<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X
______ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File Number: 0-19848
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FOSSIL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2018505
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2280 N. GREENVILLE AVE., DALLAS, TEXAS 75082
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (214) 234-2525
--------------
Indicate by check mark whether registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares of Registrant's common stock, outstanding as of
August 13, 1996: 13,189,692
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,901,693 $ 5,980,535
Accounts receivable - net 30,071,478 24,932,467
Inventories 45,601,956 42,515,468
Deferred income tax benefits 3,233,611 3,290,419
Prepaid expenses and other current assets 1,695,240 1,428,273
------------ ------------
Total current assets 88,503,978 78,147,162
Property, plant and equipment - net 16,614,797 15,464,559
Intangible and other assets 3,831,083 3,381,806
------------ ------------
$108,949,858 $ 96,993,527
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 16,664,141 $ 7,173,036
Accounts payable 6,778,945 5,173,792
Accrued expenses:
Co-op advertising 5,750,383 6,181,063
Compensation 2,423,138 2,711,800
Other 3,959,825 4,835,474
Income taxes payable 703,893 2,820,890
------------ ------------
Total current liabilities 36,280,325 28,896,055
Long-term debt 4,450,000 4,811,298
Minority interests in subsidiaries 2,270,635 2,016,716
Stockholders' equity:
Common stock, shares issued and outstanding,
13,189,692 and 13,182,333, respectively 131,897 131,823
Additional paid-in capital 22,293,576 22,219,692
Retained earnings 43,648,468 38,723,962
Cumulative translation adjustment (125,043) 193,981
------------ ------------
Total stockholders' equity 65,948,898 61,269,458
------------ ------------
$108,949,858 $ 96,993,527
------------ ------------
------------ ------------
See notes to condensed consolidated financial statements.
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<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
June 30, June 30,
------- -------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 45,238,236 $ 43,340,380 $ 88,147,304 $ 78,837,205
Cost of sales 22,775,805 23,368,656 46,649,086 42,191,019
------------ ------------ ------------ ------------
Gross Profit 22,462,431 19,971,724 41,498,218 36,646,186
Operating expenses:
Selling and distribution 12,241,841 10,062,554 21,736,990 17,936,204
General and administration 5,619,881 4,745,906 10,911,728 9,192,537
------------ ------------ ------------ ------------
Total operating expenses 17,861,722 14,808,460 32,648,718 27,128,741
Operating income 4,600,709 5,163,264 8,849,500 9,517,445
Interest expense (264,412) (259,827) (440,422) (501,412)
Other inc. (exp.) - net 128,245 12,941 (42,572) (172,120)
------------ ------------ ------------ ------------
Income before income taxes 4,464,542 4,916,378 8,366,506 8,843,913
Provision for income taxes 1,880,000 1,910,000 3,442,000 3,422,000
------------ ------------ ------------ ------------
Net income $ 2,584,542 $ 3,006,378 $4,924,506 $ 5,421,913
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share $ 0.19 $ 0.23 $0.37 $0.41
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common and 13,462,680 13,330,352 13,355,513 13,320,913
common equivalent shares ------------ ------------ ------------ ------------
outstanding ------------ ------------ ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------
1996 1995
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 4,924,506 $ 5,421,913
Noncash items affecting net income:
Minority interests in subsidiaries 251,625 471,447
Depreciation and amortization 1,473,399 1,215,050
Increase in allowance for
doubtful account 531,647 369,748
Decrease in allowance for returns -
net of related inventory in transit (1,239,963) (1,029,113)
Deferred income tax benefits 56,808 269,183
Cumulative translation adjustment (319,024) 191,420
Cash from (used for) changes in assets and liabilities:
Accounts receivable (1,872,572) 3,037,515
Inventories (3,187,390) (6,159,036)
Prepaid expenses and other current assets (147,610) (805,453)
Accounts payable 1,428,387 849,156
Accrued expenses (1,821,207) (1,126,182)
Income taxes payable (2,127,566) (94,949)
---------- ----------
Net cash (used in) from operations (2,048,960) 2,610,699
Investing Activities:
Net assets acquired in business combination,
net of cash received 805,891 -
Additions to property, plant and equipment (2,527,328) (4,098,143)
Decrease (increase) in intangible
and other assets (452,468) 197,838
---------- ----------
Net cash used in investing activites (2,173,905) (3,900,305)
Financing activities:
Issuance of common stock 73,958 134,094
Increase (decrease) in minority interests in subsidiaries 2,294 (26,631)
Increase in notes payable 6,067,771 3,317,757
---------- ----------
Net cash from financing activities 6,144,023 3,425,220
---------- ----------
Net increase in cash and cash equivalents 1,921,158 2,135,614
Cash and cash equivalents:
Beginning of period 5,980,535 2,316,822
---------- ----------
End of period $ 7,901,693 $ 4,452,436
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Fossil, Inc., a Delaware corporation, and its majority owned
subsidiaries (the "Company" or "Fossil"). The consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of June 30,
1996, and the results of operations for the three- and six-month periods ended
June 30, 1996 and 1995. All adjustments are of a normal, recurring nature.
These interim financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in Form 10-K filed
by the Company pursuant to the Securities Exchange Act of 1934 for the year
ended December 31, 1995. Operating results for the three- and six-month periods
ended June 30, 1996, are not necessarily indicative of the results to be
achieved for the full year.
BUSINESS. The Company designs, develops, markets and distributes fashion
watches and other accessories, principally under the "FOSSIL", "FSL" and "RELIC"
brand names. The Company's products are sold primarily through department
stores and other major retailers, both domestically and internationally.
2. INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
Components and parts $ 2,539,525 $ 1,929,100
Work-in-process 589,747 546,917
Finished merchandise on hand 35,780,519 33,462,443
Stores 3,400,117 1,750,008
Merchandise in transit from estimated
customers' returns 3,292,048 4,827,000
----------- -----------
$45,601,956 $42,515,468
----------- -----------
----------- -----------
The Company periodically enters into forward contracts principally to hedge the
expected payment of intercompany inventory transactions with its non-U.S.
subsidiaries. Currency exchange gains or losses resulting from the translation
of the related accounts, along with the offsetting gains or losses from the
hedge, are deferred until the inventory is sold or the forward contract is
completed. At June 30, 1996, the Company had hedge contracts to sell 11,000,000
deutsche marks (DM), expiring during 1996. The average exchange rate of the DM
contracts at maturity is $1 = DM 1.51.
-4-
<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
3. ACQUISITIONS
Effective April 1, 1996, the Company invested approximately $700,000 in
cash for an 81% partnership interest in Kabushiki Kaisha Fossil Japan, a
Japanese partnership ("Fossil Japan"). Fossil Japan is the sole distributor of
Fossil products within Japan and was previously 100% owned by a foreign-based
entity. The acquisition has been accounted for as a purchase, and in connection
therewith, the Company recorded goodwill of approximately $300,000.
4. DEBT
BANK. In April 1996, the Company amended its short-term revolving credit
facility ("Short-term Revolver") with its primary bank to additionally allow for
Japanese Yen currency borrowings ("Yen borrowings") not to exceed $5,000,000.
All outstanding Yen borrowings under the amended facility bear interest at the
bank's prime rate less 0.5% or the Euroyen base rate plus 1.00% (1.50% at June
30, 1996), at the option of the Company. In May 1996, the Company renewed its
Short-term Revolver through May 3, 1997. At the time of the renewal, the Company
increased the funds available under the facility to the lesser of $30,000,000 or
the result of a calculated borrowing base, determined principally on the
Company's cash flow, as defined within the loan agreement. The credit facility
is collateralized by substantially all the Company's assets and requires the
maintenance of specified levels of tangible net worth, working capital and
financial ratios. As of June 30, 1996 borrowings outstanding under the Short-
term Revolver were $12,465,000, of which approximately $2,962,000 related to Yen
borrowings.
-5-
<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three- and six-month periods ended June 30,
1996 and 1995. This discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and the related Notes attached hereto.
GENERAL
Fossil, established in 1984, began operations as a designer, developer, marketer
and distributor of fashion watches sold under the FOSSIL brand name. Since the
Company's initial success in designing and marketing its FOSSIL brand watches,
mainly through major department stores in the United States, the Company has
increased its market share of the fashion watch market, diversified its product
offerings and expanded its distribution channels. This has been accomplished by
diversification into other watch brand names, which often target different
distribution channels, expansion of the scope of the Company's product offerings
to include men's and women's small leather goods, belts, handbags, and
sunglasses, development and marketing of private label watch programs for
several internationally recognized companies and distribution of FOSSIL products
to a growing number of international markets.
Fossil's product sales into the international marketplace have increased
substantially over the past several years, from 8% of net sales in 1992 to 32%
in 1995. Contributing significantly to the increase were sales in Germany
generated through Fossil Europe GmbH ("Fossil GmbH") formed in 1993 and in Italy
through Fossil Italia, S.r.l. formed in 1994. During 1995, the Company also
commenced operations in France and the United Kingdom. The Company maintains an
88% equity interest in these European-based subsidiaries with the exception of
Fossil Italia, S.r.l., in which the Company holds a 53% equity investment. Each
of these subsidiaries is generally responsible for the sales and operations
within their respective countries with the exception of Fossil GmbH which also
acts as the Company's main marketing and distribution point in Europe. Fossil
also currently distributes its products to more than 50 additional countries
through licensed distributors.
The Company also maintains international operations through Fossil (East)
Limited ("Fossil East") which the Company acquired in 1992. Fossil East has
acted as the Company's trading, quality and production control agent in Hong
Kong since Fossil's origination. Since 1992, Fossil East has acquired equity
interests in several assembly facilities in the Far East, which for the year
1995, accounted for 37.5% of Fossil's watch purchases.
During April 1996, the Company acquired an 81% partnership interest in Kabushiki
Kaisha Fossil Japan, a Japanese partnership ("Fossil Japan"). Fossil Japan is
responsible for the sales, marketing and distribution of Fossil products within
Japan.
Since February 1995, the Company has opened twenty-three outlet stores in
certain prime outlet centers in the United States. The Company currently plans
to increase the number of outlet store locations to a total of twenty-six stores
in 1996. These outlet stores provide the Company a distribution channel through
which to sell discontinued products at higher gross profit margins than it
presently receives for the sale of such product through traditional discounters.
In June 1996, the Company opened two full price retail locations in certain
prime shopping malls in the United States. The Company believes these retail
locations provide both an advertising vehicle for the FOSSIL brand name and a
highly visible display of all the Company's current product offerings in one
area. In addition, both the retail and outlet stores provide the Company a site
to test possible new product offerings.
-6-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) the percentages
of the Company's net sales represented by certain line items from the Company's
condensed consolidated statements of income and (ii) the percentage changes in
these line items between the current period and the comparable period for the
prior year.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE
NET SALES CHANGE FROM NET SALES CHANGE FROM
--------- ----------- --------- -----------
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- --------
1996 1995 1996 1996 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 4.4 % 100.0% 100.0% 11.8 %
Cost of sales 50.3 53.9 (2.5) 52.9 53.5 10.6
----- ----- ----- -----
Gross profit margin 49.7 46.1 12.5 47.1 46.5 13.2
Selling and 27.1 23.2 21.7 24.6 22.7 21.2
distribution
expenses
General and
administrative 12.4 11.0 18.4 12.4 11.7 18.7
expenses ----- ----- ----- -----
Operating income 10.2 11.9 (10.9) 10.1 12.1 (7.0)
Interest expense (0.6) (0.6) 1.8 (0.5) (0.7) (12.2)
Other inc (exp) - net 0.3 (0.0) 891.0 (0.1) (0.2) (75.3)
----- ----- ----- -----
Income before 9.9 11.3 (9.2) 9.5 11.2 (5.4)
income taxes
Income taxes 4.2 4.4 (1.6) 3.9 4.3 0.6
----- ----- ----- -----
Net income 5.7% 6.9% (14.0)% 5.6% 6.9% (9.17)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
-7-
<PAGE>
NET SALES. The following table sets forth certain components of the Company's
consolidated net sales and the percentage relationship of the components to
consolidated net sales for the periods indicated (in millions, except percentage
data):
<TABLE>
<CAPTION>
AMOUNTS % OF TOTAL AMOUNTS % OF TOTAL
------- ----------- ------- -----------
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- --------
1996 1995 1996 1995 1996 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International:
Europe $ 10.9 $ 10.0 24% 23% $ 22.4 $ 17.9 25% 23%
Other 3.3 4.4 7 10 7.4 7.2 8 9
------ ------ --- --- ------ ------ --- ---
Total International 14.2 14.4 31 33 29.8 25.1 33 32
------ ------ --- --- ------ ------ --- ---
Domestic:
Watch products 18.5 21.5 41 50 35.1 40.9 40 52
Other products 9.9 6.2 22 14 19.1 11.5 22 15
------ ------ --- --- ------ ------ --- ---
Total 28.4 27.7 63 64 54.2 52.4 62 67
Outlet Stores 2.6 1.2 6 3 4.1 1.3 5 1
------ ------ --- --- ------ ------ --- ---
Total Domestic 31.0 28.9 69 67 58.3 53.7 67 68
------ ------ --- --- ------ ------ --- ---
Total Net Sales $ 45.2 $ 43.3 100% 100% $ 88.1 $ 78.8 100% 100%
------ ------ --- --- ------ ------ --- ---
------ ------ --- --- ------ ------ --- ---
</TABLE>
Net sales increased 4.4% and 11.8% for the three- and six-month periods,
respectively, over the comparable periods of the prior year. Sales volume
increases during the most recent quarter were principally derived from FOSSIL
Leather and Sunglass product lines and from the opening of an additional twelve
FOSSIL outlet and two FOSSIL retail stores after June 1995. Although Fossil's
European-based operations were the largest contributors to sales volume
increases for the six-month period ended June 30, 1996, their net sales
increases for the 1996 second quarter amounted to 9% as compared to 46% in the
first quarter of the current year. International net sales in total were down
1.4% and up 18.7% for the three- and six-month periods ended June 30, 1996,
respectively , as compared to the comparable periods in 1995. A decrease in
domestic sales of FOSSIL branded and Licensed watches in the first half of 1996
from their sales totals during the comparable period in 1995, also negatively
impacted the sales volume growth.
Management believes that International net sales volumes attained during the
second quarter of 1996 by poor economic conditions in Germany, and the
Company's decision to terminate its sales force in France. Sales within
Germany were also negatively effected by a large sales promotion by one
of the Company's main competitors and the Company's decision to replace a key
distributor in Germany. International export sales to distributors have
slowed in the second quarter of 1996 in comparison to the comparable quarter
in 1995, due mainly to a slowdown in the retail sales environment in several
countries and a consumer preference shift to metal banded watches (as opposed
to leather strap products which represents the majority of the Company's
distributors' inventory). Efforts on the part of the Company's major
domestic customers to decrease inventory levels in order to increase their
inventory turnover rate, which first began in late June 1995, resulted in
decreases in FOSSIL branded watch purchase order volumes in comparison to
last year. Licensing product sales, under the FOSSIL label, have declined in
the current year due to intentional efforts by the Company, started in the
later half of 1995, to decrease Fossil's percentage of business in limited
licensed products.
GROSS PROFIT. Gross profit margins for the three- and six-month periods ended
June 30, 1996 were 49.7% and 47.1%, respectively, as compared to 46.1% and
46.5%, respectively, for the comparable periods during 1995. The increase in
gross profit margins is primarily attributable to an increase in the amount of
the Company's watch
-8-
<PAGE>
products supplied by Fossil's majority owned factories and an increase in the
percentage of sales mix generated by products that generally provide higher
gross profit margins than the Company average, including Sunglass product sales
and sales derived from Fossil-owned outlet and retail stores. In addition,
based on the recent strength of the U.S. dollar over the Japanese Yen, the
Company was able to decrease the purchase cost of certain of its watch products.
Management believes that the Company's gross profit margins for the remainder of
the year will approximate the level achieved over the full six-month period
ended June 30, 1996.
OPERATING EXPENSES.
Selling, general and administrative expenses increased as a percentage of
net sales for the three- and six-month periods ended June 30, 1996, to
39.5% and 37.0%, respectively, from 34.2% and 34.4%, for 1995,
respectively. The aggregate increase in operating expenses was due
principally to increased sales volumes, the operating costs of Fossil Japan,
which was acquired in April 1996, and from the operations of the Company's
outlet and retail stores, the majority of which commenced operations after
June 1995. The Company's international operations historically operate at a
higher operating expense ratio to sales than domestically due to generally
higher advertising and sales-related expenses in distributing the products
and in building FOSSIL brand name recognition. In addition, the operating
expense ratio derived from FOSSIL outlet and retail stores is historically
substantially higher than the consolidated average. During the second quarter
of 1996, the shortfall in planned international sales significantly
increased the operating expense percentage of net sales as fixed costs and
committed advertising campaigns were not correspondingly reduced in relation
to the sales shortfall. For the remainder of the year, management believes
that operating expenses as a percentage of sales may decrease as increased
sales levels permit the Company to more fully leverage its operating expenses.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased for the
three- and six-month periods ended June 30, 1996 to 42.1% and 41.1%,
respectively, from 38.9% from both the respective periods in 1995. This
increase resulted primarily from losses incurred in countries where the Company
has recently commenced operations or such foreign locations have continued to
generate losses from inception. The Company will not recognize any tax benefits
in these countries until realization is assured.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had working capital in excess of $52
million and approximately $8 million in cash. As of August 9, 1996, the
Company had approximately $22 million borrowed against its combined $38
million bank credit facilities. The current bank borrowings are primarily
related to financing the growth of international operations as well as the
construction and furnishing costs of the Company's main U.S. facility. In
addition, the Company historically has required additional financing to
accumulate inventory and finance the build-up in accounts receivable
beginning in the second quarter. These financing needs have historically
peaked in the September-November time frame.
For the six-month period ended June 30, 1996, the Company had a net cash
outflow from operations. This was primarily caused by payment of income
taxes in the second quarter and an increase in the Company's trade
receivable balances. Management believes that the Company will be cash
flow positive from its operations for the 1996 year.
The Company believes that its cash flow from operations and its existing
bank credit facilities will be sufficient to satisfy its working capital
and capital expenditures requirements for at least the next twelve months.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 16, 1996. At such
meeting, the stockholders elected directors of the Company and no other matters
were voted on at the meeting. A total of 11,931,993 shares were represented at
the meeting.
The tabulation of nominees is as follows:
Director Nominee For Against Abstain Withheld
- ---------------- --- ------- ------- --------
Kenneth W. Anderson 11,916,659 15,334
Michael W. Barnes 11,916,159 15,834
Alan J. Gold 11,914,659 17,334
Kosta N. Kartsotis 11,916,159 15,834
Tom Kartsotis 11,915,959 16,034
Alan D. Moore 11,911,159 20,834
Jal S. Shroff 11,916,459 15,534
Donald J. Stone 11,916,659 15,334
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Second Amendment to Second Amended and Restated Loan
Agreement, dated May 3, 1996.
Exhibit 27
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the period ended June 30,
1996.
PART III - SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOSSIL, INC.
/s/ Randy S. Kercho
--------------------------------------
Randy S. Kercho
Vice President and Chief Financial Officer
Date: August 14, 1996
<PAGE>
INDEX TO EXHIBITS
10.1 Exhibit A Second Amendment to Second Amended
and Restated Loan Agreement, dated
May 3, 1996
27 Exhibit 27 Financial Data Schedule
-10-
<PAGE>
SECOND AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (this
"AMENDMENT") is made and entered into this ____ day of May, 1996, by and among
FIRST INTERSTATE BANK OF TEXAS, N.A., (the "BANK"), Fossil Partners, L.P. (the
"BORROWER"), Fossil, Inc. (the "COMPANY"), Fossil Intermediate, Inc. ("FOSSIL
INTERMEDIATE"), Fossil Trust ("FOSSIL TRUST"), Fossil New York, Inc. ("FOSSIL
NEW YORK"), Fossil Stores I, Inc. ("FOSSIL I") and Fossil Stores II, Inc.
("FOSSIL II").
RECITALS
WHEREAS, the Bank, the Borrower, the Company, Fossil Intermediate, Fossil
Trust, Fossil New York and Fossil I are parties to that certain Second Amended
and Restated Loan Agreement, dated effective April 30, 1995, as amended by that
certain First Amendment to Second Amended and Restated Loan Agreement, dated
effective March 27, 1996, by and among the Bank, the Borrower, the Company,
Fossil Intermediate, Fossil Trust, Fossil New York and Fossil I (as amended, the
"LOAN AGREEMENT");
WHEREAS, the Company has formed Fossil II, a Delaware corporation, and a
direct or indirect wholly-owned subsidiary of the Company;
WHEREAS, the Bank has previously consented to the formation of Fossil II by
the Company;
WHEREAS, the Company desires to utilize Fossil II for the conduct of
certain business of the Borrower, and in connection therewith, Fossil II will
own or hold certain tangible assets having an aggregate book value of $2,000,000
or more;
WHEREAS, the Bank, the Borrower, the Company, Fossil Intermediate, Fossil
Trust, Fossil New York, Fossil I and Fossil II desire to amend the Loan
Agreement and the other Loan Documents to, among other things, add Fossil II as
a guarantor thereunder, as required by SECTION 15(S) of the Loan Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
1
<PAGE>
ARTICLE I
DEFINITIONS
1.01 Capitalized terms used in this Amendment are defined in the Loan
Agreement, as amended hereby, unless otherwise stated.
ARTICLE II
AMENDMENTS
2.01 AMENDMENT TO PREAMBLE. Effective as of the date hereof, the
definition of "GUARANTOR" included in the parenthetical in the preamble of the
Loan Agreement is hereby amended to read in its entirety as follows:
"(the Company, Fossil Intermediate, Fossil Trust, Fossil New York, Fossil I
and Fossil Stores II, Inc. are sometimes referred to herein individually as
a "GUARANTOR" and collectively as the "GUARANTORS")".
2.02 AMENDMENT TO SECTION 1. Effective as of the date hereof, the second
sentence of SECTION 1 of the Loan Agreement is hereby amended by (i) deleting
therefrom in their entirety the words reading "Fourth Amended and Restated
Master Revolving Credit Note" and substituting therefor the words reading "Fifth
Amended and Restated Master Revolving Credit Note", (ii) deleting therefrom in
its entirety the reference to the dollar amount "$25,000,000" and substituting
therefor the dollar amount "$30,000,000.00" and (iii) deleting therefrom in its
entirety the reference to the dollar amount "$25,000,000.00" and substituting
therefor the dollar amount "$30,000,000.00".
2.03 AMENDMENT TO SECTION 6(A). Effective as of the date hereof, SECTION
6(A) of the Loan Agreement is hereby amended by deleting therefrom in its
entirety the reference to the dollar amount "$25,000,000.00" and substituting
therefor the dollar amount "$30,000,000.00".
2.04 AMENDMENT TO SECTION 19. Effective as of the date hereof, SECTION 19
of the Loan Agreement is amended by adding the following notice address for
Fossil II to the end thereof:
"Fossil Stores II, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082
Attention: Randy S. Kercho
with a copy to Fossil Stores II, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Randy S. Kercho"
2
<PAGE>
ARTICLE III
CONDITIONS PRECEDENT
3.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is
subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by the Bank:
(a) The Bank shall have received the following documents, each in
form and substance satisfactory to the Bank and its counsel:
(i) This Amendment, duly executed by the Borrower, the Company,
Fossil Intermediate, Fossil Trust, Fossil New York, Fossil I and Fossil II;
(ii) A Revolving Note in the form of EXHIBIT A to this Amendment,
duly executed by Borrower;
(iii) A Guaranty in the form of EXHIBIT B to this Amendment,
duly executed by Fossil II;
(iv) A Commercial Security Agreement in the form of EXHIBIT C to
this Amendment, duly executed by Fossil II; and
(v) A company general certificate (hereinafter referred to as
the "COMPANY GENERAL CERTIFICATE") for Fossil II, certified by its
Secretary or Assistant Secretary, acknowledging (A) that its Board of
Directors has met and has adopted, approved, consented to and ratified
resolutions which authorize the execution, delivery and performance of this
Amendment, the Guaranty, the Security Agreement and all other Loan
Documents to which it is or is to be a party, and (B) the names of its
officers authorized to sign this Amendment, the Guaranty and the Security
Agreement and each of the other Loan Documents to which it is or is to be a
party (including the certificates contemplated herein) together with
specimen signatures of such officers. The Company General Certificate
shall conform to the Company General Certificate which is attached hereto
as EXHIBIT D and incorporated herein for all purposes;
(b) There shall have been no material adverse change in the financial
condition of the Borrower or any Guarantor;
(c) There shall be no material adverse litigation, either pending or
threatened, against the Borrower or any Guarantor that could reasonably be
expected to have a material adverse effect on the Borrower or such
Guarantor;
3
<PAGE>
(d) The representations and warranties contained herein and in the
Loan Agreement and the other Loan Documents, as each is amended hereby,
shall be true and correct as of the date hereof, as if made on the date
hereof;
(e) No default or Event of Default shall have occurred and be
continuing, unless such default or Event of Default has been specifically
waived in writing by the Bank;
(f) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to the Bank
and its legal counsel; and
(g) The Bank shall have received from the Company or the Borrower, as
appropriate, all fees and expenses required to be paid to the Bank pursuant
to the Loan Agreement.
ARTICLE IV
NO WAIVER
4.01 Nothing contained herein shall be construed as a waiver by the Bank of
any covenant or provision of the Loan Agreement, the other Loan Documents, this
Amendment, or of any other contract or instrument between the Borrower or the
Guarantors and the Bank, and the failure of the Bank at any time or times
hereafter to require strict performance by the Borrower or any Guarantor of any
provision thereof shall not waive, affect or diminish any right of the Bank to
thereafter demand strict compliance therewith. The Bank hereby reserves all
rights granted under the Loan Agreement, the other Loan Documents, this
Amendment and any other contract or instrument between the Borrower, the
Guarantors and the Bank.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
5.01 RATIFICATIONS. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Loan Agreement and the other Loan Documents, and, except as expressly
modified and superseded by this Amendment, the terms and provisions of the Loan
Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. The parties hereto agree that the Loan
Agreement and the other Loan Documents, as amended hereby, shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
5.02 REPRESENTATIONS AND WARRANTIES. The Borrower, the Company, Fossil
Intermediate, Fossil Trust, Fossil New York, Fossil I and Fossil II hereby
represent and warrant to the Bank that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been duly authorized by all
requisite corporate, partnership or trust proceedings, as appropriate, and will
not contravene, or constitute a default under, any provision of applicable law
or regulation or of the
4
<PAGE>
Agreement of Limited Partnership, Articles of Incorporation, By-Laws or Trust
Agreement, as applicable, of the Borrower or any Guarantor, or of any mortgage,
indenture, contract, agreement or other instrument, or any judgment, order or
decree, binding upon the Borrower or any Guarantor; (b) the representations and
warranties contained in the Loan Agreement, as amended hereby, and the other
Loan Documents are true and correct on and as of the date hereof and on and as
of the date of execution hereof as though made on and as of each such date; (c)
no default or Event of Default under the Loan Agreement, as amended hereby, has
occurred and is continuing, unless such default or Event of Default has been
specifically waived in writing by the Bank; and (d) the Borrower and the
Guarantors are in full compliance with all covenants and agreements contained in
the Loan Agreement and the other Loan Documents, as amended hereby.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in the Loan Agreement or any other Loan Documents, including,
without limitation, any document furnished in connection with this Amendment,
shall survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by the Bank or any closing shall affect the
representations and warranties or the right of the Bank to rely upon them.
6.02 REFERENCE TO LOAN AGREEMENT. Each of the Loan Agreement and the other
Loan Documents, and any and all other agreements, documents or instruments now
or hereafter executed and delivered pursuant to the terms hereof or pursuant to
the terms of the Loan Agreement, as amended hereby, are hereby amended so that
any reference in the Loan Agreement and such other Loan Documents to the Loan
Agreement shall mean a reference to the Loan Agreement as amended hereby.
6.03 EXPENSES OF THE BANK. As provided in the Loan Agreement, the Borrower
agrees to pay on demand all reasonable costs and expenses incurred by the Bank
in connection with the preparation, negotiation, and execution of this Amendment
and the other Loan Documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including, without
limitation, the costs and fees of the Bank's legal counsel, and all costs and
expenses incurred by the Bank in connection with the enforcement or preservation
of any rights under the Loan Agreement, as amended hereby, or any other Loan
Documents, including, without, limitation, the costs and fees of the Bank's
legal counsel.
6.04 SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of the Borrower, the Guarantors and the Bank and their
respective successors and assigns.
5
<PAGE>
6.06 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by the
Bank to or for any breach of or deviation from any covenant or condition by the
Borrower or any Guarantor shall be deemed a consent to or waiver of any other
breach of the same or any other covenant, condition or duty.
6.08 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
6.10 FINAL AGREEMENT. THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS,
EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED.
THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWER,
THE GUARANTORS AND THE BANK.
6.11 Release. THE BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE "INDEBTEDNESS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES
OF ANY KIND OR NATURE FROM THE BANK. THE BORROWER AND THE GUARANTORS HEREBY
VOLUNTARILY AND KNOWINGLY RELEASE AND FOREVER DISCHARGE THE BANK, ITS
PREDECESSORS, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS,
FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS,
EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR
UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT
LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS
AMENDMENT IS EXECUTED, WHICH THE BORROWER OR THE GUARANTORS MAY NOW OR HEREAFTER
HAVE AGAINST THE BANK, ITS PREDECESSORS, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES,
SUCCESSORS AND ASSIGNS, IF ANY, AND
6
<PAGE>
IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS OR EXTENSIONS OF
CREDIT FROM THE BANK TO THE BORROWER UNDER THE LOAN AGREEMENT OR THE OTHER LOAN
DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING,
RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE
APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR
OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
6.12 AGREEMENT FOR BINDING ARBITRATION. Each party to this Amendment
hereby acknowledges that it has agreed to be bound by the terms and provisions
of the Bank's current Arbitration Program, which is incorporated by reference
herein and is acknowledged as received by the parties pursuant to which any and
all disputes shall be resolved by mandatory binding arbitration upon the request
of any party.
IN WITNESS WHEREOF, this Amendment has been executed and is effective as of
the date first above-written.
"BANK"
FIRST INTERSTATE BANK OF TEXAS, N.A.
By:
----------------------------
Jeffrey S.A. Cook, Vice President
"BORROWER"
FOSSIL PARTNERS, L.P.
By: Fossil, Inc., its general partner
By:
----------------------------
Randy S. Kercho, Senior Vice
President and Chief Financial
Officer
7
<PAGE>
"GUARANTORS"
FOSSIL, INC.
By:
---------------------------------
Randy S. Kercho, Senior Vice
President and Chief Financial Officer
FOSSIL INTERMEDIATE, INC.
By:
--------------------------------
Kosta N. Kartsotis, President
FOSSIL TRUST
By:
--------------------------------
Randy S. Kercho, Trustee
FOSSIL NEW YORK, INC.
By:
--------------------------------
Kosta N. Kartsotis, Chief Executive
Officer
FOSSIL STORES I, INC.
By:
--------------------------------
Randy S. Kercho, Treasurer
FOSSIL STORES II, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL STATEMENTS OF FOSSIL, INC. AND
SUBSIDIARIES AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 FILED ON
FORM 10Q AND IS PART QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,901,693
<SECURITIES> 0
<RECEIVABLES> 33,470,528
<ALLOWANCES> 3,399,050
<INVENTORY> 45,601,956
<CURRENT-ASSETS> 88,503,978
<PP&E> 23,264,576
<DEPRECIATION> 6,649,779
<TOTAL-ASSETS> 108,949,858
<CURRENT-LIABILITIES> 36,280,325
<BONDS> 0
0
0
<COMMON> 131,897
<OTHER-SE> 65,817,001
<TOTAL-LIABILITY-AND-EQUITY> 108,949,858
<SALES> 88,147,304
<TOTAL-REVENUES> 88,147,304
<CGS> 46,649,086
<TOTAL-COSTS> 79,297,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 531,647
<INTEREST-EXPENSE> 440,422
<INCOME-PRETAX> 8,366,506
<INCOME-TAX> 3,442,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,924,506
<EPS-PRIMARY> .37
<EPS-DILUTED> 0.00
</TABLE>
