Connecticut
upon which the landlord has constructed a 85,000 square foot building that SABI
uses as a facility for warehousing, distribution, imprinting and assembly. The
lease commenced in June 1991 and has a term of ten years, subject to renewal
options. SABI also leases approximately 13,000 square feet in a building in
Toronto, Canada that it uses for office space and warehousing of products. The
lease commenced in December 1992 and expired in December 1997. The Company has
extended the term on this lease until December 31, 2000. Also, in 1996, SABI
entered into a four-year lease for 7,000 square feet of space in a 30,000 square
foot building in Bienne, Switzerland for use as a distribution center. This
lease has been extended until January 2001.
SABI believes its properties are sufficient for the current and anticipated
needs of its business.
Item 3. Legal Proceedings.
- ------ -----------------
Except as set forth or referenced below, the Company is not involved in any
material pending legal proceedings.
K-Swiss filed on December 30, 1996 petitions to cancel the Company's U.S.
Trademark Reg. No. 1,734,665 for watches and Reg. No. 1,715,093 for sunglasses
for "Swiss Army". The Company believes it has meritorious defenses to these
petitions although their outcome cannot be predicted at this time.
On July 14, 1997, the Company filed with the American Arbitration
Association in New York, New York a demand for arbitration against Precise. In
the demand for arbitration, the Company charged that Precise had violated the
license agreement dated June 30, 1992 between Precise and the Company by
utilizing the trademark Swiss Army in ways prohibited by the agreement. In
response, Precise alleged certain counterclaims. These claims and counterclaims
between the Company and Precise were dismissed with prejudice on December 31,
1999 pursuant to the terms of a November 7, 1998 stipulation since neither party
exercised its right to continue the proceeding.
The Company is also a plaintiff in several proceedings to enforce its
intellectual property rights. In addition, see "Business - Trademark
Agreements".
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not Applicable.
9
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PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
A. Market Information.
------------------
Shares of SABI's Common Stock trades on The Nasdaq Stock Market under the
symbol "SABI". The high and low closing sales prices for shares of Common Stock,
which is the only class of capital stock of SABI outstanding, as reported by
Nasdaq since the first quarter of 1998 were as follows:
<TABLE>
<CAPTION>
1998 1999 2000*
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $12 1/16 $ 9 3/16 $10 1/8 $8 5/8 $8 1/2 $6
Second Quarter 12 1/2 10 1/4 10 7 5/8
Third Quarter 11 1/4 8 3/4 11 1/2 7 9/32
Fourth Quarter 10 3/8 8 7/8 9 1/2 6 5/8
</TABLE>
*Through March 20, 2000.
The public market for Common Stock is limited and the foregoing quotations
should not be taken as necessarily reflective of prices that might be obtained
in transactions involving substantial numbers of shares.
B. Holders.
-------
On March 20, 2000, shares of Common Stock were held of record by 299
persons, including several holders who are nominees for an undetermined number
of beneficial owners.
C. Dividends.
---------
The Company has not paid a cash dividend since its inception, and its
present policy is to retain earnings for use in its business. Payment of
dividends is dependent upon the earnings and financial condition of SABI and
other factors that its Board of Directors may deem appropriate. Under SABI's
revolving credit agreement, which expires on June 30, 2001, SABI agreed not to
declare or pay any dividends unless immediately following such payment SABI's is
in compliance with the financial covenants set forth in the revolving credit
agreement.
10
<PAGE>
Item 6. Selected Financial Data
- ------ -----------------------
The following selected financial data for the five years ended December 31, 1999
was derived from the consolidated financial statements of the Company. This data
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended December 31,
- ----------------------------------------
Operating Data: 1999 1998 1997(1) 1996(2) 1995
---- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 129,452 $127,851 $118,744 $130,030 $126,695
Gross profit 50,846 49,982 42,724 40,836 44,264
Selling, general and
administrative expenses 46,305 49,005 49,639 46,241 40,265
Operating income (loss) 4,541 977 (6,915) (5,405) 3,999
Gain (loss) on sale (write-down)
of investments (2,280) 1,651 398 (2,382) 1,771
Other income (expense), net (610) 55 116 179 (134)
Income (loss) before income taxes 1,651 2,683 (6,401) (7,608) 5,636
Income tax provision (benefit) 1,531 1,220 (2,376) (2,343) 2,523
--------- -------- -------- -------- --------
Net income (loss) $ 120 $1,463 ($4,025) ($5,265) $3,113
========= ======== ======== ======== ========
Earnings per share:
Basic $ 0.02 $ 0.18 ($0.49) ($0.64) $0.38
Diluted $ 0.01 $ 0.18 ($0.49) ($0.64) $0.38
Balance Sheet Data:
Current assets $ 70,540 $ 70,383 $64,144 $70,933 $74,355
Total assets 107,604 100,404 94,051 98,643 101,230
Current liabilities 19,169 25,210 18,343 18,787 16,291
Long-term debt 11,362 - - - -
Stockholders' equity 76,380 74,598 75,708 79,856 84,939
Cash dividends per common share $ - $ - $ - $ - $ -
Weighted average number of shares outstanding:
Basic 7,862 8,138 8,209 8,202 8,185
Diluted 8,021 8,236 8,209 8,202 8,236
</TABLE>
(1) The financial results for 1997 include a $1.3 million write-off of
discontinued inventory (included in cost of sales) and $0.8 million of
restructuring costs (included in selling, general and administrative expenses).
See Note 16 to the Company's Consolidated Financial Statements.
(2) The financial results for 1996 include special charges of approximately
$9.9 million. The special charges consisted of a $4.9 million write-off of
discontinued inventory (included in cost of sales), a $2.6 million write-off of
obsolete displays, goodwill and other assets (included in selling, general and
administrative expenses) and a $2.4 million write-down of non-strategic
investments.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
FORWARD LOOKING STATEMENTS
The following discussion, as well as other portions of this Annual Report
on Form 10-K, contains, in addition to historical information, forward looking
statements. The forward looking statements were prepared on the basis of certain
assumptions which relate, among other things, to the demand for and cost of
purchasing and marketing the Company's products; the prices at which such
products may be sold; new product development; seasonal selling trends; the
Swiss franc-U.S. dollar exchange rates; the extent to which the Company is able
to successfully hedge against foreign currency fluctuations; and the Company's
anticipated credit needs and ability to obtain such credit. Even if the
assumptions upon which the projections are based prove accurate and appropriate,
the actual results of the Company's operations in the future may vary widely
from financial projections due to increased competition, changes in consumer
tastes and other factors not yet known or anticipated. Accordingly, the actual
results of the Company's operations in the future may vary widely from the
forward looking statements included herein.
11
<PAGE>
Results of Operations
The financial results for 1999 and 1997 were negatively impacted by
investment write-downs, inventory write-offs and restructuring costs. The 1999
results included a $2.7 million ($2.4 million after-tax) write-down of the
Company's investment in Hudson River Capital LLC. The 1997 financial results
included a $1.3 million inventory write-off of discontinued inventory (included
in cost of sales) and $0.8 million of restructuring costs (included in selling,
general and administrative expenses). These restructuring costs primarily
consisted of severance and related expenses.
The following table shows, as a percentage of net sales, the Company's
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 60.7 60.9 64.0
----- ----- -----
Gross profit 39.3 39.1 36.0
Selling, general and
administrative expense 35.8 38.3 41.8
----- ----- -----
Operating income (loss) 3.5 0.8 (5.8)
Interest income (expense), net (0.5) - .1
Gain (loss) on sale (write-down)
of investments (1.8) 1.3 .3
Other income, net - - -
----- ----- -----
Income (loss) before
income taxes 1.2 2.1 (5.4)
Income tax provision (benefit) 1.1 1.0 (2.0)
----- ----- -----
Net income (loss) 0.1% 1.1% (3.4%)
===== ===== =====
</TABLE>
Comparison of the Years Ended December 31, 1999 and December 31, 1998
- ---------------------------------------------------------------------
Net sales for the year ended December 31, 1999 were $129.5 million compared
with $127.9 million for the same period in 1998, representing an increase of
$1.6 million or 1.3%. The sales increase was due primarily to $5.3 million in
sales related to Bear Cutlery, Inc., an increase in sales of new Victorinox
products, primarily the Victorinox CyberTool, SwissCard and AutoTool, and an
increase in North American sales of Swiss Army Brand Watches. The increases
were partially offset by a decrease in sales of watches marketed under the St.
John Timepiece Collection and a decrease in sales of Swiss Army Brand
Sunglasses.
12
<PAGE>
Gross profit for the year ended December 31, 1999 was $50.8 million, 1.7%
higher than in 1998. The increase in gross profit was primarily due to the
increase in the value of the U.S. dollar versus the Swiss franc and an increase
in net sales, partially offset by unfavorable product mix. The Company's gross
profit margin is a function of both product mix and Swiss franc exchange rates.
Since the Company 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. Increases in the value of the Swiss franc versus the dollar may
effectively increase the cost of these products to the Company. The increase in
the cost of products to the Company may result in either higher prices charged
to customers or reductions in gross profit, both of which may have an adverse
effect on the Company's results of operations. The Company enters into foreign
currency contracts and options to hedge the exposure associated with foreign
currency fluctuations. Based upon current estimated Swiss franc requirements,
the Company believes it is hedged through the first quarter of 2001. 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 of any increase in the dollar
relative to the Swiss franc. The Company plans to continue to engage in hedging
transactions; however, the extent to which such hedging transactions will reduce
the effect of adverse currency fluctuations is uncertain.
Selling, general and administrative expenses for the year ended December
31, 1999 were $46.3 million, $2.7 million or 5.5% lower than in 1998. The
expense decrease resulted primarily from decreased advertising and merchandising
expense related to Swiss Army Brand Sunglasses offset in part by expenses
related to Bear. As a percentage of net sales, selling, general and
administrative expenses decreased to 35.8% in 1999 from 38.3% in 1998.
As a result of the above, the Company recorded operating income of $4.5
million for the year ended December 31, 1999 compared to $1.0 million in 1998.
Interest expense of $748,000 for the year ended December 31, 1999 was
$615,000 higher than interest expense in 1998 due to the debt incurred related
to the acquisition of Bear, and the Company's repurchase of $3.6 million of its
common stock since the fourth quarter of 1998.
Interest income of $44,000 for the year ended December 31, 1999 was
$144,000 lower than interest income in 1998, due to decreased cash balances
during 1999 compared to 1998.
Gain (loss) on sale of investments was a loss of $2,280,000 for the year
ended December 31, 1999 compared to a gain of $1,651,000 in 1998. The loss in
1999 consisted of a $2.7 million non-cash write-down of the Company's investment
in Hudson River Capital LLC due to the other than temporary impairment in the
value of the investment, offset in part by a $420,000 gain related to the sale
of the Company's investment in Iron Mountain, Inc. In 1998, the Company recorded
a $1.5 million gain due to a cash and stock distribution from the Company's
investment in Hudson River Capital LLC; received distributions from Victory
Ventures LLC consisting of common stock in two publicly traded entities, both of
which were sold by the Company resulting in a $57,000 gain; and sold its
investment in SWWT, Inc. and realized a gain of $94,000.
13
<PAGE>
As a result of the above, the income before income taxes was $1,651,000 for
the year ended December 31, 1999 compared to $2,683,000 in 1998.
Income tax expense (benefit) was provided at an effective rate of 92.7% for
the year ended December 31, 1999 compared to 45.5% for the year ended December
31, 1998. The change in the effective rate was the result of the Company taking
limited tax benefits on the capital loss write-down of the Hudson River Capital
LLC investment.
As a result of the above, the net income for the year ended December 31,
1999 was $120,000 ($0.01 per share-diluted, $0.02 per share-basic) compared to
$1.5 million ($0.18 per share-basic and diluted) in 1998.
Comparison of the Years Ended December 31, 1998 and December 31, 1997
- ---------------------------------------------------------------------
Net sales for the year ended December 31, 1998 were $127.9 million compared
with $118.7 million for the same period in 1997, representing an increase of
$9.1 million or 7.7%. The sales increase was due primarily to a 14.2% increase
in sales of Victorinox products, primarily the Victorinox SwissTool and
SwissCard, and an increase in sales of Swiss Army Brand Sunglasses and the
introduction of watches marketed under the St. John Timepiece Collection.
Gross profit for the year ended December 31, 1998 was $50.0 million, 17.0%
higher than in 1997. The increase in gross profit was primarily due to an
increase in net sales, an increase in the value of the U.S. dollar versus the
Swiss franc, and a $1.3 million inventory write-off in 1997.
Selling, general and administrative expenses for the year ended December
31, 1998 were $49.0 million, $0.6 million or 1.3% lower than in 1997. The
expense decrease resulted primarily from decreased advertising expense offset by
increased expenditures in the areas of product development and merchandising and
promotion. As a percentage of net sales, selling, general and administrative
expenses decreased to 38.3% in 1998 from 41.8% in 1997.
As a result of the above, the Company recorded operating income of $1.0
million for the year ended December 31, 1998 compared to an operating loss of
$6.9 million in 1997.
Interest expense of $133,000 for the year ended December 31, 1998 was
$93,000 higher than interest expense in 1997, due to higher borrowings in 1998
related to the Company's repurchase of $3.1 million of its common stock.
Interest income of $188,000 for the year ended December 31, 1998 was
$33,000 higher than interest income in 1997, due to increased invested cash
balances during the first half of 1998 compared to 1997.
The gain on sale of investments for the year ended December 31, 1998 was
$1.7 million compared to $398,000 in 1997. In 1998, the Company recorded a $1.5
million gain due to a cash and stock distribution from the Company's investment
in Hudson River Capital LLC. In addition, the Company received distributions
from Victory Ventures LLC consisting of common stock in two publicly traded
entities, both of which were sold by the Company resulting in a $57,000 gain;
and sold its investment in SWWT, Inc. and realized a gain of $94,000. The gain
in 1997 was due to a distribution from the Company's investment in Victory
Ventures LLC and a $112,000 recovery of a privately held entity that was
written-off in 1996.
14
<PAGE>
As a result of the above, the income before income taxes for the year ended
December 31, 1998 was $2.7 million compared to $6.4 million loss in 1997.
Income tax expense (benefit) was provided at an effective rate of 45.5% for
the year ended December 31, 1998 compared to 37.1% for the year ended December
31, 1997. The change in the effective tax rate was due to foreign and state
income taxes.
As a result of the above, the net income for the year ended December 31,
1998 was $1.5 million ($0.18 per share) compared to $4.0 million loss ($0.49 per
share) in 1997.
Liquidity and Capital Resources
- -------------------------------
As of December 31, 1999, the Company had working capital of $51.4 million
compared with $45.2 million as of December 31, 1998, an increase of $6.2
million. Significant sources of working capital included proceeds from the sale
of long-term investments of $1.9 million and the conversion of short-term debt
to long-term debt. Also, working capital increased due to the acquisition of
Bear. Significant uses of working capital consisted of additions to other assets
of $3.8 million, capital expenditures of $1.7 million and repurchases of common
stock of $0.5 million. The Company currently has no material commitments for
capital expenditures.
Cash provided from operating activities was approximately $4.9 million in
the year ended December 31, 1999 compared to $0.2 million in the year ended
December 31, 1998. The change primarily resulted from a decrease in inventory in
1999 compared to an increase in 1998, a smaller increase in accounts receivable
in 1999 compared to 1998, a decrease in prepaid and other in 1999 compared to an
increase in 1998 and an increase in accrued liabilities in 1999 compared to a
decrease in 1998, offset in part by a decrease in accounts payable in 1999
compared to an increase in 1998.
The Company meets its short-term liquidity needs with cash generated from
operations, and, when necessary, bank borrowings under its bank agreement. As of
December 31, 1999, the Company had $12,237,000 of outstanding borrowings under
its bank agreement. The Company currently has a $23.0 million credit line,
consisting of a $16.0 million revolving credit line and a $7.0 million term
loan. The revolving credit line expires in June 2001. The Company's short-term
liquidity is affected by seasonal changes in inventory levels, payment terms and
seasonality of sales. The Company believes its current liquidity levels and
financial resources continue to be sufficient to meet its operating needs.
Year 2000
- ---------
The Company conducted a review of its computer systems and operations to
identify those areas that could have been affected by the "Year 2000" issue and
developed an implementation plan to minimize disruption. Based upon that
assessment, certain computer systems were vulnerable to the Year 2000 issues.
The Company modified certain software and hardware, and made investment in new
software and hardware, which successfully mitigated the effect of the Year 2000
problem as it related to its own computer systems. The Company's operations
incurred no disruption of their ability to conduct business.
The costs associated with the Year 2000 compliance were approximately
$100,000. As of December 31, 1999, all the costs have been incurred.
The Company also communicated with its significant suppliers and service
providers to ensure that those parties had appropriate plans to manage the Year
2000 issue as it relates to the Company's operations. The Company experienced no
significant problems with its key suppliers, service providers or customers as a
result of the Year 2000 issue.
15
<PAGE>
Recently Issued Accounting Standards
- ------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
statement standardizes the accounting and reporting standards for derivatives
and hedging activities and is effective for fiscal years beginning after June
15, 2000. The Company will adopt this statement effective January 1, 2001. The
Company is currently evaluating the impact of SFAS No. 133 on the Company's
financial position and results of operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Foreign Exchange Risk
- ---------------------
The Company is exposed to significant market risk from changes in foreign
exchange rates as the Company imports virtually all its products from
Switzerland. To minimize the risks associated with fluctuations in the value of
the Swiss franc versus the U.S. dollar, the Company enters into foreign currency
contracts and options. Pursuant to guidelines approved by its Board of
Directors, the Company is to engage in these activities only as a hedging
mechanism against foreign exchange rate fluctuations associated with specific
inventory purchase commitments to protect gross margin and is not to engage in
speculative trading. Gains or losses on these contracts and options are deferred
and recognized in cost of sales when the related inventory is sold. At December
31, 1999, the Company entered into foreign currency contracts and options to
purchase approximately 107,000,000 Swiss francs in 2000 and 2001 at a weighted
average rate $1.509 Swiss franc/dollar. The Company's ultimate unrealized gain
or loss on these contracts and options will primarily depend on the currency
exchange rates in effect at the time the contracts and options mature. At
December 31, 1999, the Company has reviewed its foreign exchange risks and based
upon its foreign currency hedging program and review of its outstanding foreign
exchange contracts, it believes that a near-term increase in the value of the
Swiss franc versus the U.S. dollar would not have a material effect on the
Company's results of operations or financial condition. See Notes to
Consolidated Financial Statements for further discussion of the Company's
accounting policies and other information related to it foreign exchange
instruments.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
The financial information required by Item 8 is included elsewhere in this
report. See Part IV, Item 14.
Item 9. Disagreements on Accounting and Financial Disclosure
- ------ ----------------------------------------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
Incorporated herein by reference to the information under the heading
"Election of Directors" in the Company's Proxy Statement with respect to the
Company's Annual Meeting of Stockholders scheduled to be held on May 18, 2000.
16
<PAGE>
Item 11. Executive Compensation
- ------- ----------------------
Incorporated herein by reference to the information under the headings
"Compensation of Directors", "Compensation Committee Interlocks and Insider
Participation", "Compensation of Executive Officers", "Options" and "Report of
the Compensation Committee on Executive Compensation" in the Company's Proxy
Statement with respect to the Company's Annual Meeting of Stockholders scheduled
to be held on May 18, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
Incorporated herein by reference to the information under the headings
"Principal Shareholders" and "Security Ownership of Management" in the Company's
Proxy Statement with respect to the Company's Annual Meeting of Stockholders
scheduled to be held on May 18, 2000.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Incorporated herein by reference to the information under the headings
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement with respect to the Company's Annual Meeting of Stockholder's
scheduled to be held May 18, 2000.
17
<PAGE>
PART IV
-------
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------- ----------------------------------------------------------------
<S> <C>
(a) Documents filed as part of this report:
Page(s)
(1)
Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1999 and 1998 F-2 to F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years
Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-23
(2)
Schedule --
Schedule II -- Valuation and Qualifying Accounts
for the Years Ended December 31, 1999, 1998 and 1997 F-24
</TABLE>
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required, or because the required information is
included in the financial statements or notes thereto.
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Swiss Army Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Swiss Army
Brands, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Swiss Army Brands, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
February 18, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
December 31,
1999 1998
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $1,302 $1,309
Accounts receivable, less
allowance for doubtful accounts
of $1,060 and $975, respectively 33,718 31,321
Inventories 30,227 28,890
Deferred income taxes 2,235 2,205
Prepaid and other 3,058 6,658
------ -------
Total current assets 70,540 70,383
------ -------
Deferred income taxes 1,474 1,069
Property, plant and equipment, net 4,856 3,735
Investments 4,476 9,467
Intangible assets, net 11,548 2,875
Other assets, net 14,710 12,875
------ ------
Total assets $107,604 $100,404
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-2
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
<S> <C> <C>
Total Liabilities 1999 1998
Current liabilities
Current portion of long-term debt $875 $5,140
Accounts payable 7,732 12,439
Accrued liabilities 10,562 7,631
------ ------
Total current liabilities 19,169 25,210
------ ------
Long-term liabilities
Long-term debt 11,362 -
Other 693 596
------ ------
31,224 25,806
Commitments and contingencies (Note 15)
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 -
18,000,000; shares issued - 8,866,218
and 8,858,218, respectively 886 885
Additional paid-in capital 49,137 46,472
Accumulated other comprehensive income (loss) (401) 177
Retained earnings 35,576 35,456
------ ------
85,198 82,990
Less: Treasury stock; 1,014,108 and
958,108 shares, respectively (8,711) (8,194)
Deferred compensation (107) (198)
------ ------
Total stockholders' equity 76,380 74,598
------ ------
Total liabilities and stockholders' equity $ 107,604 $100,404
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $129,452 $127,851 $118,744
Cost of sales 78,606 77,869 76,020
-------- -------- --------
Gross profit 50,846 49,982 42,724
Selling, general, administrative
expenses 46,305 49,005 49,639
-------- -------- --------
Operating income (loss) 4,541 977 (6,915)
-------- -------- --------
Interest expense (748) (133) (40)
Interest income 44 188 155
Gain (loss) on sale (write-down)
of investments (2,280) 1,651 398
Other income, net 94 - 1
-------- -------- --------
Total interest and other
income (expense), net (2,890) 1,706 514
-------- -------- --------
Income (loss) before income taxes 1,651 2,683 (6,401)
Income tax provision (benefit) 1,531 1,220 (2,376)
-------- -------- --------
Net income (loss) $ 120 $1,463 ($4,025)
======== ======== ========
Earnings per share:
Basic $0.02 $0.18 ($0.49)
======== ======== ========
Diluted $0.01 $0.18 ($0.49)
======== ======== ========
Weighted average number of shares
outstanding:
Basic 7,862 8,138 8,209
======== ======== ========
Diluted 8,021 8,236 8,209
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands, except share data)
Accumulated
Common Stock Additional Other
Par Value $.10 Paid-In Comprehensive Retained Treasury Comprehensive
Shares Amount Capital Income (Loss) Earnings Stock Income (Loss)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
December 31, 1996 8,822,968 $882 $46,182 ($113) $38,018 ($5,113)
Comprehensive Loss:
Net loss - - - - (4,025) - ($4,025)
Foreign currency
translation adjustment - - - (127) - - (127)
-------
Comprehensive Loss ($4,152)
=======
Stock options exercised 750 - 4 - - -
---------- ----- ------- ----- -------- -------
BALANCE
December 31, 1997 8,823,718 882 46,186 (240) 33,993 (5,113)
Comprehensive Income:
Net income - - - - 1,463 - $1,463
Unrealized gain on
marketable securities - - - 603 - - 603
Foreign currency
translation adjustment - - - (186) - - (186)
-------
Comprehensive Income $1,880
=======
Stock options exercised 9,500 - 70 - - -
Stock grant 25,000 3 216 - - -
Repurchase of common stock - - - - - (3,081)
---------- ------ ------- ----- -------- -------
BALANCE
December 31, 1998 8,858,218 885 46,472 177 35,456 (8,194)
Comprehensive Loss:
Net income - - - - 120 - $120
Foreign currency
translation adjustment - - - 233 - - 233
Unrealized gain in
marketable securities - - - (811) - - (811)
------
Comprehensive Loss ($458)
======
Acquisition of Bear MGC
Cutlery, Inc. - - 2,630 - - -
Stock options exercised 10,000 1 53 - - -
Cancellation of stock grant (2,000) - (18) - - -
Repurchase of common stock - - - - - (517)
---------- ------ ------- ----- -------- -------
BALANCE
December 31, 1999 8,866,218 $886 $49,137 ($401) $35,576 ($8,711)
========== ====== ======= ===== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 120 $1,463 ($4,025)
Adjustments to reconcile net income (loss)
to cash provided from operating activities:
Depreciation and amortization 3,230 2,834 2,709
Stock compensation expense 73 21 -
Deferred income taxes (435) 2,652 (1,034)
(Gain) loss on (sale) write-down
of investments 2,280 (1,651) (398)
------- ------- --------
5,268 5,319 (2,748)
Changes in other current assets and liabilities:
Accounts receivable (1,206) (3,167) 4,745
Inventories 383 (1,433) 2,204
Prepaid and other 3,652 (2,814) (967)
Accounts payable (5,030) 3,937 (2,462)
Accrued liabilities 1,872 (1,661) 1,880
------- ------- --------
Net cash provided from operating
activities 4,939 181 2,652
------- ------- --------
Cash flows from investing activities:
Acquisition of Bear MGC Cutlery, Inc.,
net of cash acquired (7,982) - -
Capital expenditures (1,698) (1,302) (1,056)
Additions to other assets (3,776) (2,701) (3,070)
Proceeds from sales of investments 1,972 1,949 550
------- -------- --------
Net cash used for investing activities (11,484) (2,054) (3,576)
Cash flows from financing activities:
Borrowings under bank agreements 59,440 32,914 1,930
Repayments under bank agreements (52,343) (27,774) (1,930)
Repurchase of common stock (517) (3,081) -
Proceeds from exercise of stock
options and warrants 54 70 4
-------- -------- --------
Net cash provided from financing activities 6,634 2,129 4
-------- -------- --------
Effect of exchange rate changes on cash (96) (25) (69)
Net increase (decrease) in cash and cash
equivalents (7) 231 (989)
Cash and cash equivalents, beginning
of period 1,309 1,078 2,067
-------- -------- --------
Cash and cash equivalents, end of period $ 1,302 $ 1,309 $ 1,078
======== ======== ========
Cash paid during the period:
Interest $ 766 $ 102 $ 34
======== ======== ========
Income taxes $ 618 $ 1,752 $ 321
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Swiss Army Brands, Inc. ("Swiss Army" or the "Company") is the
exclusive distributor in the United States, Canada (with one minor
exception for cutlery) and the Caribbean of the Victorinox Original
Swiss Army Knife, Victorinox SwissTool, Victorinox SwissCard,
Victorinox Cutlery and Victorinox Watches. Swiss Army also markets its
own line of Swiss Army Brand Watches, Swiss Army Brand Sunglasses and
Swiss Army Brand Writing Instruments under its Swiss Army Brand
worldwide. In addition, in 1999, the Company began manufacture and
distributing Bear MGC knives and multi-tools. Swiss Army has only one
business segment - the importation, manufacture and distribution of
cutlery, knives, multi-tools, watches and other consumer products. No
customer accounted for greater than 10% of net sales in any of the
three years ended December 31, 1999.
In April 1999, the Company purchased substantially all of the assets
and assumed certain liabilities of Bear MGC Cutlery, Inc., which
manufactured and distributed Bear MGC knives and multi-tools. See Note
4 for further information.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company transactions have been eliminated.
Revenue recognition
The Company recognizes revenue upon shipment of product. Net sales are
comprised of gross revenues less returns, trade discounts and customer
allowances.
Use of estimates
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 and disclosures 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.
Foreign currency translation and transactions
Assets and liabilities of the Company's foreign operations are
translated into U.S. dollars using the exchange rate in effect at the
balance sheet date. Results of operations are translated using the
average exchange rate prevailing throughout the period. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included in the foreign currency
translation adjustment component of stockholders' equity, while gains
and losses resulting from foreign currency transactions are included
in net income (loss).
F-7
<PAGE>
The vast majority of the Company's products are imported from
Switzerland and are paid for in Swiss francs. Increases in the value
of the Swiss franc versus the dollar may effectively increase the cost
of these products to the Company. The increase in the cost of products
to the Company may result in either higher prices charged to customers
or reductions in gross margin, both of which may have an adverse
effect on the Company's results of operations. 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. Gains and losses on these contracts are deferred and
recognized in cost of sales when the related inventory is sold. These
hedging transactions, which are meant to reduce foreign currency risk,
also reduce the beneficial effects to the Company of any increase in
the dollar relative to the Swiss franc. The Company plans to continue
to engage in hedging transactions; however, it is uncertain as to the
extent to which such hedging transactions will reduce the effect of
adverse currency fluctuations.
Cash and cash equivalents
Cash and cash equivalents consist of all highly liquid investments
with original maturities of three months or less. Investments with
maturities between three and twelve months are considered short-term
investments.
Inventories
Domestic inventories are valued at the lower of cost determined by the
last-in, first-out (LIFO) method or market. Had the first-in,
first-out (FIFO) method been used to value domestic inventories as of
December 31, 1999 and 1998, the amount at which inventories are stated
would have been $3,372,000 and $3,076,000 higher, respectively.
Foreign inventories are valued at the lower of cost or market
determined by the FIFO method. Inventories primarily consist of
finished goods and packaging materials.
Property, plant and equipment
Property, plant and equipment are stated at cost. Major improvements
that add to productive capacity or extend the life of an asset are
capitalized while repairs and maintenance are charged to expense as
incurred. Property, plant and equipment are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
1999 1998
(in thousands)
------------------
<S> <C> <C>
Leasehold improvements $1,133 $1,115
Equipment 8,485 5,966
Furniture and fixtures 1,458 1,290
------ ------
11,076 8,371
Accumulated depreciation (6,220) (4,636)
------ ------
$4,856 $3,735
====== ======
</TABLE>
Depreciation is computed principally by use of the straight-line
method based on the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Equipment 3 to 10
Furniture and fixtures 3 to 10
</TABLE>
The provision for amortization of leasehold improvements is provided
on a straight-line basis over the estimated useful lives of the assets
or terms of the leases, whichever is shorter. For the years ended
December 31, 1999, 1998, and 1997, depreciation expense of property,
plant and equipment was approximately $1,594,000, $1,300,000 and
$1,260,000, respectively.
F-8
<PAGE>
Long-lived assets
The Company follows Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". The Company continually
reviews the recoverability of the carrying value of these assets using
the provisions of SFAS No. 121. Based upon the Company's review of its
long-lived assets, no impairment exists at December 31, 1999.
Investments
Investments in preferred units are accounted for at cost, subject to
review for impairment. Since these investments do not have a readily
determinable fair value, the valuation of these investments is subject
to uncertainty.
Investments in common stock of companies in which the Company owns
less than 20% are accounted for at fair value, subject to review for
impairment. Changes between cost and fair value are reflected as a
component of stockholders' equity. Any write-down of the cost due to
impairment is reflected in income.
Earnings per share
Basic earnings per share is computed by dividing net income (loss) by
the number of weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income (loss)
by the weighted average number of common shares and dilutive common
share equivalents outstanding during the period. No common share
equivalents have been included in the year ended December 31, 1997, as
they would have had an anti-dilutive effect. Common share equivalents
are calculated using the treasury stock method.
Stock-based compensation
The Company accounts for stock options and warrants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Disclosures required by SFAS No. 123, "Accounting for
Stock-Based Compensation", are included in Note 14.
Income taxes
The provision for income taxes, as determined using the liability
method, includes deferred taxes resulting from temporary differences
in income for financial and tax purposes. Such temporary differences
primarily result from differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting
purposes.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement standardizes the accounting and reporting
standards for derivatives and hedging activities and is effective for
fiscal years beginning after June 15, 2000. The Company will adopt
this statement effective January 1, 2001. The Company is currently
evaluating the impact of SFAS No. 133 on the Company's financial
position and results of operations.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
F-9
<PAGE>
<TABLE>
<CAPTION>
(3) INTANGIBLE ASSETS
Intangible assets are comprised of the following:
December 31,
1999 1998
---- ----
<S> <C> <C>
Goodwill (A) $ 8,153 $ -
Foreign distributon rights (B) 2,207 2,875
Trademark rights (C) 1,188 -
-------- --------
$11,548 $2,875
======== ========
</TABLE>
(A) Represents the goodwill related to the acquisition of Bear MGC
Cutlery, Inc. The goodwill is being amortized on a straight-line basis
over 20 years. See Note 4 for further discussion.
(B) Represents foreign distribution rights with Victorinox Cutlery
Company ("Victorinox"). The foreign distribution rights are being
amortized on a straight-line basis over 10 years. See Note 5 for
further discussion.
(C) On August 17, 1999, the Company purchased all the rights in and
trademarks containing Swiss Martial Terms, as defined, from S.A.W.
Company S.A. These trademark rights are being amortized as a
straight-line basis over 10 years.
For the years ended December 31, 1999, 1998, and 1997, amortization
expense was $916,000, $674 000 and $674,000, respectively.
(4) ACQUISTION
On April 16, 1999, Swiss Army and Bear Cutlery, Inc. ("Bear"), a
Delaware corporation and a wholly- owned subsidiary of Swiss Army
(collectively, the "Buyer"), entered into an Asset Purchase Agreement
(the "Agreement") with Bear MGC Cutlery, Inc. ("Bear MGC") and the
stockholders (the "Shareholders") of Bear MGC, pursuant to which the
Buyer acquired substantially all of the assets and assumed certain of
the liabilities of Bear MGC. In consideration for the acquisition of
the assets, the Buyer paid Bear MGC $6,970,000 in cash and repaid debt
of $298,000 upon execution of the Agreement. In further consideration
of the acquired assets, on each of April 16, 2000, 2001 and 2002, the
Company shall transfer to Bear MGC 52,868 shares of its common stock,
valued at $500,000 (based on the average daily closing price of the
common stock during the 30 trading days prior to April 16, 1999). The
total value of these shares of common stock is included in additional
paid-in capital as of December 31, 1999. Pursuant to the Agreement,
Swiss Army will also pay an additional $2,130,000 ( $1.0 million in
cash and $1.13 million in common stock of Swiss Army) because Bear
attained certain earnings targets for the year ending December 31,
1999. The cash amount is to be paid in April 2000 and has been
included in accrued liabilities and the common stock amount has been
included in additional paid-in capital as of December 31,1999.
F-10
<PAGE>
The purchase method of accounting was used to account for the
acquisition. The aggregate purchase price has been allocated to the
assets and liabilities of Bear based on preliminary estimates of fair
market value. Any adjustments resulting from the final purchase price
allocation, which could result in changes to the carrying values of
assets and liabilities, including goodwill, are not expected to be
material to the consolidated financial statements. The purchase price
has resulted in acquired goodwill of approximately $8.4 million, which
is being amortized on a straight-line basis over 20 years. The
following is a summary of the preliminary allocation (in thousands):
<TABLE>
<S> <C>
Cash $ 16
Accounts receivable 1,175
Inventory 1,497
Other current assets 13
Plant and equipment 1,025
Goodwill 8,368
Accrued expenses and other liabilities 466
------
Total $11,628
======
</TABLE>
The unaudited pro forma results of operations for the years ended
December 31, 1999 and 1998, respectively, had the acquisition of Bear
occurred at the beginning of each of the periods presented, are
provided in the following table. These pro forma results include
adjustments for depreciation and amortization of assets acquired based
on their fair market values at the acquisition date, increased
interest on debt, additional issuance of common stock, and the related
income tax effect. For purposes of computing income taxes, an
effective tax rate of 40% was used. The unaudited pro forma
information does not necessarily represent what the results of
operations would have been in such periods and is not intended to be
indicative of future results.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
(Unaudited, in thousands
except per share data)
<S> <C> <C>
Net sales $131,398 $134,743
Net income 261 1,802
Earnings per share - basic
and diluted 0.03 0.21
</TABLE>
(5) PRINCIPAL SUPPLIERS
Swiss Army imports for resale all of its Swiss Army Knives,
SwissTools, SwissCards and most of its other cutlery products from a
principal supplier, Victorinox, a Swiss company. Effective December
12, 1998, Swiss Army renewed a five-year agreement with Victorinox,
which appoints Swiss Army as exclusive distributor of Victorinox
Original Swiss Army Knives, Victorinox SwissTools, Victorinox
SwissCards and Victorinox Cutlery and which gives Swiss Army exclusive
rights to use Victorinox trademarks and trade names in the United
States with respect to those products. The agreement is subject to
renewal at five year intervals at the Company's option and remains in
effect as long as Swiss Army continues to purchase quantities of Swiss
Army Knives and cutlery (based on the Swiss franc purchase price) at
least equal to 85% of the maximum amount of purchases of each in any
preceding year. In the years 1998 and 1997, Victorinox agreed to
reduce the minimum purchase requirements. The Company met the reduced
minimum purchase requirements in 1998 and 1997. In 1999, the Company
met the minimum purchase requirement as set forth in the distribution
agreement. Pursuant to this agreement, Swiss Army must obtain
Victorinox's permission to sell new cutlery items. All of the Swiss
Army Knives and certain of the cutlery items that Swiss Army sells in
Canada and the Caribbean also are supplied by Victorinox.
F-11
<PAGE>
Foreign distribution rights with Victorinox are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Canadian distribution
rights (A) $3,483 $3,483
Caribbean and Victorinox Watch
distribution rights (B) 3,261 3,261
------- --------
6,744 6,744
Accumulated amortization (4,537) (3,869)
------- --------
$2,207 $2,875
======= ========
</TABLE>
(A) In April 1992, Swiss Army entered into an agreement with
Victorinox under which it received the exclusive distribution rights
for Victorinox Original Swiss Army Knives in Canada and was appointed
the principal distributor of Victorinox professional cutlery in
Canada. In exchange for the grant of these rights, Swiss Army issued
to Victorinox 277,066 shares of its common stock from treasury. The
rights received were awarded to Swiss Army for a fixed seven-year
term, which were renewed in April 1999, with a continuous five-year
renewal arrangement upon expiration of the fixed term. Victorinox has
the right not to renew the agreement; however, should Victorinox
choose not to renew the agreement, Victorinox is required to pay Swiss
Army $3,500,000.
(B) In December 1993, Swiss Army entered into an agreement with
Victorinox under which it received the exclusive distribution rights
for Victorinox Original Swiss Army Knives and professional cutlery in
the Caribbean. Swiss Army also received the right to distribute
Victorinox Swiss-made watches in the United States, Canada and the
Caribbean and acquired the 20% share of the Company's subsidiary,
Victorinox of Switzerland, Ltd., that Victorinox owned. As part of the
agreement, Swiss Army pays Victorinox a royalty of 1% of net sales of
Victorinox Watches. The Caribbean distribution rights are for a fixed
seven-year term automatically renewable in successive five-year
periods unless either party notifies the other at least six months
prior to expiration of such period of its intent not to renew. The
term of Victorinox Watch distribution rights in each territory
coincides with the term for Victorinox cutlery products in that
territory.
The Company does not have any manufacturing facilities, except for the
facility that manufacturers Bear MGC products, and imports virtually
all of its products from independent suppliers. The Company's business
is subject to certain risks related to its arrangements with its
foreign suppliers, including possible restrictions on transfer of
funds, the risk of imposition of quotas on the amount of products that
may be imported into the United States (although no quota currently
exists), maritime union strikes and political instability. Although
the Company has exclusive distributorship agreements with Victorinox,
its principal supplier, it does not have such contractual arrangements
with its other suppliers. The agreements with Victorinox provides for
certain minimum annual purchases of products by the Company, and
failure to achieve these goals would result in Victorinox having the
right to terminate the agreements. Although the Company has a
contractual right to receive minimum quantities of Swiss Army Knives
from Victorinox, were this source of supply to fail for any reason,
the Company probably would be unable to find an alternative source.
Any termination or substantial disruption of the Company's
relationships with Victorinox would have a material adverse effect on
its operation and results. Virtually all of the Company's imported
products are subject to United States custom duties.
F-12
<PAGE>
Although approximately 72%, or $19,700,000, of total payments for
watches and watch parts in 1999 were made to a single watch supplier,
which is responsible for the final assembly of watch components
manufactured by several manufacturers, the Company believes that
alternate watch suppliers would be available, if necessary.
Furthermore, the Company believes that the loss of this supplier of
Swiss Army Brand Watches would not have a material adverse effect on
the Company's business.
(6) RELATED PARTY TRANSACTIONS
Until 1998, one of Swiss Army's directors was a partner in a law firm
that provided legal services to the Company. For the years ended
December 31, 1998 and 1997, Swiss Army incurred fees of $174,000 and
$629,000, respectively, relating to these services.
Four of Swiss Army's directors serve as directors of Hudson River
Capital LLC, including two who serve as Co-Chairman. Five of Swiss
Army's directors serve as directors of Victory Ventures LLC, including
one who serves as Co-Chairman. See Note 7 for further discussion.
In July 1994, Swiss Army entered into a Services Agreement with Brae
Group, Inc. ("Brae"), a company that is a stockholder of Swiss Army
and in which a Swiss Army director and a principal supplier have a
controlling and non-controlling stock interest, respectively. Under
the Services Agreement, Brae agreed to provide various services to
Swiss Army for a period of four years relating to maintaining,
enhancing and expanding Swiss Army's relationship with the Company's
principal supplier. In exchange for these services, Brae received an
option to purchase 500,000 shares of Swiss Army's common stock at the
then current market price of $10.75 per share. The option vested
immediately and can be exercised for 10 years from the date of the
Services Agreement.
On May 1, 1998, the Company entered into an agreement with an
affiliated company whereby this company would supply Swiss Army with
legal services. The fees incurred for the years ended December 31,
1999 and 1998 were approximately $179,000 and $103,000, respectively.
This agreement can be terminated by either party upon thirty days
written notice.
(7) INVESTMENTS
Investments are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
Preferred units of Hudson
River Capital LLC (A) $3,613 $6,313
Preferred units of
Victory Ventures LLC (B) 851 851
Common stock of Iron Mountain, Inc. (C) - 2,273
Common stock of Chaparral Resources, Inc. (D) 12 30
------- -------
Total investments $4,476 $9,467
======= =======
</TABLE>
F-13
<PAGE>
(A) Hudson River Capital LLC ("Hudson River"), is a private equity
firm specializing in middle market acquisitions, re-capitalization and
expansion capital investments. In January 1998, Hudson River
distributed to the Company $1,613,000 in cash and authorized the
distribution of 63,019 shares of common stock (as adjusted for a three
to two stock split), valued at $1,481,000, of Iron Mountain Inc.
("Iron Mountain"). In 1998, the Company recognized a $1.5 million gain
on this cash and common stock distribution which is included in gain
on sale of investments in the accompanying financial statements. In
1999, the Company recorded a $2.7 million write-down of its investment
in Hudson River due to the other than temporary impairment in the
value of the investment. At December 31, 1999 and 1998, the Company
owned 890,776 preferred units of Hudson River which represented
approximately 9.6% of the outstanding equity of Hudson River. The
preferred units in Hudson River owned by the Company carry a
preference on liquidation equal to their per unit cost as well as, in
certain instances, an annual preferred return. The Company accounts
for this investment on the cost basis, subject to review for
impairment. Since this investment does not have a readily determinable
fair value, the valuation of this investment is subject to
uncertainty.
(B) Victory Ventures LLC ("Victory Ventures")is a private equity firm
specializing in small market venture capital investments. In 1997, the
Company received a cash distribution from Victory Ventures of
$438,000, of which $286,000 was recorded as a gain and has been
included in gain (loss) on sale (write-down) of investments. In 1997,
Victory Ventures distributed to its members its investment in
Chaparral Resources, Inc. ("Chaparral"). See (D) for further
discussion. In 1998, Victory distributed 3,053 shares of common stock
of Micromuse and 4,178 shares of common stock of FaxSav. The Company
liquidated these investments in 1998 and realized a gain of
approximately $57,000 on these investments. At December 31, 1999 and
1998, the Company owned 890,776 preferred units of Victory Ventures
which represented approximately 1.2% and 1.3% of the outstanding
equity of Victory Ventures, respectively. The preferred units in
Victory Ventures owned by the Company carry a preference on
liquidation equal to their per unit cost as well as, in certain
instances, an annual preferred return. The Company accounts for this
investment on the cost basis, subject to review for impairment. Since
this investment does not have a readily determinable fair value, the
valuation of this investment is subject to uncertainty.
(C) Iron Mountain, a publicly traded company, is a full service
provider of records management and related services. At December 31,
1998, the Company owned 63,019 shares of Iron Mountain stock valued at
$36.06 per share. The Company accounted for this investment at fair
value, with changes between cost and fair value reflected as a
component of stockholders' equity. In January 1999, the Company sold
its entire investment in Iron Mountain and recognized a gain of
approximately $420,000.
(D) Chaparral, a publicly traded company, is an independent oil and
gas exploration and production company. At December 31, 1999, the
Company owned 1,461 shares (adjusted for a reverse stock split of one
share in exchange for sixty) of Chapparal common stock valued at $7.88
per share. The Company accounts for this investment at fair value,
with changes between cost and fair value reflected as a component of
stockholders' equity.
F-14
<PAGE>
(8) OTHER ASSETS
Other assets are comprised of the following :
<TABLE>
<CAPTION>
December 31, Amortization
1999 1998 Period
---- ---- ------------
(in thousands)
<S> <C> <C> <C>
Cash surrender value of
life insurance (see Note 15) $14,111 $12,044 N/A
Other 3,085 2,808 1-5 years
-------- --------
Accumulated amortization (2,486) (1,977)
-------- --------
$14,710 $12,875
======== ========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, amortization
expense related to other assets was approximately $720,000, $860,000,
and $775,000, respectively.
(9) ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Sales, marketing and promotional $3,951 $3,106
Payroll related 1,353 1,515
Acquisition payment - see Note 4 1,000 -
Other 4,258 3,010
------- --------
$10,562 $7,631
======== ========
</TABLE>
(10) DEBT AGREEMENTS
On November 15, 1999, Swiss Army entered into a revolving credit
agreement which, among other things, states that the Company can
borrow up to $23.0 million, consisting of a $16.0 million line of
credit for working capital purposes and a $7.0 million term loan
related to the acquisition of Bear MGC, at one of three interest rate
options: (i) LIBOR plus the applicable margin; (ii) Base Rate, as
defined; or (iii) Cost of Funds rate, as defined. The interest rate
also varies dependent on the Company's financial performance. The line
of credit is secured by substantially all the assets of the Company
and the agreement requires the Company to satisfy certain financial
covenants including minimum tangible net worth, interest rate coverage
and current ratio, and to continue the exclusive distributorship
arrangement with Victorinox. At December 31, 1999, the Company is in
compliance with the covenants contained in the Agreement. The fair
value of the amount outstanding under the line of credit approximates
book value as the interest rate is adjusted on a quarterly basis.
The Company has entered into an interest rate cap agreement to
provide interest rate protection on $5.0 million of debt to the
maximum interest rate of 7.0% (before applicable margin) expiring in
November 2004.
F-15
<PAGE>
Scheduled principal payments due on debt in the next five years are as
follows:
<TABLE>
<S> <C>
2000 $ 875
2001 6,185
2002 875
2003 875
2004 3,427
</TABLE>
(11) INCOME TAXES
The income tax provision (benefit) for the years ended December 31,
1999, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current
Federal $1,681 ($1,662) ($1,276)
Foreign - - (280)
State 285 230 214
------ ------ -------
Total current 1,966 (1,432) (1,342)
Deferred
Federal (600) 2,294 (700)
State 165 358 (334)
------ ------- -------
Total deferred (435) 2,652 (1,034)
------ ------- -------
Provision (benefit) for
income taxes $1,531 $1,220 ($2,376)
====== ======= =======
</TABLE>
The significant components of the deferred tax asset as of December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION> 1999 1998
---- ----
(in thousands)
<S> <C> <C>
Sales and marketing reserves $940 $888
Inventory related reserves 850 843
Depreciation and amortization 771 561
Loss carryforwards 1,329 411
Accrued employee benefits 234 363
Other, net 228 208
------ -----
4,352 3,274
Valuation allowance (643) -
------ ------
Total $3,709 $3,274
======= =======
</TABLE>
A valuation allowance of $643,000 has been recorded against a portion
of the Company's deferred tax assets related to the capital loss
write-down of the Company's investment in Hudson River.
F-16
<PAGE>
A reconciliation of the income tax provision (benefit) calculated at
the federal income tax statutory rate and the Company's effective
income tax rate for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% (34.0%)
State income taxes, net of
federal income tax benefit 11.4 5.7 (0.8)
Foreign taxes 19.7 2.1 (4.0)
Valuation allowance 38.9 - -
Other (11.3) 3.7 1.7
------ ----- ------
Effective income tax rate 92.7% 45.5% (37.1%)
====== ===== ======
</TABLE>
(12) COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) activity for the three
years ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Foreign Currency Unrealized Gain (Loss) Accumulated Other
Translation On Marketable Securities Comprehensive Income (Loss)
---------------- ------------------------ ---------------------------
(In thousands)
<S> <C> <C> <C>
January 1, 1997 ($ 113) $ - ($113)
1997 activity ( 127) - (127)
------- ------- ------
December 31, 1997 ( 240) - (240)
1998 activity ( 186) 603 417
------- ------- ------
December 31, 1998 ( 426) 603 177
1999 activity 233 (811) (578)
------- ------- ------
December 31, 1999 ($193) ($208) ($401)
======= ======= ======
</TABLE>
(13) EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a
noncontributory defined benefit pension plan. Benefits are based on
years of service and the employee's compensation during the five
highest consecutive compensation years. Costs under the plan are
accrued and funded on the basis of accepted actuarial methods. Total
pension expense approximated $405,000, $285,000, and $336,000, for the
years ended December 31, 1999, 1998 and 1997, respectively. The net
periodic pension cost of Swiss Army's pension plan in 1999, 1998 and
1997 includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $367 $286 $339
Interest cost on projected benefit obligation 182 166 189
Expected return on assets (141) (143) (171)
Amortization of net transition asset (14) (14) (14)
Amortization of unrecognized prior service cost (13) (13) (13)
Amortization of net loss 24 3 6
----- ----- ------
Net periodic pension cost $405 $285 $336
===== ===== ======
</TABLE>
F-17
<PAGE>
The changes in benefit obligations and plan assets and the funded status
reconciliation as of December 31, 1999 and 1998 for Swiss Army's pension plan
are shown below:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, January 1 $2,742 $3,211
Service cost 367 286
Interest cost 182 166
Actuarial (gain) loss (581) (750)
Benefits paid - expected (91) (171)
------- -------
Benefit obligation, December 31 $2,619 $2,742
======= =======
Change in Plan Assets
Fair value of plan assets, January 1 $1,726 $1,792
Actual return on plan assets 96 132
Company contributions 260 140
Benefits paid - actual (653) (338)
------- -------
Fair value of plan assets December 31 $1,429 $1,726
======= =======
Funded Status Reconciliation
Funded status, December 31 ($1,188) ($1,016)
Unrecognized (gains) losses, net 460 460
Unrecognized prior service costs (230) (243)
Unrecognized transition amount (42) (56)
------- -------
Accrued pension cost, December 31 ($1,000) ($855)
======= =======
</TABLE>
Rates used in determining the actuarial present value of the projected
benefit obligation are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Discount rate 7.00% 6.25%
Rate of increase in future compensation levels 4.50% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00%
</TABLE>
Plan assets consist principally of investments in fixed income
securities, short-term investments and common stock.
The Company maintains a 401(k) employee benefit plan pursuant to which
participants can defer a certain percentage of their annual
compensation in order to receive certain benefits upon retirement,
death, disability or termination of employment. The Company can elect
to make a matching contribution of up to 6% of annual eligible
compensation per employee. The determination to make a matching
contribution is made at the beginning of each fiscal year. During
1999, 1998 and 1997, the Company incurred expenses of approximately
$173,000, $161,000, and $175,000, respectively, related to this plan.
The Company offers no other post retirement benefits.
F-18
<PAGE>
(14) STOCKHOLDERS' EQUITY
The Swiss Army Brands, Inc. 1996 Stock Option Plan provides for the
grant of options to employees, including officers of the Company, and
members of the Board of Directors. Under this plan and previous stock
option plans, 760,093 shares of common stock are reserved and
available for issuance. Options expire no later than ten years after
the date of grant. Option prices equal at least 100% of the fair
market value of Swiss Army's common stock on the date of grant. The
vesting of options is determined by the Stock Option and Compensation
Committee of the Board of Directors, which administers the plan, and
for options outstanding as of December 31, 1999, vesting ranges from
immediately upon grant to three years.
The following table summarizes stock option plan and warrant activity
for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
Number
of Shares Option Price
<S> <C> <C>
Outstanding at December 31, 1996 2,312,000 $ 5.25 - $14.50
Exercised (750) $ 5.25
Canceled (70,219) $ 12.25 - $14.00
----------
Outstanding at December 31, 1997 2,241,031 $ 5.25 - $14.50
Granted (A) 555,000 $ 8.75 - $10.125
Exercised (9,500) $ 5.25 - $ 8.62
Canceled (270,780) $ 8.75 - $14.00
----------
Outstanding at December 31, 1998 2,515,751 $ 5.25 - $14.50
Granted 3,000 $ 8.75
Exercised (10,000) $ 5.38
Canceled (274,501) $ 8.75 - $14.00
----------
Outstanding at December 31, 1999 2,234,250 $ 5.25 - $14.50
==========
</TABLE>
Of the options and warrants outstanding at December 31, 1999,
2,006,750 are exercisable at a weighted average option price of $11.78
per share.
(A) In September 1998, the Company issued 505,000 options to purchase
common stock at $8.75 per share to various employees and officers.
These options are exercisable in four equal installments over three
years starting with the grant date. In November 1998, the Company
issued 50,000 options to purchase common stock at $10.125 per share to
two directors. Of these options, 25,000 options are exercisable in
four equal installments over three years starting with the grant date,
and 25,000 options are exercisable immediately.
The weighted-average fair value of the stock options granted in 1999
and 1998 was approximately $3.53 and $3.51, respectively. The
weighted-average fair value of the options was estimated using the
Black-Scholes option-pricing model with the following assumptions:
expected volatility of 30%; expected life of options of six years;
dividend yield of 0%; and risk free interest rate of 5.26% in 1999 and
4.91% in 1998, respectively.
F-19
<PAGE>
The Company accounts for stock options and warrants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", under which no compensation cost has been recognized. Had
compensation cost for the three years ending December 31, 1999, been
determined under the principles of SFAS No. 123, the Company's net
income (loss) and earnings per share would have been the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) As reported: $120 $1,463 ($4,025)
Pro forma: ($346) $ 812 ($5,320)
Earnings per share As reported:
Basic $0.02 $0.18 ($0.49)
Diluted $0.01 $0.18 ($0.49)
Pro forma:
Basic ($0.04) $0.10 ($0.65)
Diluted ($0.04) $0.10 ($0.65)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as SFAS No. 123 does not apply to
stock options and warrants granted prior to 1995, and additional
options and warrants may be granted in future years.
In September 1998, the Company issued 25,000 shares of its common
stock to certain employees and officers. The common stock vests in
four equal installments over three years beginning with the grant
date. The Company recognized $73,000 and $21,000 for the years ended
December 31, 1999 and 1998, respectively, in stock compensation
expense related to this grant.
On September 16, 1998, the Company's Board of Directors authorized a
repurchase of up to 400,000 shares of its common stock. Through
December 31, 1999, the Company had repurchased 400,000 shares for a
total purchase price of approximately $3,598,000.
(15) COMMITMENTS AND CONTINGENCIES
The Company has minimum purchase requirements under an agreement with
Victorinox (see Note 5).
At December 31, 1999, minimum rental payment commitments for office
and warehouse space leased by Swiss Army under operating leases were,
as follows (in thousands):
<TABLE>
<S> <C>
2000 $1,296
2001 828
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, rent expense
was approximately $1,487,000, $1,374,000 and $1,390,000, respectively.
At December 31, 1999, the Company has open contracts to purchase
approximately 107.0 million Swiss francs in 2000 and 2001 as a hedge
against future purchase of inventories at a weighted average rate of
$1.509 Swiss Franc/dollar.
F-20
<PAGE>
The Company maintains split dollar life insurance agreements covering
two members of the Board of Directors. Primarily, these policies can
only be canceled upon the mutual agreement of the Company and the
insured. However, if these policies were canceled at December 31,
1999, the Company would receive in cash an amount equal to the lesser
of the cash surrender value or cumulative premiums paid to date on
these policies, which was approximately $6,300,000. Under the terms of
these life insurance policies, the Company will make approximate
future premium payments, if the policies remain in force, as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 873
2001 512
2002 493
2003 460
2004 and thereafter 2,200
</TABLE>
In 1993, Swiss Army's Board of Directors adopted a charitable
insurance program that enables Swiss Army to make a commitment to the
Victorinox-Swiss Army Knife Foundation (the "Foundation"), a
foundation that engages in various charitable activities including the
promotion of athletic events for underprivileged urban youth. Under
the program, Swiss Army owns, is the beneficiary of and pays all the
premiums for life insurance policies on the lives of certain Board
members. Pursuant to the program, upon the death of each Director, the
Company retains a share of the insurance proceeds equal to the
cumulative premiums paid by the Company for the policy on that
Director's life. One half of any additional insurance proceeds
received upon the death of an insured Director will be used to fulfill
charitable pledges made to the Foundation. The remaining half of the
additional proceeds will be used to fulfill charitable pledges
recommended by the individual Directors. Swiss Army is generally bound
to continue to pay all premiums on the policies for the lives of the
insured Directors or, in the case of the Chairman of the Management
Committee, as long as he is an officer or a board member or agrees to
serve as a consultant to the Company. Swiss Army will make approximate
future premium payments related to these programs as follows (in
thousands):
<TABLE>
<S> <C>
2000 $1,115
2001 1,102
2002 1,102
2003 1,086
2004 and thereafter 4,914
</TABLE>
Under existing federal tax laws, the receipt by Swiss Army of the
proceeds from an insurance policy upon the death of a director would
not result in regular taxable income to the Company; however, Swiss
Army may be subject to alternative minimum tax on a portion of the
receipts. When Swiss Army makes cash contributions to a designated
charity, it will be entitled to a tax deduction equivalent to the sum
of those contributions. The extent of the utilization of this
deduction in that year will depend upon Swiss Army's taxable income,
since Swiss Army is entitled to claim as charitable deductions only
10% of its taxable income in any year. However, these deductions may
be carried forward for tax purposes for a period of five years.
Based upon estimates prepared by the Company's insurance agent, the
anticipated earnings impact related to the policies for both the
Foundation and the two members of the Board of Directors is expected
to be insignificant.
F-21
<PAGE>
On July 14, 1997, the Company filed with the American Arbitration
Association in New York, New York a demand for arbitration against
Precise Imports Corporation, the United States and Canadian
distributor of Swiss Army Knives manufactured by Wenger S.A., the only
company other than Victorinox supplying pocketknives to the Swiss
Armed Forces. In the demand for arbitration, the Company charged that
Precise had violated the license agreement dated June 30, 1992 between
Precise and the Company by utilizing the trademark Swiss Army in ways
prohibited by the agreement. In response, Precise alleged certain
counterclaims. These claims and counterclaims between the Company and
Precise were dismissed with prejudice on December 31, 1999 pursuant to
the terms of a November 7, 1998 stipulation since neither party
exercised its right to continue the proceeding.
In addition, the Company is involved in certain legal matters relating
to trademark, patent, and other general business matters. Management
believes that the outcome of these legal matters will not have a
material adverse effect on the financial position and results of
operations of the Company.
(16) SPECIAL CHARGES
In 1997, the Company recorded $0.8 million of restructuring costs
(included in selling, general and administrative expenses) , which
were paid in 1998, and a special charge of $1.3 million (included in
cost of sales) related to discontinued inventory. The restructuring
costs primarily consisted of severance and related expenses.
(17) SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes
standards for the reporting of information about operating segments.
The Company is engaged in one line of business - the importation,
manufacture and distribution of cutlery, knives, multi-tools, watches
and other consumer products. There were no material amounts of sales
or transactions between or among geographic areas. Summarized
financial information concerning the Company's reportable segment and
geographic areas is shown in the following table. The "Other" column
includes corporate related items and results of insignificant
operations.
<TABLE>
<CAPTION>
United
States Canada International Other Total
1999
----
<S> <C> <C> <C> <C> <C>
Sales $113,471 $8,573 $6,117 $ 1,291 $129,452
Operating
income (loss) 26,124 1,168 187 (22,938) 4,541
Identifiable
assets 58,045 3,557 3,376 42,626 107,604
1998
----
Sales $111,107 $8,483 $7,811 $ 450 $127,851
Operating
income (loss) 22,674 1,435 338 (23,470) 977
Identifiable
assets 52,998 3,512 4,832 39,062 100,404
</TABLE>
F-22
<PAGE>
(18) QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
(in thousands, except per share data)
March 31 June 30 September 30 December 31
1999
----
<S> <C> <C> <C> <C>
Net sales $23,570 $30,396 $33,026 $42,460
Gross profit 8,949 11,990 12,798 17,109
Income (loss) before
income taxes (614) (2,183) 1,353 3,095
Net income (loss) (353) (2,126) 766 1,853
Earnings per share - basic ($0.04) ($0.27) $0.10 $0.23
Earnings per share - diluted ($0.04) ($0.27) $0.10 $0.22
1998
----
Net sales $24,610 $30,187 $31,370 $41,684
Gross profit 9,235 11,637 12,690 16,420
Income before income
taxes 480 173 806 1,224
Net income 286 103 465 609
Earnings per share $0.03 $0.01 $0.06 $0.08
</TABLE>
There was no difference between basic and fully diluted earnings per
share for the 1998 periods presented above.
F-23
<PAGE>
<TABLE>
<CAPTION>
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
Column A Column B Column C Column D Column E
Additions
Balance At Charged to Balance At
Beginning Costs and End of
Classification of Year Expenses Deductions Year
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowance for Doubtful Accounts $ 975 $ 85 $ - $1,060
======= ====== ======= =======
Inventory Reserve $ 1,163 $ 51 $ - $1,215
======= ====== ======= =======
Year Ended December 31, 1998:
Allowance for Doubtful Accounts $ 975 $ - $ - $ 975
======= ====== ======= =======
Inventory Reserve $ 2,852 $ - ($1,689) $ 1,163
======= ====== ======= =======
Year Ended December 31, 1997:
Allowance for Doubtful Accounts $ 1,032 $(57) - $ 975
======= ====== ======= =======
Inventory Reserve $ 1,950 $ 1,310 (408) $2,852
======= ====== ======= =======
</TABLE>
F-24
<PAGE>
Exhibits.
Exhibit Title Exhibit No.
------------- -----------
(3) (A) Articles of Incorporation, as amended, incorporated by
reference to the Exhibits to Quarterly Report on Form 10-Q for the
fiscal year ended June 30, 1997.
(B) By-laws, as amended, incorporated by reference to the Exhibits to
Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
(10) Material Contracts
(A) Letter Agreement dated December 12, 1983 between Victorinox
Cutlery Company and The Forschner Group., Inc., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(B) Mutual Agreement dated as of October 20, 1986 between Victorinox
Cutlery Company and The Forschner Group, Inc., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(C) Letter Agreement dated as of October 20, 1986 between Victorinox
Cutlery Company and The Forschner Group, Inc., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(D) Life insurance agreement dated as of December 7, 1991 between The
Forschner Group, Inc. and Stanley R. Rawn, Jr., as Trustee u/a dtd.
December 9, 1986 between Louis Marx, Jr. and Stanley R. Rawn, Jr.,
incorporated by reference to the Exhibits to Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
(E) License Agreement dated June 30, 1992 between The Forschner Group, Inc.
and Precise Imports Corporation, incorporated by reference to the
Exhibits to Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
(F) Life insurance agreement dated December 24, 1992 between The
Forschner Group, Inc. and Louis Marx, Jr., as Trustee u/a dtd. as of
October 24, 1988 between Stanley R. Rawn, Jr. and Barbara Rawn and
Louis Marx, Jr., incorporated by reference to the Exhibits to Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(G) Mutual Agreement dated April 6, 1992 between The Forschner Group,
Inc. and Victorinox Cutlery Company, incorporated by reference to the
Exhibits to Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
(H) 1993 Stock Option Plan, incorporated by reference to the Exhibits
to Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
(I) Lease dated May 3, 1993 between One Research Drive Associates
Limited Partnership and The Forschner Group, Inc., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
19
<PAGE>
(J) Life insurance agreement dated as of December 24, 1992 between The
Forschner Group, Inc. and Louis Marx, Jr., incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(K) Life insurance agreement dated as of September 24, 1993 between
The Forschner Group, Inc. and Louis Marx, Jr., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
(L) Life insurance agreement dated as of September 24, 1993 between
The Forschner Group, Inc. and James D. Rawn, as Trustee u/a dtd. as of
June 4, 1992 between Louis Marx, Jr., Grantor and James D. Rawn,
Trustee, incorporated by reference to the Exhibits to Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(M) Mutual Agreement dated December 21, 1993 between The Forschner
Group, Inc. and Victorinox Cutlery Company, incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993.
(N) 1994 Stock Option Plan, incorporated by reference to the Exhibits
to Registration Statement on Form S-8, No. 33-87078 filed by The
Forschner Group, Inc.
(O) Services Agreement dated as of July 29, 1994 between The Forschner
Group, Inc. and Brae Group, Inc., incorporated by reference to the
Exhibits to Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1994.
(P) Non-Incentive Stock Option Agreement dated as of July 29, 1994
between The Forschner Group, Inc. and Brae Group, Inc., incorporated
by reference to the Exhibits to Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1994.
(Q) Consulting Agreement dated as of December 7, 1991 by and between
The Forschner Group, Inc. and Louis Marx, Jr., incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(R) First Amendment to Lease dated June 16, 1994 between The Forschner
Group, Inc. and Pefran Trap Falls Associates, incorporated by
reference to the Exhibits to Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(S) Life insurance agreement dated as of April 15, 1994 between The
Forschner Group, Inc. and Lawrence T. Warble, as Trustee u/a dtd. as
of March 21, 1994 between Stanley R. Rawn, Jr., Grantor and Lawrence
T. Warble, Trustee, incorporated by reference to the Exhibits to
Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
(T) Employment agreement dated as of January 2, 1996 between The
Forschner Group, Inc. and James W. Kennedy, incorporated by reference
to the Exhibits to Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(U) Warrant dated as of December 13, 1995 between The Forschner Group,
Inc. and J. Merrick Taggart, incorporated by reference to the Exhibits
to Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
20
<PAGE>
(V) Watch design and Consulting Agreement dated as January 2, 1995
between The Forschner Group, Inc., Polenberg, Inc. and Myron Polenberg
Incorporated by reference to the Exhibits to quarterly report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(W) 1996 Stock Option Plan incorporated by reference to the Exhibits
on Form 10-K for the fiscal year ended December 31, 1996.
(X) Trademark Agreement dated as of December 18, 1996 by and between
the Swiss Confederation represented by the Federal Military Department
represented by the Federal Defense Production Group and Swiss Army
Brands, Inc. (confidential treatment has been granted for certain
portions of this exhibit) incorporated by reference to the Exhibits on
Form 10-K for the fiscal year ended December 31, 1996.
(Y) Asset Purchase Agreement dated January 31, 1997 among Cuisine de
France Limited, Sabatier USA, LLC, Robert P. Wolff and Robert Candler
incorporated by reference on Form 10-K for the fiscal year ended
December 31, 1996.
(Z) License Agreement dated May 15, 1997 by and between Swiss Army
Brands, Inc. and St. John Knits, Inc., incorporated by reference to
the Exhibits on Form 10-Q for the fiscal quarter ended June 30, 1997.
(AA) Letter Agreement dated September 27, 1996 between Swiss Army
Brands, Inc. and Victorinox Cutlery Company.
(BB) Asset Purchase Agreement dated April 16, 1999 by and
among Swiss Army Brands, Inc., Bear Cutlery, Inc. Bear
MGC Cutlery, Inc., and its shareholders incorporated
by reference on form 8-K dated April 16, 1999.
(CC) The 1999 Amended and Restated Commercial Loan Agreement
dated November 15, 1999 between Fleet National Bank
and Swiss Army Brands, Inc.. (A list of exhibits and
schedules to the agreement is set forth therein. The
Company agrees to furnish to the Commission supplementally,
upon request, a copy of any such exhibit or schedule not
otherwise filed herewith.) 10.1
(21) Subsidiaries of Registrant. 21
(23) Consent of Arthur Andersen LLP. 23
(27) Financial Data Schedule.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SWISS ARMY BRANDS, INC.
(Registrant)
By/s/ J. Merrick Taggart
J. Merrick Taggart
President and Chief Executive Officer
By/s/ Thomas M. Lupinski
Thomas M. Lupinski
Senior Vice President, Chief Financial Officer,
Secretary, and Treasurer
By/s/ Marc A. Gold
Marc A. Gold
Vice President and Controller
Date: March 27, 2000
22
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ J. Merrick Taggart March 27, 2000
J. Merrick Taggart
President, Chief Executive Office and Director
/s/ A. Clinton Allen March 27, 2000
A. Clinton Allen
Director
/s/ Clarke H. Bailey March 27, 2000
Clarke H. Bailey
Director
/s/ Thomas A. Barron March 27, 2000
Thomas A. Barron
Director
/s/ Vincent D. Farrell, Jr. March 27, 2000
Vincent D. Farrell, Jr.
Director
/s/ Herbert M. Friedman March 27, 2000
Herbert M. Friedman
Director
/s/ Peter W. Gilson March 27, 2000
Peter W. Gilson
Director
/s/ Keith R. Lively March 27, 2000
Keith R. Lively
Director
/s/ Louis Marx, Jr. March 27, 2000
Louis Marx, Jr.
Director
/s/ Robert S. Prather, Jr. March 27, 2000
Robert S. Prather, Jr.
Director
23
<PAGE>
/s/ Stanley R. Rawn, Jr. March 27, 2000
Stanley R. Rawn, Jr.
Director
/s/ Eric M. Reynolds March 27, 2000
Eric M. Reynolds
Director
/s/ John Spencer March 27, 2000
John Spencer
Director
/s/ John V. Tunney March 27, 2000
John V. Tunney
Director
24
FLEET NATIONAL BANK
1999 Amended and Restated
Commercial Loan Agreement
THIS 1999 AMENDED AND RESTATED COMMERCIAL LOAN AGREEMENT ("Agreement"),
dated as of November 15, 1999, between FLEET NATIONAL BANK (the "Bank"), having
an office at 157 Church Street, New Haven, Connecticut 06510 and SWISS ARMY
BRANDS, INC. (the "Borrower"), having its chief executive office at One Research
Drive, Shelton, Connecticut 06484.
This Agreement constitutes the amendment and restatement of that certain
1998 Amended and Restated Commercial Revolving Line of Credit Agreement between
the Borrower and the Lender dated as of September 30, 1998, as modified by a
First Modification to 1998 Commercial Revolving Line of Credit Agreement dated
as of April 22, 1999, a letter agreement dated as of August 6, 1999, a Second
Modification to 1998 Commercial Revolving Line of Credit Agreement dated as of
September 17, 1999, and a letter agreement dated October 15, 1999 (collectively,
the "1998 Loan Agreement, as modified").
W I T N E S S E T H:
Section 1. Definitions
Unless otherwise defined or specified herein, all accounting terms shall be
construed and all accounting determinations shall be made in accordance with
GAAP.
Account means accounts, chattel paper and instruments as those terms are
defined in the Code, whether now owned or hereafter acquired by the Borrower.
Account Debtor means any Person who is or may become obligated to Borrower
under or on account of an Account.
Advance means an advance of funds to the Borrower by the Bank pursuant to
this Agreement under the Line of Credit or a reborrowing by the Borrower of an
outstanding amount under the Line of Credit, which shall bear interest at the
Base Rate, the LIBOR Rate or the Cost of Funds Rate.
Affiliate means any person or corporation which directly or indirectly
controls, or is controlled by, or is under common control with the Borrower.
Agreement means this 1999 Amended and Restated Commercial Loan Agreement.
Applicable Interest Period means the Interest Period selected by the
Borrower pursuant to this Agreement.
Base Rate Advance means an Advance that bears interest at a rate per annum
equal to the Base Rate.
Base Rate means the variable per annum rate of interest so designated by
the Bank from time to time as its Base Rate. The Base Rate is a reference rate
and does not necessarily represent the lowest or best rate being charged to any
customer.
Borrowing Base means seventy-five percent (75%) of the face value of the
Eligible Accounts plus twenty five percent (25%) of the value of the Eligible
Inventory (determined according to the lower of market value or cost on a last
in first out basis) minus the then currently outstanding balance under the Term
Loan.
Borrowing Base Certificate means a form for reporting the Borrowing Base a
specimen of which is attached hereto as Exhibit 1 or such other form as the Bank
may require from time to time.
Borrowing Date means the date on which the Bank shall make an Advance
pursuant to the terms of this Agreement.
Business Day means in respect of any date that is specified in this
Agreement or the Notes to be subject to adjustment in accordance with the
Modified Business Day Convention, a day on which commercial banks settle
payments in (i) New York or London if the payment obligation is calculated by
reference to LIBOR, or (ii) Connecticut, if the payment obligation is calculated
by reference to any Base Rate.
Capital Assets means assets that in accordance with GAAP are required or
permitted to be depreciated or amortized on Borrower's balance sheet.
Capital Leases means capital leases, conditional sales contracts and other
title retention agreements relating to the purchase or acquisition of Capital
Assets.
Code means the Uniform Commercial Code in effect in Connecticut.
Control shall be deemed to exist if any Person shall have possession,
directly or indirectly, of the power to direct the management or policies of the
Borrower or any Person deemed to be an Affiliate of the Borrower, and shall be
deemed to include any holder of 10% or more of any stock or other interest in
the Borrower or in any Person deemed to be an Affiliate of the Borrower, whether
such holding is direct or indirect.
Cost of Funds means the per annum rate of interest which Bank is required
to pay, or is offering to pay, for wholesale liabilities, adjusted for reserve
requirements and such other requirements as may be imposed by federal, state or
local government and regulatory agencies, as determined by Fleet Treasury Group.
Cost of Funds Advance means an Advance that bears interest at a rate per
annum equal to the Cost of Funds Rate.
Cost of Funds Rate Loan shall mean a Cost of Funds Advance or the Term Loan
bearing interest at the Term Loan Cost of Funds Rate.
Cost of Funds Rate means an interest rate per annum equal at all times
during an Interest Period to the aggregate of (i) Cost of Funds and (ii) the
Interest Rate Margin.
Current Maturity of Long-Term Debt ("CMLTD") means the current maturity of
long-term Indebtedness paid during the applicable period, including, but not
limited to, amounts required to be paid during such period under Capital Leases.
Current Ratio means the ratio of Total Current Assets to Total Current
Liabilities.
Dividends means, for the applicable period, the aggregate of all amounts
paid or payable as dividends, with respect to Borrower's shares of stock,
whether now or hereafter outstanding.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
means, for the applicable period, income from continuing operations, excluding
the effect of any non-cash reductions in the value of investments on the
Borrower's balance sheet, before the payment of interest and taxes plus
depreciation and amortization, all as determined in accordance with GAAP.
Eligible Accounts shall be determined by the Bank, upon delivery to Bank of
a Borrowing Base Certificate, in the reasonable exercise of its discretion, as
to which Accounts listed thereon shall be deemed to be "Eligible Accounts". In
making this determination, Bank will consider, but shall not be limited to, the
following criteria:
(A) The goods or services giving rise to such Account have been shipped or
delivered to or performed for an Account Debtor (i) on an absolute sale basis
and not on consignment, on approval or on a sale-or-return basis or subject to
any other repurchase or return agreement, (ii) on an open account basis, (iii)
no material part of the subject goods or services has been returned, rejected,
lost or damaged, (iv) the Account is not evidenced by chattel paper or an
instrument of any kind, and (v) the Account Debtor is not insolvent or the
subject of any bankruptcy or insolvency proceeding of any kind;
(B) If the Account Debtor is located outside the United States, (i) the
subject goods shall have been shipped or the services rendered after receipt, by
Borrower from the Account Debtor, of an irrevocable letter of credit, which
letter of credit shall have been confirmed by a financial institution acceptable
to Bank and shall be in form and substance acceptable to Bank and shall be
transferred, assigned or otherwise made payable to Bank in form and substance
satisfactory to Bank, and (ii) the Account shall be payable in the full amount
of the face value of the Account in United States dollars;
(C) The Account is a valid, legally enforceable obligation of the Account
Debtor thereunder and is not subject to any offset or other defense on the part
of such Account Debtor or to any claim on the part of such Account Debtor
denying liability thereunder; provided, however, that, if it is subject to any
such offset, defense or claim, it shall be ineligible only to the extent of such
offset, defense or claim;
(D) The Account is subject to a duly perfected first priority security
interest in favor of the Bank;
(E) The Account is subject to no lien or security interest whatsoever,
except for the security interest of Bank hereunder and liens or security
interests which have been expressly subordinated to the security interest of
Bank in form and substance satisfactory to Bank;
(F) The Account is evidenced by an invoice or other proof of delivery in
form acceptable to Bank;
(G) The Account has not remained unpaid for a period exceeding ninety (90)
days after the due date;
(H) The Account is not owing from an Account Debtor which is located in the
State of New Jersey or the State of Minnesota unless Borrower has filed a Notice
of Business Activities Report with the New Jersey Division of Taxation or the
applicable Minnesota agency, as appropriate, for the then current year;
(I) The Account does not arise out of transactions with an employee,
officer, agent, director, stockholder, Affiliate, or Subsidiary of Borrower;
(J) The Account does not arise out of a transaction with the United States
or any department or agency thereof, unless assignment of which to Bank has been
properly filed in accordance with the Federal Assignment of Claims Act; and
(K) The Account is not an Account which is, or may become, a contra
account.
Eligible Inventory shall be determined by the Bank, upon delivery to Bank
of a Borrowing Base Certificate, in the reasonable exercise of its discretion,
as to what Inventory listed thereon shall be deemed to be "Eligible Inventory."
In making this determination, Bank will consider, but shall not be limited to,
the following criteria:
(A) The Inventory consists of finished goods that are useable and saleable
by the Borrower or Bear Cutlery, Inc. in the ordinary course of business;
(B) The Inventory complies with all applicable laws, regulations and rules;
(C) The Inventory is located in the United States or the province of
Ontario, Canada;
(D) The Inventory is subject to a duly perfected first priority security
interest in favor of the Bank; and
(E) The Inventory is subject to no lien or security interest whatsoever,
except for the security interest of Bank hereunder and liens or security
interests which have been expressly subordinated to the security interest of
Bank in form and substance satisfactory to Bank.
Events of Default shall have the meaning given such term in Section 8 of
this Agreement.
Eurocurrency Liabilities shall have the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
Fixed Rate Advance means a LIBOR Advance or a Cost of Funds Advance.
Funded Debt means (i) Indebtedness on account of borrowed money; and
(ii) obligations under Capital Leases.
GAAP means generally accepted accounting principles in the United States of
America, as from time to time in effect; provided, however, that for purposes of
compliance of Section 7 of this Agreement and the related definitions, GAAP
means such principles as in effect on the date of the preparation and delivery
of the financial statements described in Section 3.3 and Schedule A hereto and
consistently followed, without giving effect to any subsequent changes other
than changes consented to in writing by the Bank.
Guarantor means, individually and collectively, Excelsior Advertising,
Inc., Swiss Army Brand, Ltd., Swiss Army Brands (Suisse) S.A., and Bear Cutlery,
Inc.
Indebtedness means all obligations that in accordance with GAAP should be
classified as liabilities upon Borrower's balance sheet or to which reference
should be made by footnotes thereto.
Intangible Assets means assets that in accordance with GAAP are properly
classifiable as intangible assets, including, but not limited to, goodwill,
franchises, licenses, patents, trademarks, tradenames and copyrights.
Interest means, for the applicable period, all interest paid or payable,
including, but not limited to, interest paid or payable on Indebtedness and on
Capital Leases, determined in accordance with GAAP.
Interest Period means with respect to the Term Loan and each Fixed Rate
Advance:
(i) initially the period (A) commencing on the Borrowing Date of the Term
Loan or such Advance, and (B) ending at the end of the Applicable Interest
Period, for LIBOR Loans - 7, 30, 60 or 90 days thereafter, and for Cost of Funds
Rate Loans, 7, 14, or 21 days thereafter, as the case may be, as selected by the
Borrower, and (ii) thereafter, such subsequent Interest Period for the Term Loan
or such Fixed Rate Advance shall begin on the last day of the preceding Interest
Period for the Term Loan or such Fixed Rate Advance and shall end at the end of
the Applicable Interest Period as the Borrower may select pursuant to this
Agreement; provided that (A) any Interest Period for a LIBOR Loan which would
otherwise end on a day which is not a Business Day shall end and the next
Interest Period shall commence on the next preceding or the next succeeding day
which is a Business Day as determined conclusively by the Bank in accordance
with the then current bank practices in London, England, (B) any Interest Period
for a Cost of Funds Rate Loan which would otherwise end on a day which is not a
Business Day shall end and the next Interest Period shall commence on the next
preceding or the next succeeding day which is a Business Day as determined
conclusively by the Bank; and (C) no Interest Period for the Term Loan or a
Fixed Rate Advance shall end after the Termination Date.
Interest Rate Margin means, with regard to the Term Loan and the Line of
Credit, the percentage rate by which LIBOR and Cost of Funds is increased as
determined by referring to the Performance Pricing Grid attached hereto as
Schedule B.
Inventory means inventory, as the term is defined in the Code, whether now
owned or hereafter acquired by the Borrower, and, including, without limitation,
any and all goods, merchandise and other personal property, wheresoever located
and whether or not in transit, now owned or hereafter acquired by the Borrower,
which is or may at any time be held for sale or lease, or furnished or to be
furnished under any contract of service or held as raw materials, work in
process, supplies or materials used or consumed in the Borrower's businesses,
and all such property the sale or other disposition of which has given rise to
Accounts or Documents (as that term is defined in the Code) and which has been
returned to or repossessed or stopped in transit by the Borrower.
LIBOR Advance means an Advance that bears interest at a rate per annum
equal to the LIBOR Interest Rate.
LIBOR shall mean, as applicable to any Term Loan LIBOR Rate or LIBOR
Advance (collectively, a "LIBOR Loan"), the rate per annum (rounded upward, if
necessary, to the nearest 1/32 of one percent) as determined on the basis of the
offered rates for deposits in U.S. dollars, for a period of time comparable to
such LIBOR Loan which appears on the Telerate page 3750 as of 11:00 a.m. London
time on the day that is two (2) London Banking Days preceding the first day of
such LIBOR Loan; provided, however, if the rate described above does not appear
on the Telerate system on any applicable interest determination date, the LIBOR
rate shall be the rate (rounded upwards as described above, if necessary) for
deposits in U.S. dollars for a period substantially equal to the interest period
on the Reuters Page "LIBO" or such other page as may replace the LIBO Page on
that service for the purpose of displaying such rates), as of 11:00 a.m. (London
Time), on the day that is two (2) London Banking Days prior to the beginning of
such interest period. "Banking Day" shall mean, in respect of any city, any date
on which commercial banks are open for business in that city.
If both the Telerate and Reuters system are unavailable, then the rate for
that date will be determined on the basis of the offered rates for deposits in
U.S. dollars for a period of time comparable to such LIBOR Loan which are
offered by four major banks in the London interbank market at approximately
11:00 a.m. London time, on the day that is two (2) London Banking Days preceding
the first day of such LIBOR Loan as selected by the calculation agent. The
principal London office of each of the four major London banks will be requested
to provide a quotation of its U.S. dollar deposit offered rate. If at least two
(2) such quotations are provided, the rate for that date will be the arithmetic
mean of the quotations. If fewer than two (2) quotations are provided as
requested, the rate for that date will be determined on the basis of the rates
quoted for loans in U.S. dollars to leading European banks for a period of time
comparable to such LIBOR Loan offered by major banks in New York City at
approximately 11:00 a.m. New York City time, on the day that is two (2) London
Banking Days preceding the first day of such LIBOR Loan. In the event that Bank
is unable to obtain any such quotation as provided above, it will be deemed that
LIBOR pursuant to LIBOR Loan cannot be determined.
In the event that the Board of Governors of the Federal Reserve System
shall impose a Reserve Rate with respect to LIBOR deposits of Bank, then for any
period during which such Reserve Rate shall apply, LIBOR shall be equal to the
amount determined above divided by an amount equal to 1 minus the Reserve Rate.
LIBOR Interest Rate means an interest rate per annum equal at all times
during an Interest Period to the aggregate of (i) LIBOR and (ii) the Interest
Rate Margin.
LIBOR Loan shall mean a LIBOR Advance or the Term Loan bearing interest at
the Tem Loan LIBOR Rate.
Line of Credit means the revolving line of credit set forth in Section 2.1
of this Agreement that the Bank may advance to the Borrower and the Borrower may
borrow from the Bank.
Line of Credit Note means the note executed and delivered by the Borrower
in substantially the form of Exhibit 2 hereto and which evidences the Line of
Credit.
Modified Following Business Day Convention shall mean the convention for
adjusting any relevant date if it would otherwise fall on a day that is not a
Business Day. The following terms, when used in conjunction with the term,
"Modified Following Business Day Convention", and a date, shall mean that an
adjustment will be made if that date would otherwise fall on a day that is not a
Business Day so that the date will be the first following day that is a Business
Day.
Net Income (Net Loss) means the net income (or net loss, expressed as a
negative number) for any period, after all taxes actually paid or accrued and
all expenses and other charges determined in accordance with GAAP.
Notes means the Line of Credit Note and the Term Note.
Performance Pricing Grid means that chart outlining the applicable
adjustment to the interest rate payable under the Line of Credit Note and the
Term Note, respectively, which chart is attached hereto as Schedule B.
Person means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, entity, party, or government (whether
national, federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
Related Agreements means the various agreements and documents described
under the heading "Related Agreements" in Schedule A to this Agreement and such
other documents, delivered or caused to be delivered, by the Borrower to the
Bank.
Reserve Rate means the rate (expressed as a decimal) at which the Bank
would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System against Eurocurrency Liabilities if such
liabilities were outstanding. The LIBOR Interest Rate shall be adjusted
automatically on and as of the effective date of any change in the Reserve Rate,
and the rate of interest thereby effected shall simultaneously change.
Subsidiary means any corporation, a majority of whose outstanding stock
having ordinary voting powers for the election of directors, shall at any time
be owned or controlled by the Borrower or one or more of its subsidiaries.
Stockholder Equity means total stockholders' equity determined in
accordance with GAAP.
Tangible Net Worth means Stockholder Equity minus Intangible Assets.
Termination Date shall have the meaning given such term in Section 2.1 of
this Agreement.
Term Loan means the Term Loan as defined in Section 2.A. hereof.
Term Loan Base Rate means the variable per annum rate of interest equal at
all times to the Base Rate.
Term Loan Cost of Funds Rate means an interest rate per annum equal at all
times during an Interest Period to the aggregate of (i) Cost of Funds and (ii)
the Interest Rate Margin.
Term Loan Fixed Rate means the Term Loan LIBOR Rate or the Term Loan Cost
of Funds Rate.
Term Loan LIBOR Rate means an interest rate per annum equal at all times
during an Interest Period to the aggregate of (i) LIBOR and (ii) the Interest
Rate Margin.
Term Note means the 1999 Commercial Promissory Term Note substantially in
the form of Exhibit 3 hereto.
Total Current Assets means total current assets determined in accordance
with GAAP.
Total Current Liabilities means total current Indebtedness determined in
accordance with GAAP.
Total Liabilities means total Indebtedness determined in accordance with
GAAP.
Working Capital means Total Current Assets less Total Current Liabilities.
Year 2000 Compliant means, with regard to the Borrower and/or its
suppliers, vendors and customers, that all software, embedded microchips, and
other processing capabilities utilized by, and material to the business
operations or financial condition of, such entity are able to interpret and
manipulate data on and involving all calendar dates correctly and without
causing any abnormal ending scenario, including in relation to dates on and
after January 1, 2000.
Year 2000 Risk means the risk that computer applications used by Borrower
and/or its suppliers, vendors and customers may be unable to recognize and
perform without error date-sensitive functions involving certain dates prior to
and any date after December 31, 1999.
Section 2. The Line of Credit
2.1 The Line of Credit. Pursuant to the terms of this Agreement and upon
the satisfaction of the conditions precedent referred to in Section 4 hereof,
the Bank will lend to the Borrower, and the Borrower may, in its sole
discretion, borrow from the Bank, Advances not to exceed the aggregate principal
amount to be outstanding at any time of the lesser of: (a) Sixteen Million and
No/100 DOLLARS ($16,000,000.00); or (b) the amount of the Borrowing Base (the
"Line of Credit") as evidenced by the Line of Credit Note. Unless an Event of
Default occurs and is continuing, the Borrower may borrow, repay and reborrow
Advances under this Agreement during the period from the date hereof until June
30, 2001(as such date may be extended in writing from time to time in the Bank's
sole and absolute discretion, the "Termination Date"); provided, however, that
all outstanding principal plus accrued and unpaid interest shall be paid in full
on the Termination Date as adjusted by the Modified Following Business Day
Convention.
2.2 Advances. (a) The Borrower may, in writing, request that the Bank make
an Advance under the Line of Credit. Each such written request shall be
accompanied by a certificate by the president or chief financial officer of the
Borrower stating that: (i) the Borrower is current with its obligation to submit
Borrowing Base Certificates to the Bank pursuant to Section 5.1(f) of this
Agreement; and (ii) the aggregate outstanding Advances are not in excess of the
lesser of the Borrowing Base and the Line of Credit; and (iii) the making of the
requested Advance will not increase the aggregate outstanding Advances to an
amount greater than the lesser of the Borrowing Base and the Line of Credit. If
any Advance is made, the Advance shall be made by a deposit to any of Borrower's
accounts with the Bank. Advances will be payable as provided in the Line of
Credit Note. In the event the Borrower fails to provide notice of the type of
Advance to be effected by a new borrowing, Borrower shall be deemed to have
elected a Base Rate Advance. If any Advance is made, the Bank may, at its
option, record on the books and records of the Bank or endorse on a schedule
attached to the Line of Credit Note, an appropriate notation evidencing any
Advance, each repayment on account of the principal thereof and the amount of
interest paid; and the Borrower authorizes the Bank to maintain such records or
make such notations and agrees that the amount shown on the books and records or
on said schedule, as applicable, as outstanding from time to time shall
constitute the amount owing to the Bank pursuant to this Agreement, absent
manifest error. In the event the amount shown on the schedule conflicts with the
amount noted as due pursuant to the books and records of the Bank, the books and
records of the Bank shall control the disposition of the conflict.
(b) Whenever Borrower desires that the Bank make an Advance which is to be
a Base Rate Advance, it shall give the Bank notice of such request. The
Borrowing Date relating to such Advance shall be a Business Day.
(c) When Borrower desires that Bank make an Advance which is to be a LIBOR
Advance or a Cost of Funds Advance, it shall give Bank not less than two (2)
Business Days notice of such request. The Borrowing Date relating to such
Advance shall be a Business Day. No LIBOR Advance will be made in an amount less
than $100,000 and no more than eight (8) Fixed Rate Advances may be outstanding
under the Line of Credit at any time.
(d) Each request for an Advance shall specify whether such Advance is to be
a Base Rate Advance, or a LIBOR Advance or a Cost of Funds Advance and, once so
specified, such specification may not be changed except with prior approval of
the Bank. Each such request shall further specify the Interest Period to be
applicable to such Advance as follows:
(i) for Base Rate Advances no Interest Period need be specified; and
(ii) for LIBOR Advances, the Interest Period may be of a duration of 7, 30,
60 or 90 days; and
(iii) for Cost of Funds Advances, the Interest Period may be of a duration
of from 7, 14 or 21 days.
2.2.A Letters of Credit; Reduction in Availability. (a) Within the limits
set forth in 2.1 of this Agreement and subject to the provisions of this Section
2.2.A, the Borrower may, from time to time, request the Lender to issue
commercial letters of credit and standby letters of credit ("Letters of
Credit"). The aggregate outstanding available undrawn amount of all outstanding
Letters of Credit shall not exceed $10,000,000.
(b) The amount of Advances which would otherwise be available to the
Borrower under the Line of Credit shall be reduced by the aggregate outstanding
available undrawn amount of outstanding Letters of Credit.
(c) A draw under a Letter of Credit shall be deemed to be a request for an
Advance under the Line of Credit.
(d) No Letters of Credit shall be issued with an expiration date later than
180 days after the Termination Date.
(e) Borrower shall execute any additional documentation as the Bank may
request in connection with the issuance of Letters of Credit including, without
limitation, reimbursement agreements.
(f) The Bank's obligation to issue Letters of Credit is contingent upon the
payment by the Borrower of the applicable fees from the Bank's then current fee
schedule for commercial letters of credit, and a fee of 1.5% of the face amount
for standby letters of credit.
2.3 Interest; Principal. LIBOR Advances, Base Rate Advances and Cost of
Funds Advances will bear interest at a per annum rate as provided in the Line of
Credit Note. Such interest shall be payable as specified in the Line of Credit
Note. Principal shall also be repaid in accordance with the terms of the Line of
Credit Note. Upon the occurrence of and during the continuance of an Event of
Default or after maturity or after judgment has been rendered on the Line of
Credit Note, Borrower's right to select pricing options shall, at the option of
the Bank, cease and the unpaid principal of all advances shall, at the option of
the Bank, bear interest at a rate which is two (2) percentage points per annum
greater than that which would otherwise be applicable.
All agreements between Borrower and Bank are hereby expressly limited so
that in no contingency or event whatsoever, whether by reason of acceleration of
maturity of the indebtedness evidenced hereby or otherwise, shall the amount
paid or agreed to be paid to Bank for the use or the forbearance of the
indebtedness evidenced hereby exceed the maximum permissible under applicable
law. As used herein, the term "applicable law" shall mean the law in effect as
of the date hereof provided, however that in the event there is a change in the
law which results in a higher permissible rate of interest, then the Line of
Credit Note shall be governed by such new law as of its effective date. In this
regard, it is expressly agreed that it is the intent of Borrower and Lender in
the execution, delivery and acceptance of the Line of Credit to contract in
strict compliance with the laws of the State of Connecticut from time to time in
effect. If, under or from any circumstances whatsoever, fulfillment of any
provision hereof, the Line of Credit Note or of any of the Related Agreements at
the time of performance of such provision shall be due, shall involve
transcending the limit of such validity prescribed by applicable law, then the
obligation to be fulfilled shall automatically be reduced to the limits of such
validity, and if under or from any circumstances whatsoever Bank should ever
receive as interest an amount which would exceed the highest lawful rate, such
amount which would be excessive interest shall be applied to the reduction of
the principal balance evidenced hereby and not to the payment of interest. This
provision shall control every other provision of all agreements between Borrower
and Bank.
2.4 Computation of Interest. All computations of interest on the Line of
Credit Note shall be made on the basis of a three hundred sixty (360) day year
and the actual days elapsed.
2.5 Payment of Principal and Interest. All payments shall be made in lawful
money of the United States in immediately available funds. The Bank is
authorized (but not required) to charge principal and interest and all other
amounts due hereunder and under the Line of Credit Note to any account of the
Borrower when and as it becomes due.
2.6 Prepayments. (a) The Borrower may prepay Base Rate Advances LIBOR
Advances or Cost of Funds Advances in accordance with the terms of the Line of
Credit Note. If at any time, the aggregate principal amount of all Advances
under the Line of Credit Note shall exceed the lesser of the Borrowing Base and
the Line of Credit, the Borrower shall immediately prepay so much of the
outstanding principal balance, together with accrued interest on the portion of
principal so prepaid as shall be necessary in order that the unpaid principal
balance, after giving effect to such prepayments, shall not exceed the lesser of
the Borrowing Base and the Line of Credit. Any such prepayment will, at the
option of the Bank, be applied first to the payment of all costs and expenses
incurred by the Bank and arising out of this Agreement, the Notes or any Related
Agreement and which has not been paid or reimbursed to the Bank, then to accrued
interest to the date of the prepayment and the remainder to the outstanding
principal.
(b) Notwithstanding any other provision of this Agreement, (i) if, after
the date of this Agreement, the introduction of or any change in any law or
regulation (or change in the interpretation thereof by regulatory authorities)
applicable to the Bank, shall make it, or (ii) if any central bank or other
governmental authority having jurisdiction over the Bank shall assert that it
is, unlawful for the Bank to perform its obligations hereunder to make LIBOR
Advances to the Borrower or to continue to fund or maintain LIBOR Advances to
the Borrower hereunder, then, on notice thereof by the Bank to the Borrower, (A)
the obligation of the Bank to the Borrower to make LIBOR Advances shall
terminate, and (B) within five (5) Business Days after the Bank gives notice,
the Borrower shall prepay in full all such LIBOR Advances then outstanding,
which the Bank is prohibited from maintaining or continuing, together with
interest accrued thereon, provided, however, the Borrower may elect to convert
all outstanding LIBOR Advances to Base Rate Advances.
(c) The Borrower may, at its option, prepay any Base Rate Advances, in
whole or in part, at any time, without fee or premium.
(d) If at any time (i) the interest rate on the Line of Credit is a fixed
rate, and (ii) Bank in its sole discretion should determine that current market
conditions can accommodate a prepayment request, Borrower shall have the right
at any time and from time to time to prepay the Line of Credit in whole or in
part, in minimum increments of $100,000, and Borrower shall pay to Bank a make
whole premium in an amount computed as follows: The current rate for United
States Treasury securities (bills on a discounted basis shall be converted to a
bond equivalent) with a maturity date closest to the maturity date of the term
chosen pursuant to the Fixed Rate Election as to which the prepayment is made,
shall be subtracted from the "cost of funds" component of the fixed rate in
effect at the time of prepayment. If the result is zero or a negative number,
there shall be no make whole premium. If the result is a positive number, then
the resulting percentage shall be multiplied by the amount of the principal
balance being prepaid. The resulting amount shall be divided by 360 and
multiplied by the number of days remaining in the term chosen pursuant to the
Fixed Rate Election as to which the prepayment is made. Said amount shall be
reduced to present value calculated by using the above-referenced United States
Treasury security rate and the number of days remaining in the term chosen
pursuant to the Fixed Rate Election as to which the prepayment is made. The
resulting amount shall be the make whole premium due to Bank upon prepayment of
the fixed rate loan. Each reference in this paragraph to "Fixed Rate Election"
shall mean the effective election by Borrower pursuant to paragraph 2.2 of this
Loan Agreement and the Line of Credit Note of a Fixed Rate Advance.
If by reason of the occurrence and continuance of an Event of Default Bank
elects to declare the Line of Credit to be immediately due and payable, then any
make whole premium with respect to the Line of Credit shall become due and
payable in the same manner as though Borrower had exercised such right of
prepayment
2.7 Intentionally Omitted.
2.8 Late Charge. If the entire amount of any required installment of
principal and/or interest is not paid in full within ten (10) days after the
same is due, Borrower shall, at the discretion of the Bank, pay to the Bank a
late fee equal to five percent (5%) of the required payment. The minimum late
charge shall be $25.00. The assessment and collection of a late fee by the Bank
shall not waive any Event of Default or preclude the exercise of the other
rights and remedies available to the Bank hereunder.
2.9 Additional Payments. (a) If the Bank shall deem applicable to this
Agreement or the Line of Credit Note (including, in each case, any borrowed and
any unused portion thereof), any requirement of any law of the United States of
America, any regulation, order, interpretation, ruling, official directive or
guideline (whether or not having the force of law) of the Board of Governors of
the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation or any other board or governmental or administrative
agency of the United States of America which shall impose, increase, modify or
make applicable to this Agreement or the Line of Credit Note or cause this
Agreement or the Line of Credit Note to be included in any reserve, special
deposit, calculation used in the computation of regulatory capital standards,
assessment or other requirement which imposes on the Bank any cost that is
attributable to the maintenance thereof, then, and in each such event, the
Borrower shall promptly pay the Bank, upon its demand, such amount as will
compensate the Bank for any such cost, which determination may be based upon the
Bank's reasonable allocation of the aggregate of such costs resulting from such
events. In the event any such cost is a continuing cost, a fee payable to the
Bank may be imposed upon the Borrower periodically for so long as any such cost
is deemed applicable by the Bank, in an amount determined by the Bank to be
necessary to compensate the Bank for any such cost, which determination may be
based upon the Bank's reasonable allocation of the aggregate of such costs
resulting from such events. The determination by the Bank of the existence and
amount of any such costs shall, in the absence of manifest error, be conclusive.
(b) In the event the Bank shall determine that, by reason of circumstances
affecting the London inter-bank Eurodollar market, adequate and reasonable
methods do not exist for ascertaining the LIBOR Interest Rate which would
otherwise be applicable during any Interest Period, the Bank shall forthwith
give notice of such determination (which shall be conclusive and binding on the
Borrower) to the Borrower at least one Business Day before the first day of such
Interest Period. In such event: (i) any pending notice of borrowing which
specified a LIBOR Advance shall be of no effect; and (ii) the obligation of the
Bank to make the LIBOR Advance shall be suspended until the Bank determines that
the circumstances giving rise to such suspension no longer exist, whereupon the
Bank shall notify the Borrower.
(c) If, after the date of this Agreement, there shall be any increase in
the cost to the Bank due to either (i) the introduction of or any change in any
law or regulation (or the interpretation thereof by regulatory authorities) or
(ii) compliance with any written guideline or written request from any central
bank or other governmental authority having jurisdiction over Bank (whether or
not such guideline or request has the force of law), of agreeing to make or
making, funding or maintaining LIBOR Advances to the Borrower, then the Borrower
shall, from time to time, upon such notice by the Bank, pay to the Bank
additional amounts sufficient to reimburse the Bank for such increased cost.
Section 2A. The Term Loan
2A.1 The Term Loan. Pursuant to the terms of this Agreement and upon the
satisfaction of the conditions precedent referred to in Section 4 hereof, the
Bank will lend to the Borrower the aggregate principal amount of Seven Million
and No/100 DOLLARS ($7,000,000.00) (the "Term Loan") as evidenced by the Term
Note. All outstanding principal plus accrued and unpaid interest shall be paid
in full on the Termination Date (as the Termination Date may be extended from
time to time) or November 1, 2004 (the "Maturity Date") should the Termination
Date be extended beyond the Maturity Date.
2A.2 Interest Rate. (a) The outstanding principal balance of the Term Loan
shall bear interest equal to a Term Loan Base Rate, the Term Loan LIBOR Rate, or
the Term Loan Cost of Funds Rate.
(b) Whenever Borrower desires that the Term Loan bear interest at the Term
Loan Base Rate, it shall give the Bank notice of such request. The effective
date of a Term Loan Base Rate request shall be a Business Day.
(c) Whenever Borrower desires that the Term Loan bear interest at the Term
Loan LIBOR Rate or the Term Loan Cost of Funds Rate: it shall give Bank not less
than two (2) Business Days notice of such request; and the effective date of a
Term Loan LIBOR Rate request or Term Loan Cost of Funds Rate shall be a Business
Day.
(d) Each request regarding the interest rate applicable to the Term Loan
shall specify whether the interest rate is to be the Term Loan Base Rate, the
Term Loan LIBOR Rate, or the Term Loan Cost of Funds Rate and, once so
specified, such specification may not be changed except with prior approval of
the Bank. Each such request shall further specify the Interest Period to be
applicable to such request as follows:
(i) for Term Loan Base Rate no Interest Period need be specified;
(ii) for Term Loan LIBOR Rate, the Interest Period may be of a duration of
7, 30, 60 or 90 days; and
(iii) for Term Loan Cost of Funds Rate, the Interest Period may be of a
duration of from 7, 14 or 21 days.
2A.3 Interest; Principal. The Term Loan will bear interest at a per annum
rate as provided in the Term Note. Such interest shall be payable as specified
in the Term Note. Principal shall also be repaid in accordance with the terms of
the Term Note. Upon the occurrence of and during the continuance of an Event of
Default or after maturity or after judgment has been rendered on the Term Note,
Borrower's right to select pricing options shall, at the option of the Bank,
cease and the unpaid principal of the Term Loan shall, at the option of the
Bank, bear interest at a rate which is two (2) percentage points per annum
greater than that which would otherwise be applicable.
All agreements between Borrower and Bank are hereby expressly limited so
that in no contingency or event whatsoever, whether by reason of acceleration of
maturity of the indebtedness evidenced hereby or otherwise, shall the amount
paid or agreed to be paid to Bank for the use or the forbearance of the
indebtedness evidenced hereby exceed the maximum permissible under applicable
law. As used herein, the term "applicable law" shall mean the law in effect as
of the date hereof provided, however that in the event there is a change in the
law which results in a higher permissible rate of interest, then this Note shall
be governed by such new law as of its effective date. In this regard, it is
expressly agreed that it is the intent of Borrower and Lender in the execution,
delivery and acceptance of the Term Note to contract in strict compliance with
the laws of the State of Connecticut from time to time in effect. If, under or
from any circumstances whatsoever, fulfillment of any provision hereof, the Term
Note or of any of the Related Agreements at the time of performance of such
provision shall be due, shall involve transcending the limit of such validity
prescribed by applicable law, then the obligation to be fulfilled shall
automatically be reduced to the limits of such validity, and if under or from
any circumstances whatsoever Bank should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which would be excessive
interest shall be applied to the reduction of the principal balance evidenced
hereby and not to the payment of interest. This provision shall control every
other provision of all agreements between Borrower and Bank.
2A.4 Computation of Interest. All computations of interest on the Term Note
shall be made on the basis of a three hundred sixty (360) day year and the
actual days elapsed.
2A.5 Payment of Principal and Interest. All payments shall be made in
lawful money of the United States in immediately available funds. The Bank is
authorized (but not required) to charge principal and interest and all other
amounts due hereunder and under the Term Note to any account of the Borrower
when and as it becomes due.
2A.6 Prepayments. (a) The Borrower may prepay the Term Loan in accordance
with the terms of the Term Note. Any such prepayment will, at the option of the
Bank, be applied first to the payment of all costs and expenses incurred by the
Bank and arising out of this Agreement, the Term Note or any Related Agreement
and which has not been paid or reimbursed to the Bank, then to accrued interest
to the date of the prepayment and the remainder to the outstanding principal.
(b) Notwithstanding any other provision of this Agreement, (i) if, after
the date of this Agreement, the introduction of or any change in any law or
regulation (or change in the interpretation thereof by regulatory authorities)
applicable to the Bank, shall make it, or (ii) if any central bank or other
governmental authority having jurisdiction over the Bank shall assert that it
is, unlawful for the Bank to perform its obligations hereunder to continue to
offer or maintain the Term Loan LIBOR Rate for the Borrower hereunder, then, on
notice thereof by the Bank to the Borrower, (A) the obligation of the Bank to
the Borrower to offer or maintain the Term Loan LIBOR Rate shall terminate, and
(B) within five (5) Business Days after the Bank gives notice, the Borrower
shall convert the outstanding principal balance of the Term Loan to the Term
Loan Base Rate.
(c) The Borrower may, at its option, prepay any Base Rate Advances, in
whole or in part, at any time, subject only to the prepayment premium, if
applicable, as set forth in the Term Note.
(d) If at any time (i) the interest rate on the Term Loan is a fixed rate,
and (ii) Bank in its sole discretion should determine that current market
conditions can accommodate a prepayment request, Borrower shall have the right
at any time and from time to time to prepay the Term Loan in whole or in part,
in minimum increments of $100,000, and Borrower shall pay to Bank a make whole
premium in an amount computed as follows: The current rate for United States
Treasury securities (bills on a discounted basis shall be converted to a bond
equivalent) with a maturity date closest to the maturity date of the term chosen
pursuant to the Fixed Rate Election as to which the prepayment is made, shall be
subtracted from the "cost of funds" component of the fixed rate in effect at the
time of prepayment. If the result is zero or a negative number, there shall be
no make whole premium. If the result is a positive number, then the resulting
percentage shall be multiplied by the amount of the principal balance being
prepaid. The resulting amount shall be divided by 360 and multiplied by the
number of days remaining in the term chosen pursuant to the Fixed Rate Election
as to which the prepayment is made. Said amount shall be reduced to present
value calculated by using the above-referenced United States Treasury security
rate and the number of days remaining in the term chosen pursuant to the Fixed
Rate Election as to which the prepayment is made. The resulting amount shall be
the make whole premium due to Bank upon prepayment of the fixed rate loan. Each
reference in this paragraph to "Fixed Rate Election" shall mean the effective
election by Borrower pursuant to paragraph 2A.2 of this Loan Agreement and the
Term Note of a Term Loan LIBOR Rate or the Term Loan Cost of Funds Rate.
If by reason of the occurrence and continuance of an Event of Default Bank
elects to declare the loan to be immediately due and payable, then any make
whole premium with respect to the Term Loan shall become due and payable in the
same manner as though Borrower had exercised such right of prepayment
2A.8 Late Charge. If the entire amount of any required installment of
principal and/or interest is not paid in full within ten (10) days after the
same is due, Borrower shall, at the discretion of the Bank, pay to the Bank a
late fee equal to five percent (5%) of the required payment. The minimum late
charge shall be $25.00. The assessment and collection of a late fee by the Bank
shall not waive any Event of Default or preclude the exercise of the other
rights and remedies available to the Bank hereunder.
2A.9 Additional Payments. (a) If the Bank shall deem applicable to this
Agreement or the Term Note (including, in each case, any borrowed and any unused
portion thereof), any requirement of any law of the United States of America,
any regulation, order, interpretation, ruling, official directive or guideline
(whether or not having the force of law) of the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation or any other board or governmental or administrative
agency of the United States of America which shall impose, increase, modify or
make applicable to this Agreement or the Term Note or cause this Agreement or
the Term Note to be included in any reserve, special deposit, calculation used
in the computation of regulatory capital standards, assessment or other
requirement which imposes on the Bank any cost that is attributable to the
maintenance thereof, then, and in each such event, the Borrower shall promptly
pay the Bank, upon its demand, such amount as will compensate the Bank for any
such cost, which determination may be based upon the Bank's reasonable
allocation of the aggregate of such costs resulting from such events. In the
event any such cost is a continuing cost, a fee payable to the Bank may be
imposed upon the Borrower periodically for so long as any such cost is deemed
applicable by the Bank, in an amount determined by the Bank to be necessary to
compensate the Bank for any such cost, which determination may be based upon the
Bank's reasonable allocation of the aggregate of such costs resulting from such
events. The determination by the Bank of the existence and amount of any such
costs shall, in the absence of manifest error, be conclusive.
(b) In the event the Bank shall determine that, by reason of circumstances
affecting the London inter-bank Eurodollar market, adequate and reasonable
methods do not exist for ascertaining the LIBOR Interest Rate which would
otherwise be applicable during any Interest Period, the Bank shall forthwith
give notice of such determination (which shall be conclusive and binding on the
Borrower) to the Borrower at least one Business Day before the first day of such
Interest Period. In such event: (i) any pending request for the Term Loan LIBOR
Rate shall be of no effect; and (ii) the obligation of the Bank to maintain or
offer the Term Loan LIBOR Rate shall be suspended until the Bank determines that
the circumstances giving rise to such suspension no longer exist, whereupon the
Bank shall notify the Borrower.
(c) If, after the date of this Agreement, there shall be any increase in
the cost to the Bank due to either (i) the introduction of or any change in any
law or regulation (or the interpretation thereof by regulatory authorities) or
(ii) compliance with any written guideline or written request from any central
bank or other governmental authority having jurisdiction over Bank (whether or
not such guideline or request has the force of law), of agreeing to make or
making, funding or maintaining the Term Loan LIBOR Rate to the Borrower, then
the Borrower shall, from time to time, upon such notice by the Bank, pay to the
Bank additional amounts sufficient to reimburse the Bank for such increased
cost.
Section 3. Representations and Warranties
The Borrower hereby represents and warrants to the Bank (which
representations and warranties will survive the delivery of the Notes and this
Agreement and the making of any Advances and shall be deemed to be continuing
until the Notes are fully paid and this Agreement is terminated) that:
3.1 Existence and Power. (a) The Borrower is a corporation which is and
will continue to be, duly organized and validly existing; the Borrower is in
good standing under the laws of its state of organization; (b) the Borrower is
qualified and in good standing to do business in all other jurisdictions in
which the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary; (c) the Borrower has the
power to execute and deliver this Agreement, the Notes, the Related Agreements
and to borrow hereunder, and (d) the Borrower has all permits, authorizations
and licenses, without unusual restrictions or limitations, to own, operate and
lease its properties and to conduct the business in which it is presently
engaged, all of which are in full force and effect.
3.2 Authority. The making and performance by the Borrower of this Agreement
and the Related Agreements have been authorized by all necessary action. The
execution and delivery of this Agreement, the Notes and the Related Agreements,
the consummation of the transactions herein and therein contemplated, the
fulfillment of or compliance with the terms and provisions hereof and thereof,
(a) are within its powers, (b) will not violate any provision of law or, of its
certificate of incorporation or by-laws or (c) will not result in the breach of,
or constitute a default under, or result in the creation of any lien, charge or
encumbrance upon any property or assets of the Borrower pursuant to any
indenture or bank loan or credit agreement (other than pursuant to this
Agreement) or other material agreement or instrument to which the Borrower is a
party. No approval, authorization, consent or other order of or registration or
filing with any governmental body is required in connection with the making and
performance of this Agreement, the Notes or the Related Agreements.
3.3 Financial Condition. The financial statements described in Schedule A
hereto under the heading "Description of Financial Statements," heretofore
delivered to the Bank, were prepared in conformity with GAAP and are correct and
complete and fairly present the financial condition and the results of
operations of the Borrower for the period(s) and as of the date(s) thereof with
the exception of all interim statements. The Borrower has no direct or
contingent liabilities not disclosed in such statements or in Schedule A hereto
under the heading "Liabilities Not Disclosed in Financial Statements." Since the
date of the latest financial statement delivered to the Bank, except as
disclosed to the Bank in writing, there has been no adverse change in the
assets, liabilities, financial condition or business of the Borrower and, no
Dividends have been declared or made to stockholders.
3.4 Information Complete. Subject to any limitations stated therein or in
connection therewith, all information furnished or to be furnished by the
Borrower pursuant to the terms hereof is, or will be at the time the same is
furnished, accurate and complete in all respects necessary in order to make the
information furnished, in the light of the circumstances under which such
information is furnished, not misleading.
3.5 Statutory Compliance. The Borrower is in compliance with all federal,
state, county and municipal laws, ordinances, rules or regulations applicable to
it, its property or the conduct of its business, including, without limitation,
those pertaining to or concerning the employment of labor, employee benefits,
public health, safety and the environment.
3.6 Litigation. No proceedings by or before any private, public or
governmental body, agency or authority and no litigation is pending, or, so far
as is known to the Borrower or, a any of its officers, threatened against it
except such as are disclosed in Schedule A hereto under the heading "Litigation
Pending or Threatened."
3.7 Subsidiaries, Affiliates. The Borrower has no Subsidiaries or
Affiliates other than those shown on Schedule A attached hereto under the
heading "Subsidiaries, Affiliates and Trade Names" and the Borrower has not
invested in the stock, common or preferred, of any other corporation and there
are no fixed, contingent or other obligations on the part of the Borrower to
issue any additional shares of its capital stock
3.8 Events of Default. No Event of Default has occurred and no event has
occurred or is continuing which, pursuant to the provisions of Section 8, with
the lapse of time and/or the giving of a notice specified therein, would
constitute such an Event of Default.
3.9 Validity. This Agreement, the Notes and all Related Agreements, upon
the execution and delivery thereof, will be legal, valid, binding and
enforceable obligations of the Borrower or the person executing the same, as the
case may be, in accordance with the terms of each.
3.10 Title to Property. The Borrower has good and marketable title to its
properties and assets subject to no mortgage, pledge, lien, security interest,
encumbrance or other material charge not set forth in (a) Schedule A hereto
under the heading "Encumbrances Not Otherwise Disclosed" or (b) Section 6.1
hereinafter stated.
3.11 Taxes. The Borrower has filed all tax returns and reports required to
be filed by it with all federal, state or local authorities and has paid in full
or made adequate provision for the payment of all taxes, interest, penalties,
assessments or deficiencies shown to be due or claimed to be due on or in
respect of such tax returns and reports.
3.12 Business Name and Locations. The Borrower conducts its business solely
in its own name without the use of a trade name or the intervention of or
through any other entity of any kind, other than as disclosed on Schedule A
under the heading "Subsidiaries, Affiliates and Trade Names." All books and
records relating to Borrower's assets are located at the Borrower's chief
executive office as set forth above and its other places and locations, where
its assets are located, are as set forth on Schedule A hereto under the heading
"Places of Business."
3.13 Notices of Environmental Problems. The Borrower and any tenants have
not given nor have they received, any notice that: (a) there has been a release,
or there is a threat of release, of toxic substances or hazardous wastes from
any real property owned or operated by the Borrower, (b) the Borrower or any
tenants may be or is liable for the costs of cleaning up or responding to a
release of any toxic substances or hazardous wastes; or (c) any of such real
property is subject to a lien for any liability arising from costs incurred in
response to a release of toxic substances or hazardous wastes.
3.14 ERISA Compliance. The Borrower has received no notice to the effect
that it is not in full compliance with any of the requirements of the Employee
Retirement Income Security Act of 1974, as amended, ("ERISA") and the
regulations promulgated thereunder and, to the best of its knowledge there
exists no event described in Section 4043 of ERISA, excluding subsections
4043(b)(2) and 4043(b)(3) thereof.
3.15 Year 2000. The Borrower will be Year 2000 Compliant by January 1,
2000.
3.16 Year 2000 Risk. Borrower has reviewed the Year 2000 Risk and
represents that it is taking such action as may be necessary to ensure that the
Year 2000 Risk will not materially adversely affect its business operations
and/or financial condition.
Section 4. Conditions Precedent
4.1 The initial Advance under the Line of Credit and the funding of the
Term Loan shall be subject to the following conditions precedent:
(a) Approval of Bank Counsel. All legal matters incident to the
transactions hereby contemplated shall be reasonably satisfactory to counsel for
the Bank.
(b) Proof of Action. The Bank shall have received such documents evidencing
the Borrower's power to execute and deliver this Agreement, the Notes and the
Related Agreements as the Bank or its counsel shall reasonably request.
(c) The Notes, Related Agreements and Documents. The Borrower shall have
delivered to the Bank the Notes, this Agreement and the Related Agreements and
such other documents as the Bank may reasonably request.
4.2 Every Advance under the Line of Credit shall be subject to the
following conditions precedent that:
(a) No Event of Default. No Event of Default has occurred and is continuing
and no event has occurred or is continuing which, pursuant to the provisions of
Section 8, with the lapse of time and/or the giving of a notice as specified
therein, would constitute an Event of Default.
(b) No Material Adverse Change. There has been no material adverse change
in the assets, liabilities, financial condition or business of the Borrower or
any Guarantor since the date of any financial statements delivered to the Bank
before or after the date of this Agreement.
(c) Representations and Warranties. That the representations and warranties
contained in Sections 3.1 through 3.16 are true and correct, and that the
Borrower shall have so certified to the Bank. Any request for a borrowing shall
be deemed a certification by the Borrower as to the truth and accuracy of the
representations and warranties contained in Sections 3.1 through 3.16 as of the
date of such request.
Section 5. Affirmative Covenants
The Borrower covenants and agrees that from the date hereof until payment
in full of the Notes, the performance of all Borrower's obligations hereunder
and under any Related Agreement is complete and the termination of this
Agreement, unless the Bank otherwise consents in writing, the Borrower shall:
5.1 Financial Statements; Notice of Default. Deliver to the Bank (a)within
forty-five (45) days after close of each of the quarters of each fiscal year of
the Borrower, consolidated and consolidating financial statements that are
internally prepared, consisting of a balance sheet and statement of income and
retained earnings and cash flows for that portion of the fiscal year to date
then ended, which statements shall be prepared in accordance with GAAP
consistently applied; (b) within ninety (90) days after the close of each fiscal
year of the Borrower, consolidated and consolidating financial statements
including a balance sheet as of the close of such year and statements of income
and retained earnings and cash flows for the year then ended, prepared in
conformity with GAAP and audited by a firm of independent certified public
accountants selected by the Borrower and acceptable to the Bank, such financial
statements shall be accompanied by an opinion of the auditor which (i) shall not
disclaim the auditor's obligation to address the Year 2000 Risk as it relates to
the Borrower's liabilities or contingent liabilities and (ii) shall not be
qualified due to the Borrower's possible failure to take all appropriate steps
to successfully address the Year 2000 Risk; (c) within ninety (90) days after
the close of each fiscal year, a copy of the Borrower's annual report on Form
10-k as filed with the Securities and Exchange Commission together with all
schedules, exhibits and attachments thereto; (d) promptly upon the Bank's
written request, such other information about the financial condition, business
and operations of the Borrower or any Guarantor, as the Bank may, from time to
time, reasonably request; (e) promptly upon becoming aware of any occurrence
that but for the giving of notice or the passage of time, would constitute an
Event of Default, notice thereof in writing; and (f) as of the date of this
Agreement and thereafter as of the first Business Day of each calendar month, a
Borrowing Base Certificate. Together with any and all financial statements to be
delivered to the Bank pursuant to Section 5.1, the Borrower shall submit a
certificate of compliance by the president or chief financial officer of the
Borrower, certifying that the Borrower is in compliance with all affirmative and
negative covenants of this Agreement.
The Borrower shall also deliver to the Bank, promptly upon receipt thereof,
any management audit letter issued to the Borrower by its firm of certified
public accountants.
5.2 Insurance. (a) Keep its properties insured against fire and other
hazards (so called "All Risk" coverage) in amounts and with companies reasonably
satisfactory to the Bank to the same extent and covering such risks as is
customary in the same or a similar business, (b) maintain public liability
coverage against claims for personal injuries or death, and (c) maintain all
worker's compensation, employment or similar insurance as may be required by
applicable law. Such policies of insurance shall contain an endorsement, in form
and substance satisfactory to Bank, showing loss payable to Bank. Such
endorsement or an independent instrument furnished to Bank, shall provide that
the insurance companies will give Bank at least thirty (30) days prior written
notice before any such policy or policies of insurance shall be altered or
canceled and that no act, default or misrepresentation of Borrower or any other
person shall affect the right of Bank to recover under such policy or policies
of insurance in case of loss or damage. Borrower hereby directs all insurers
under such policies of insurance to pay all proceeds payable thereunder directly
to Bank. Borrower agrees to deliver certificates and evidence of insurance to
the Bank upon request.
5.3 Compliance with Laws; Payment of Taxes and Other Liens. Comply in all
respects with all federal, state, county and municipal laws, rules, ordinances
and regulations applicable to Borrower, Borrower's business or property,
including without limitation, those pertaining to or concerning the employment
of labor, employee benefits, public health, safety and the environment. The
Borrower shall pay all taxes, assessments, governmental charges or levies, or
claims for labor, supplies, rent and other obligations made against Borrower or
Borrower's property which, if unpaid, might become a lien or charge against the
Borrower or Borrower's property, except liabilities being contested in good
faith and against which, if requested by the Bank, the Borrower shall maintain
reasonable reserves.
5.4 Chief Executive Office and Places of Business. Keep its chief executive
office, principal places of business and locations of assets at the locations
set forth in this Agreement and maintain its principal places of business, its
chief executive office and locations of assets at said locations or, in the
event that the Borrower changes any of such locations or adds any new locations,
Borrower shall promptly give Bank written notice of any change in any of such
addresses or such new locations. All business records of the Borrower, including
those pertaining to all accounts and contract rights, shall be kept at the said
chief executive office of the Borrower unless prior written notice is given to
the Bank with respect to a change of location.
5.5 Inspection. Allow the Bank by or through any of its officers, agents,
attorneys, or accountants designated by it, for the purpose of ascertaining
whether or not the provisions hereof and of any Related Agreement, instrument or
document is being performed and for the purpose of examining the assets of the
Borrower and the records relating thereto, to enter the offices, and plants of
the Borrower to examine or inspect any of the properties, books and records or
extracts therefrom and to discuss the affairs, finances and accounts thereof
with the Borrower with prior notification and consent; such consent not to be
unreasonably withheld, all at reasonable times and as often as the Bank may
reasonably request.
5.6 Litigation. Promptly advise the Bank of the commencement of litigation,
including arbitration proceedings and any proceedings before any governmental
agency, which might have a material adverse effect upon the assets, liabilities,
financial condition or business of the Borrower, or where the amount involved is
$100,000.00 or more.
5.7 Notices of Environmental and Labor Actions and Claims. Promptly notify
the Bank in writing of (a) any enforcement, clean-up, removal or other action
instituted by any federal, state, county or municipal authority or agency
pursuant to any public health, safety or environmental laws, rules, ordinances
and regulations, (b) any and all claims made by any third party against Borrower
or any real property owned or operated by either relating to the existence of,
or damage, loss or injury from any toxic substances or hazardous wastes or any
other conditions constituting actual or potential violations of such laws,
rules, ordinances or regulations and (c) any enforcement or compliance action,
instituted or claim made by any federal or state authority relating to the
employment of labor or employee benefits.
5.8 Maintenance of Existence. Continue to conduct its business as presently
conducted, maintain its existence and maintain its properties in good repair,
working order and operating condition. The Borrower shall promptly notify the
Bank of any event causing material loss or unusual depreciation in the value of
its business assets and the amount of same.
5.9 Performance. Comply with all terms and conditions of this Agreement,
the Related Agreements and the Notes and pay all debts of the Borrower before
the same shall become delinquent.
5.10 Covenant to Secure Equally and Ratably. Secure the Notes or cause the
Notes to be secured equally and ratably with any and all Indebtedness secured by
any lien or encumbrance created after the date hereof by the Borrower or any
Subsidiary upon any of its property or assets, whether owned or hereafter
acquired, other than liens or encumbrances permitted pursuant to Section 6.1
hereof.
5.11 Deposits. Maintain the Bank as its principal bank of deposit and
account.
5.12 Use of Proceeds.
(a) Advances Under the Line of Credit. The Borrower shall use the proceeds
of each Advance under the Line of Credit for general commercial purposes,
provided that no part of such proceeds will be used, in whole or in part, for
the purpose of (i) purchasing or carrying any "margin stock" as such term is
defined in Regulation U of the Board of Governors of the Federal Reserve System,
or (ii) acquiring all or substantially all of the assets or stock of, or
otherwise investing in, any person, firm or corporation;
(b) Advances under the Term Loan. The Borrower shall use the proceeds of
the Term Loan to pay down existing indebtedness owing to the Bank.
5.13 Victorinox Contract. The Borrower shall maintain in full force and
effect the exclusive distribution agreement with Victorinox Cutlery Company,
dated December 12, 1983, as amended and modified from time to time (the
"Victorinox Cutlery Contract"). The Borrower will not modify or amend the
Victorinox Cutlery Contract so as to disturb its status as the exclusive
distributor thereunder without the prior express written consent of the Bank.
Section 6. Negative Covenants
The Borrower covenants and agrees that until payment is made in full of the
Notes, the performance of all Borrower's obligations hereunder and under any
Related Agreement is complete and the termination of this Agreement, unless the
Bank otherwise consents in writing which consent shall not be unreasonably
withheld, the Borrower shall not:
6.1 Encumbrances. Incur or permit to exist any lien, mortgage, security
interest, pledge, charge or other encumbrance against any of its property or
assets (including, without limitation, the Victorinox Cutlery Contract), whether
now owned or hereafter acquired (including, without limitation, any lien or
encumbrance relating to any response, removal or clean-up of any toxic
substances or hazardous wastes), except: (a) pledges or deposits in connection
with or to secure workers' compensation and unemployment insurance; (b) tax
liens which are being contested in good faith and in compliance with Section 5.3
hereof; (c)liens, mortgages, security interests, pledges, charges or other
encumbrances in favor of the Bank or specifically permitted, in writing, by the
Bank; and (d) purchase money security interests provided such purchase money
security interest does not attach to any property other than the property being
acquired with the proceeds of purchase money security interest indebtedness
permitted under Section 6.2 hereof.
6.2 Limitation on Indebtedness. Create or incur any Indebtedness for
borrowed money, become liable, either actually or contingently, in respect of
letters of credit or banker's acceptances or issue or sell any obligations of
the Borrower, excluding, however, from the operation of this covenant: (a) the
Line of Credit and the Term Loan hereunder and all other Indebtedness of the
Borrower to the Bank; (b) Indebtedness subordinated in payment and priority to
all Indebtedness of the Borrower to the Bank in writing and in form and
substance reasonably satisfactory to the Bank; (c) trade debt incurred in the
ordinary course of business; (d) Indebtedness secured by a purchase money
security interest, provided such Indebtedness does not exceed the lesser of
(i) the purchase price or (ii) the value of the property acquired with the
proceeds thereof; (e) obligations in connection with performance bonds which the
Borrower is required to provide in the ordinary course of its business; and (f)
Indebtedness to financial institutions under or pursuant to foreign currency
exchange facilities.
6.3 Disposition of Assets. Sell, lease, pledge, transfer or otherwise
dispose of all or any of its assets whether now owned or hereafter acquired
except for liens or encumbrances required or permitted hereby or by any Related
Agreement, except (a) sales of inventory in the ordinary course of business; (b)
sales of machinery, equipment and inventory which has become obsolete and is no
longer used or useful; (c) sales of machinery or equipment in the ordinary
course of business if such machinery and equipment is replaced with other
similar equipment or machinery; (d) sales of any assets not described in (a),
(b), or (c) above, having an aggregate value not in the excess of $100,000 in
any year calculated on a consolidated basis; and (e) a lien on the currency or
contracts which are the subject of any foreign exchange transaction.
6.4 Contingent Liabilities. Without prior notice to the Bank (Bank consent
not required) assume, guarantee, endorse or otherwise become liable upon the
obligations of any Person except by the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business.
6.5 Consolidation or Merger. Merge or consolidate with, or acquire all or
substantially all of the assets of, or make any investment in the securities of,
any other Person or other entity, except that (a) the Borrower may merge or
consolidate with one or more of its Subsidiaries, provided that the Borrower is
the surviving corporation, or, if it is not the surviving corporation, the
surviving corporation assumes all of the Borrower's liabilities hereunder and
under the Notes and the Security Agreement; (b) the Borrower's Subsidiaries may
merge or consolidate with one another so long as the surviving corporation is a
Guarantor hereunder; and (c) Borrower may issue shares of its stock, without
dollar limitation.
6.6 Loans, Advances, Investments. Purchase or otherwise acquire any shares
of stock or obligations of, or make loans or advances to, or investments in, any
Person; provided, however: (1) the Borrower or any Subsidiary may extend credit
to any customer of the Borrower or such Subsidiary who is also a stockholder of
the Borrower or such Subsidiary, provided such extension of credit meets the
standards set forth in Section 6.8 below; and (2) the Borrower and any
Subsidiary may make loans or advances to any other Person, provided that the
aggregate amount of all such loans or advances outstanding at any time does not
exceed $150,000.
6.7 Dividends. Declare or pay dividends or make any distributions of its
property or assets upon any of its stock or make any loans, advances, or
extension of credit to any of its stockholders unless no Event of Default, or
any event or condition which with the passage of time, the giving of notice or
both would constitute an Event of Default, is existing hereunder at the time of
or immediately following such transaction; provided, however, that,
notwithstanding this Section, any Subsidiaries of the Borrower may declare or
pay dividends or make distributions of its property or assets upon any of its
stock to the Borrower or make loans, advances or extensions of credit to the
Borrower.
6.8 Transactions with Subsidiaries and Affiliates. Enter into, or be a
party to, any transaction with any Subsidiary or Affiliate (including, without
limitation, transactions involving the purchase, sale or exchange of property,
the rendering of services or the sale of stock) except in the ordinary course of
business pursuant to the reasonable requirements of the Borrower and upon fair
and reasonable terms no less favorable to the Borrower than Borrower would
obtain in a comparable arm's-length transaction with a person other than a
Subsidiary or an Affiliate.
6.9 Change of Name or Location. Without at least 30 days prior notice to
the Bank, change its name or conduct its business under any trade name or style
other than as herein above set forth or change its chief executive office,
places of business or the present locations of its assets or records relating
thereto from those addresses set forth on page 1 of this Agreement.
6.10 Subsidiaries, Affiliates. Acquire, form or dispose of any Subsidiary
or Affiliate or acquire all or substantially all or any portion of the stock or
assets of any other person, firm or corporation.
6.11 Management, Capital Structure, Accounting Methods. Make or consent to
a change in the ownership or capital structure of the Borrower, or make a change
in the executive management of the Borrower or in the manner in which the
business of the Borrower is conducted or in its method of accounting.
6.12 Use of Property. Allow any business or activity to be conducted on
real property owned or occupied by the Borrower that uses, manufacturers,
treats, stores or disposes of any toxic substances or hazardous wastes which are
prohibited or regulated under any public health, safety or environmental law,
rule, ordinance or regulation or contrary to the provisions of any insurance
policy.
6.13 Grant of Negative Pledge. Enter into any agreement with any Person
(other than the Bank) in which the Borrower agrees not to create or suffer to
exist any liens or encumbrances of any kind on any property of the Borrower,
except that the Borrower may enter into such an agreement with respect to assets
which are subject to liens permitted under Section 6.1.
6.14 Acquisition of Stock of Borrower. Purchase, acquire, redeem or retire,
or make any commitment to purchase, acquire, redeem or retire any of the capital
stock of the Borrower, whether now or hereafter outstanding.
6.15 Transactions with Victorinox Cutlery Company. Make any distributions
of its assets or any loans, advances or extensions of credit to Victorinox
Cutlery Company, except in the ordinary course of business as reasonable payment
for goods or services actually received.
Section 7. Financial Covenants
The Borrower covenants and agrees that until payment is made in full of the
Notes, the performance of Borrower's obligations hereunder and under any Related
Agreement is complete and the termination of this Agreement, unless the Bank
otherwise consents in writing:
7.1 Calculation of Financial Covenants. The calculation of the financial
covenants set forth in this Section 7 shall be measured against the Borrower's
financial statements required to be delivered to the Bank pursuant to Section
3.1 of this Agreement on a consolidated basis unless otherwise noted.
All financial covenants set forth below are to be tested quarterly.
7.2 Funded Debt to EBITDA Ratio. On a rolling four quarter basis, Borrower
shall not permit its ratio of Funded Debt to EBITDA to be greater than:
3.7 to 1.0 through December 30, 1999;
2.25 to 1.0 as of December 31, 1999 and thereafter.
7.3 Current Ratio. Borrower shall not permit its Current Ratio to be less
than:
2.0 to 1.0 through March 30, 2001;
2.5 to 1.0 as of March 31, 2001 and thereafter.
7.4 EBITDA to Interest Expenses plus CMLTD Ratio. On a rolling four quarter
basis, Borrower shall not permit its ratio of EBITDA to Interest Expense plus
CMLTD to be less than 3.0 to 1.0.
7.5 Tangible Net Worth: Borrower shall not permit Tangible Net Worth to be
less than:
$64,000,000 through December 30, 1999
$66,000,000 as of December 31, 1999 through
September 29, 2000;
$66,500,000 as of September 30, 2000 through
December 30, 2000; and
$68,000,000 as of December 31, 2000 and thereafter.
Section 8. Events of Default
If any one or more of the following "Events of Default" shall occur and be
continuing:
8.1 Failure to make due payment of the principal of the Notes, or in the
payment of interest on the Notes or in the payment of any other liability owing
by the Borrower to the Bank within 10 days of the due date, now existing or
hereinafter incurred, whether direct or contingent; or
8.2 Failure by the Borrower to observe or perform any covenant contained in
Sections 5, 6 or 7 hereof; or
8.3 Failure by the Borrower to perform any act, duty, obligation or other
agreement contained herein and not otherwise constituting an Event of Default
hereunder, or failure by the Borrower to perform any of its obligations under
any Related Agreement, which shall occur and continue without correction for
thirty (30) days following the Bank giving the Borrower notice thereof; or
8.4 Any representation or warranty made by the Borrower herein or in any
Related Agreement, or any statement, certificate or other data furnished by the
Borrower in connection herewith or with any Related Agreement, proves to have
been incorrect when made in any material respect; or
8.5 A judgment or judgments for the payment of money shall be rendered
against the Borrower, and any such judgment shall remain unsatisfied and in
effect for any period of thirty (30) consecutive days without a stay of
execution; or
8.6 Any levy, seizure, attachment, execution or similar process shall be
issued or levied on any of the Borrower's property in excess of $100,000 and
Borrower shall not in good faith be contesting such situation; or
8.7 The Borrower shall (a) apply for or consent to the appointment of a
receiver, conservator, trustee or liquidator of all or a substantial part of any
of its assets; (b) be unable, or admit in writing its inability, to pay its
debts as they mature; (c) file or permit the filing of any petition, case,
arrangement, reorganization, or the like under any insolvency or bankruptcy law,
or the adjudication of it as a bankrupt, or the making of an assignment for the
benefit of creditors or the consenting to any form of arrangement for the
satisfaction settlement or delay of debt or the appointment of a receiver for
all or any part of its properties; or (d) take any action for the purpose of
effecting any of the foregoing; or
8.8 An order, judgment or decree shall be entered, or a case shall be
commenced, against the Borrower, without the application, approval or consent of
the Borrower by or in any court of competent jurisdiction, approving a petition
or permitting the commencement of a case seeking reorganization or liquidation
of the Borrower or appointing a receiver, trustee, conservator or liquidator of
the Borrower or of all or a substantial part of its assets and Borrower, by any
act, indicates its approval thereof, consent thereto, or acquiescence therein,
or such order, judgment, decree or case shall continue unstayed and in effect
for any period of one hundred twenty (120) consecutive days; or
8.9 The Borrower shall dissolve or liquidate, or be dissolved or
liquidated, or cease to legally exist; or
8.10 Intentionally Omitted;
8.11 Failure by the Borrower to pay any other Indebtedness in an amount in
excess of $250,000, whether contingent or otherwise upon maturity or the
acceleration thereof; unless such other Indebtedness is subject to a bona fide
dispute and the Borrower maintains on its books an adequate reserve with respect
to such Indebtedness; or
8.12 Any material adverse change in the assets, liabilities, financial
condition or business of the Borrower has occurred since the date of any
financial statements delivered to the Bank before or after the date of this
Agreement which condition shall remain in effect for thirty (30) days after
notice and an opportunity to cure;
then, and in such event, the Bank may declare the then outstanding
principal balance and all interest accrued on the Notes and all applicable late
charges and surcharges and all other liabilities and obligations of the Borrower
to the Bank to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, the availability of the Line of Credit shall be
deemed to be automatically terminated, Borrower's right to select pricing
options for Advances shall terminate, and the Bank may exercise its rights and
remedies under this Agreement and the Related Agreements; all of the foregoing
without presentment or demand for payment, notice of non-payment, protest or any
other notice or demand of any kind, all of which are expressly waived by the
Borrower and each Guarantor.
Section 9. Intentionally Omitted
Section 10. Miscellaneous
10.1 Waivers.
(a) Borrower hereby waives presentment, demand, notice, protest, notice of
acceptance of this Agreement, notices of advances made, credit extended,
collateral received or delivered or other action taken in reliance hereon and
all other demands and notices of any description. With respect to this
Agreement, the Related Agreements, the Notes and any collateral now or hereafter
securing the Notes, Borrower assents to any extension or postponement of the
time of payment or any other indulgence, to any substitution, to the addition or
release of any party or person primarily or secondarily liable, to the
acceptance of partial payments thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Bank may deem advisable. The Bank shall not be deemed to have waived any of its
rights upon or under any document or agreement relating to the liabilities of
the Borrower, unless such waiver be in writing and signed by the Bank. No delay
or omission on the part of the Bank in exercising any right shall operate as a
waiver of such right or any other right. A waiver on any one occasion shall not
be construed as a bar to or waiver of any right on any future occasion. The Bank
may revoke any permission or waiver previously granted to Borrower such
revocation shall be effective whether given orally or in writing. All rights and
remedies of the Bank with respect to this Agreement, the Related Agreements or
the Notes whether evidenced hereby or by any other instrument or document, shall
be cumulative and may be exercised singularly or concurrently.
(b) BORROWER AND BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED
HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE NOTES
OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH
OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT
FOR BANK TO ACCEPT THE NOTES AND MAKE THE LOANS DESCRIBED HEREIN.
(c) BORROWER (i) ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS AGREEMENT
IS A PART IS A COMMERCIAL TRANSACTION AND (ii) TO THE EXTENT PERMITTED BY ANY
STATE OR FEDERAL LAW, WAIVES ANY RIGHT IT MAY HAVE TO PRIOR NOTICE OF AND A
HEARING AND THE POSTING OF A BOND ON THE RIGHT OF ANY HOLDER OF THE NOTES TO ANY
REMEDY OR COMBINATION OF REMEDIES THAT ENABLES SAID HOLDER BY WAY OF ATTACHMENT,
FOREIGN ATTACHMENT, GARNISHMENT OR REPLEVIN, TO DEPRIVE BORROWER OR ANY
GUARANTOR OF ANY OF THEIR PROPERTY, AT ANY TIME, PRIOR TO FINAL JUDGMENT IN ANY
LITIGATION INSTITUTED IN CONNECTION WITH THIS AGREEMENT.
[The Remainder of this Page is Intentionally Left Blank]
10.2 Notices. All notices, consents, waivers and other communications
required or permitted by this Agreement shall be in writing and shall be deemed
given to a party when (a) delivered to the appropriate address by hand or by
nationally recognized overnight courier service (costs prepaid), (b) sent by
facsimile with confirmation of transmission by the transmitting equipment; or
(c) received or rejected by the addressee, if sent by certified mail, return
receipt requested, in each case to the following addresses, or facsimile numbers
and marked to the attention of the person (by name or title) designated below
(or to such other address, facsimile number, or person as a party may designated
by notice to the other parties:
If to the Bank:
FLEET NATIONAL BANK
157 Church Street
New Haven, Connecticut 06510
Facsimile No. (203) 821.7311
Attention: Kevin Burke, Vice President
with a copy to:
TYLER COOPER & ALCORN, LLP
205 Church Street
P.O. Box 1936
New Haven, Connecticut 06510
Facsimile No. (203) 789.2133
Attention: Joseph C. Lee, Esq.
If to the Borrower:
SWISS ARMY BRANDS, INC.
One Research Drive
Shelton, Connecticut 06484
Facsimile No. (203) 925.2933
Attention: Thomas M. Lupinski, Chief Financial Officer
with a copy to:
MORRISON & FOERSTER LLP
1290 Avenue of the Americas
New York, New York 10104-0050
Facsimile No. (212) 468.7900
Attention: Charles B. Friedman, Esq.
10.3 Expenses; Additional Documents. The Borrower will pay all taxes levied
or assessed upon the principal sum of the Advances made against the Bank and all
reasonable expenses arising out of the preparation, administration, amendment,
waiver, modification, protection, collection and/or other enforcement of this
Agreement, the Related Agreements, and the Notes. The Borrower will, from time
to time, at its expense, execute and deliver to the Bank all such other and
further instruments and documents as the Bank shall reasonably request.
10.4 Lien, Security Interest and Set Off. Borrower hereby grants to Bank, a
lien, security interest and right of setoff as security for all liabilities and
obligations to Bank, whether now existing or hereafter arising, upon and against
all deposits and credits, now or hereafter in the possession, custody,
safekeeping or control of Bank or in transit to the Bank. At any time, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of Borrower even though unmatured.
10.5 Indemnification. The Borrower agrees to defend, indemnify and hold
harmless the Bank and any participants, successors or assigns of the Bank and
the officers, directors, employees and agents of each of them from and against
any and all losses, claims, liabilities, asserted liabilities, reasonable costs
and expenses, including, without limitation, reasonable costs of litigation and
reasonable attorneys' fees (both the allocated costs of internal counsel and
outside counsel) incurred in connection with any and all claims or proceedings
for bodily injury, property damage, abatement or remediation, environmental
damage or impairment or any other injury or damage (including all foreseeable
damage) or any diminution in value of any real property resulting from or
relating, directly or indirectly, to (a) a release into the environment of any
toxic substances or hazardous wastes (a "Release") a threatened Release, the
existence or removal of any toxic substances or hazardous wastes on, into, from,
through or under any real property owned or operated by the Borrower or any
Guarantor (whether or not such Release caused by Borrower, or Borrower
Affiliate, tenant, subtenant, prior owner or prior tenant or any other Person
and whether or not the alleged liability is attributable to the handling,
storage, generation, transportation or disposal of toxic substances or hazardous
wastes or the mere presence of such toxic substances or hazardous wastes) or (b)
the breach or alleged breach by Borrower of any federal, state or local law or
regulation concerning public health, safety or the environment with respect to
any real property owned or operated by the Borrower and/or any business
conducted thereon.
10.6 Stamp Tax. The Borrower will pay any stamp or other tax which becomes
payable in respect of the Notes, this Agreement or the Related Agreements.
10.7 Schedules. Schedule A and Schedule B, which are attached hereto, are
and shall constitute a part of this Agreement.
10.8 Connecticut Law; Jurisdiction of Connecticut Courts. This Agreement,
the Related Agreements and the rights and obligations of the parties hereunder
and thereunder shall be construed and interpreted in accordance with the laws of
Connecticut. The Borrower and each Guarantor agree that the execution of this
Agreement and Related Agreements and the performance of the Borrower's
obligations hereunder and thereunder shall be deemed to have a Connecticut situs
and the Borrower shall be subject to the personal jurisdiction of the courts of
the State of Connecticut with respect to any action the Bank or its successors
or assigns may commence hereunder or thereunder. Accordingly, the Borrower
hereby specifically and irrevocably consents to the jurisdiction of the courts
of the State of Connecticut with respect to all matters concerning this
Agreement, the Related Agreements, the Notes, or the enforcement of any of the
foregoing.
10.9 Survival of Representations. All representations, warranties,
covenants and agreements herein contained or made in writing in connection with
this Agreement shall survive the execution and delivery of the Notes, shall
continue in full force and effect until all amounts payable on account of the
Notes, the Related Agreements and this Agreement shall have been paid in full
and this Agreement has been terminated.
10.10 Severability. If any provision of this Agreement shall to any extent
be held invalid or unenforceable, then only such provision shall be deemed
ineffective and the remainder of this Agreement shall not be affected.
10.11 Integration; Modifications. This Agreement is intended by the parties
as the final, complete and exclusive statement of the transactions evidenced by
this Agreement. No modification or amendment hereof shall be effective unless
the same shall be in writing and signed by the parties hereto.
10.12 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the Borrower, the Bank and their respective
successors and assigns.
10.13 Pledge by Bank to Federal Reserve. Bank may at any time pledge all or
any portion of its rights under this Agreement or the Notes including any
portion of the Notes to any of the twelve (12) Federal Reserve Banks organized
under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such
pledge or enforcement thereof shall release Bank from its obligations under this
Agreement or any of the Related Agreements.
10.14 Lost, Stolen, Destroyed or Mutilated Documents. Upon receipt of an
affidavit of an officer of Bank as to the loss, theft, destruction or mutilation
of the Notes or any other security document which is not of public record, and,
in the case of any such loss, theft, destruction or mutilation, upon surrender
and cancellation of such Notes or other security document, Borrower will issue,
in lieu thereof, a replacement Notes or other security document in the same
principal amount thereof and otherwise of like tenor.
10.15 Assignment of Bank's Interest. Bank shall have the unrestricted right
at any time or from time to time, and without Borrower's or any Guarantor's
consent, to assign all or any portion of its rights and obligations hereunder to
one or more banks or other financial institutions (each, an "Assignee"), and
Borrower and each Guarantor agrees that it shall execute, or cause to be
executed, such documents, including without limitation, amendments to this
Agreement and to any other documents, instruments and agreements executed in
connection herewith as Bank shall deem necessary to effect the foregoing. In
addition, at the request of Bank and any such Assignee, Borrower shall issue one
or more new promissory notes, as applicable, to any such Assignee, and, if Bank
has retained any of its rights and obligations hereunder following such
assignment, to Bank, which new promissory notes shall be issued in replacement
of, but not in discharge of, the liability evidenced by the promissory note held
by Bank prior to such assignment and shall reflect the amount of the respective
commitments and loans held by such Assignee and Bank after giving effect to such
assignment. Upon the execution and delivery of appropriate assignment
documentation, amendments and any other documentation required by Bank in
connection with such assignment, and the payment by Assignee of the purchase
price agreed to by Bank, and such Assignees, such Assignee shall be a party to
this Agreement and shall have all of the rights and obligations of Bank
hereunder (and under any and all other guaranties, documents, instruments and
agreements executed in connection herewith) to the extent that such rights and
obligations have been assigned by Bank pursuant to the assignment documentation
between Bank and such Assignee, and Bank shall be released from its obligations
hereunder and thereunder to a corresponding extent.
10.16 Participations. Bank shall have the unrestricted right at any time
and from time to time, and without the consent of or notice to Borrower or any
Guarantor to grant to one or more banks or other financial institutions (each a
"Participant") participating interest in Bank's obligation to lend hereunder
and/or any or all of the loans held by Bank hereunder. In the event of any such
grant by Bank of a participating interest to a Participant, whether or not upon
notice to Borrower, Bank shall remain responsible for the performance of its
obligations hereunder and Borrower shall continue to deal solely and directly
with Bank in connection with Bank's rights and obligations hereunder.
Bank may furnish any information concerning Borrower in its possession from
time to time to prospective Assignees and Participants, provided that Bank shall
require any such prospective Assignee or Participant to agree in writing to
maintain the confidentiality of such information.
IN WITNESS WHEREOF, the parties hereto have caused this Commercial Loan
Agreement to be duly executed as a sealed instrument as of the day and year
first above written.
SWISS ARMY BRANDS, INC.
Witness:
By /S/ Thomas M. Lupinski
Its Senior Vice President, CFO
FLEET NATIONAL BANK
Witness:
By K.E.Burke
Its
SCHEDULE A
Annexed to and made a part of the 1999 Amended and Restated Commercial Loan
Agreement (the "Loan Agreement") dated as of November ___, 1999 between FLEET
NATIONAL BANK (defined in the Loan Agreement as the "Bank") and SWISS ARMY
BRANDS, INC. (defined in the Loan Agreement as the "Borrower").
Description of Financial Statements (See Section 3.3 of Agreement):
Liabilities Not Disclosed in Financial Statements (Section 3.3 of Agreement):
Litigation, Pending or Threatened (See Section 3.6 of Agreement):
See addendum to Schedule A.
Subsidiaries, Affiliates and Trade Names-list name and state of organization of
each Subsidiary and Affiliate (See Section 3.7 of Agreement) and percentage
ownership if less than 100% and list each Trade Name used by Borrower (See
Section 3.13 of Agreement):
Encumbrances Not Otherwise Disclosed (See Section 3.11 of Agreement):
Places of Business (See Section 3.13 of Agreement):
Chief Executive Office and location of material assets.
Related Agreements (See Section 1 of Agreement, Definitions):
1999 Substituted Revolving Commercial Promissory Note
1999 Commercial Promissory Term Note
1999 Substituted Security Agreement
Negative Pledge Agreement
1999 Substituted Agreement of Guaranty and Suretyship
Agreement of Guaranty and Suretyship
Commercial Transaction Waiver
Borrowing Resolution
ISDA Master Agreement and Schedules
Schedule B - Pricing Grid
Exhibit 1 - Borrowing Base Certificate
Exhibit 2 - Revolving Note
Exhibit 3 - Term Note
Exhibit 21
List of Subsidiaries of Swiss Army Brands, Inc.
Excelsior Advertising
Forcan, Inc.
Swiss Army Brands (Suisse) AG
Swiss Army Brands, Ltd.
Swiss Army, Inc.
Victorinox Watch Importing Corporation
Forschner Watch Repair, Inc.
Bear Cutlery, Inc.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we herby consent to the incorpation of our
report dated February 18, 2000, included in Swiss Army Brands, Inc.'s Form 10-K
for the year ended December 31, 1999, into the previously filed registration
statments.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000731947
<NAME> Swiss Army Brands, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
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0
0
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</TABLE>
