UNITED STATES
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: July 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-19848
FOSSIL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2018505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2280 N. Greenville, Richardson, Texas 75082
(Address of principal executive offices)
(Zip Code)
(972) 234-2525
(Registrant's telephone number, including area code)
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 14,
1998: 20,926,805
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 4, January 3,
1998 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 30,787,882 $ 21,103,581
Accounts receivable - net 29,572,160 34,237,526
Inventories 61,050,474 51,382,160
Deferred income tax benefits 5,040,813 4,503,749
Prepaid expenses and other current assets 2,966,345 2,432,282
-------------- --------------
Total current assets 129,417,674 113,659,298
Property, plant and equipment - net 21,253,691 21,073,333
Intangible and other assets 4,763,277 4,837,259
-------------- --------------
$ 155,434,642 $ 139,569,890
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
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CORPDAL:111408.1 25513-00001
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Notes payable $ 3,653,925 $ 7,862,145
Accounts payable 14,036,486 9,609,805
Accrued expenses:
Co-op advertising 9,255,260 8,700,696
Compensation 2,562,884 2,665,485
Other 5,467,487 8,714,067
Income taxes payable 7,874,653 5,504,304
-------------- --------------
Total current liabilities 42,850,695 43,056,502
Minority interest in subsidiaries 1,071,944 1,250,405
Stockholders' equity:
Common stock, shares issued and outstanding,
20,879,135 and 20,308,503, respectively 208,791 203,085
Additional paid-in capital 32,150,578 26,021,255
Retained earnings 81,627,116 71,257,176
Cumulative translation adjustment (2,474,482) (2,218,533)
-------------- -------------
Total stockholders' equity 111,512,003 95,262,983
-------------- -------------
$ 155,434,642 $ 139,569,890
============== =============
</TABLE>
See notes to condensed consolidated financial statements.
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FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
For the 13 For the 13 For the 26 For the 26
Weeks Weeks Weeks 1/2 Weeks
Ended Ended Ended Ended
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 64,363,019 $ 56,931,466 $ 121,247,906 $ 104,381,178
Cost of sales 32,457,569 30,627,390 61,441,870 54,881,744
------------ ------------ ------------- -------------
Gross profit 31,905,450 26,304,076 59,806,036 49,499,434
Operating expenses:
Selling and distribution 15,109,978 13,142,089 28,945,885 25,143,114
General and administrative 6,908,985 6,384,510 13,123,411 12,118,079
------------ ------------ ------------- -------------
Total operating expenses 22,018,963 19,526,599 42,069,296 37,261,193
------------ ------------ ------------- -------------
Operating income 9,886,487 6,777,477 17,736,740 12,238,241
Interest expense (59,639) (267,166) (116,941) (496,716)
Other income (expense) - net (129,890) (373,208) (40,859) (562,998)
------------ ------------ ------------- -------------
Income before income taxes 9,696,958 6,137,103 17,578,940 11,178,527
Provision for income taxes 3,993,000 2,503,000 7,209,000 4,570,000
------------ ------------ ------------- -------------
Net income $ 5,703,958 $ 3,634,103 $ 10,369,940 $ 6,608,527
============ ============ ============= =============
Basic earnings per share $ 0.28 $ 0.18 $ 0.50 $ 0.33
============ ============ ============= =============
Diluted earnings per share $ 0.26 $ 0.18 $ 0.48 $ 0.32
============ ============ ============= =============
Weighted average shares
outstanding:
Basic 20,714,523 20,104,094 20,550,544 20,049,813
============ ============ ============= =============
Diluted 21,795,794 20,710,743 21,616,692 20,558,242
============ ============ ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the 26 For the 26 1/2
Weeks Ended Weeks Ended
July 4, July 5,
1998 1997
---- ----
Operating activities:
Net income $ 10,369,940 $ 6,608,527
Noncash item affecting net income:
Minority interest in subsidiaries 148,295 (178,664)
Depreciation and amortization 1,700,517 1,481,617
Increase (decrease) in allowance for doubtful accounts 697,328 (291,184)
Increase (decrease) in allowance for returns -
net of related inventory in transit 211,584 (143,350)
Deferred income tax benefits (537,064) (230,656)
Cash from changes in assets and liabilities:
Accounts receivable 3,541,536 1,495,544
Inventories (9,453,396) (2,259,386)
Prepaid expenses and other current assets (534,063) (2,241,403)
Accounts payable 4,253,472 (1,212,736)
Accrued expenses (2,794,617) (3,367,013)
Income taxes payable 2,370,349 2,156,446
------------ -----------
Net cash from operations 9,973,881 1,817,742
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Investing activities:
Net assets acquired in business combination/consolidation,
net of cash received - (1,315,703)
Additions to property, plant and equipment (1,773,505) (4,048,679)
(Increase) decrease in intangible and other assets (56,457) 224,220
------------ -----------
Net cash used in investing activities (1,829,962) (5,140,162)
Financing activities:
Issuance of common stock 6,135,029 1,794,071
Decrease in minority interests in subsidiaries (326,756) (498,785)
(Repayments) increase in notes payable-banks (4,208,220) 1,510,746
------------ -----------
Net cash from financing activities 1,600,053 2,806,032
Effect of exchange rate changes on cash and cash equivalents (59,671) (510,492)
------------ -----------
Net increase (decrease) in cash and cash equivalents 9,684,301 (1,026,880)
Cash and cash equivalents:
Beginning of period 21,103,581 11,981,246
------------ -----------
End of period $ 30,787,882 $ 10,954,366
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include
the accounts of Fossil, Inc., a Delaware corporation, and its majority-owned
subsidiaries (the "Company"). The condensed 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 July 4, 1998
and the results of operations for the thirteen and twenty-six week periods ended
July 4, 1998, respectively and the results of operations for the thirteen and
twenty-six and one-half week periods ended July 5, 1997, respectively. 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 January 3, 1998. Operating results for the thirteen and twenty-six week
periods ended July 4, 1998, are not necessarily indicative of the results to be
achieved for the full year.
Beginning January 1, 1997, the Company changed its fiscal year to reflect the
retail-based calendar (containing 4-4-5 week calendar quarters). Due to this
change, the Company's 1997 half-year period ended July 5, 1997 contained an
additional one-half week for the transition period. This change had an
immaterial impact on comparability.
On March 4, 1998, the Board of Directors of the Company declared a three-for-two
stock split of the Company's $0.01 par value common stock ("Common Stock") which
was effected in the form of a stock dividend paid on April 8, 1998 to
stockholders of record on March 25, 1998. Retroactive effect has been given to
the stock split in stockholders' equity accounts beginning as of the fiscal year
ended January 3, 1998, and in all share and per share data in the accompanying
condensed consolidated financial statements.
Business. The Company designs, develops, markets and distributes fashion watches
and other accessories, principally under the "FOSSIL," "FSL" and "RELIC" brands
names. The Company's products are sold primarily through department stores and
other major retailers, both domestically and internationally.
New Accounting Standards. Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," became effective as of the first
quarter 1998. This statement requires companies to report and display
comprehensive income and its components (revenues, expenses, gains and losses).
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Comprehensive
income consists of the following:
For the 13 For the 26
Weeks Ended Weeks Ended
July 4, 1998 July 4, 1998
------------ ------------
Net income, as reported $5,703,958 $10,369,940
Current period change in foreign
currency translation adjustment 63,397 (255,949)
---------- ------------
Comprehensive income $5,767,355 $10,113,991
========== ============
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FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
2. INVENTORIES
Inventories consist of the following:
July 4, January 3,
1998 1998
------------ ------------
Components and parts $ 6,034,851 $ 2,751,719
Work-in-process 3,572,151 2,064,623
Finished merchandise on hand 39,451,754 35,707,813
Merchandise at Company's stores 6,468,660 5,484,479
Merchandise in transit from estimated
Customers' returns 5,523,058 5,373,526
------------ ------------
$ 61,050,474 $ 51,382,160
============ ============
The Company periodically enters into forward contracts principally to hedge the
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 July 4,
1998, the Company had hedge contracts to sell 14.0 million German Marks for
approximately $8.1 million, expiring through December 1998 and 283.9 million
Japanese Yen for approximately $2.2 million, expiring through November 1998.
1. STOCKHOLDERS' EQUITY
On May 11, 1998, the Company completed a secondary offering of 2,150,000 shares
of Common Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to
an underwriter's over-allotment allocation)for an aggregate of 2,302,500 shares.
The Company sold 215,000 shares with the remaining shares sold by selling
stockholders. The Offering was priced at $19.00 per share of Common Stock.
- 8 -
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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 thirteen and twenty-six week periods ended
July 4, 1998 (the "Second Quarter" and "Half Year Period," respectively), as
compared to the thirteen and twenty-six and one-half week periods ended July 5,
1997 (the "Prior Year Quarter" and "Prior Year Half Year Period"). Due to a
change in the Company's fiscal year to reflect the retail-based calendar
(containing 4-4-5 week calendar quarters), the Company's Prior Year Half Year
Period contained an additional one-half week for the transition period. This
change had an immaterial impact on the comparability of the periods. This
discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and the related Notes attached hereto.
General
The Company is a leader in the design, development, marketing and distribution
of contemporary, high quality fashion watches and accessories. The Company
developed the FOSSIL(R) brand name to convey a distinctive fashion, quality and
value message and a brand image reminiscent of "America in the 1950s" that
suggests a time of fun, fashion and humor. Since its inception in 1984, the
Company has grown from its original flagship FOSSIL watch product into a
diversified company offering an extensive line of fashion watches that includes
it RELIC(R) and FSL(TM) brands as well as complementary lines of small leather
goods, belts, handbags and sunglasses under certain of the Company's brands. In
addition to developing its own brands, the Company leverages its development and
production expertise by designing and manufacturing private label products for
some of the most prestigious companies in the world, including national
retailers, entertainment companies and theme restaurants.
The Company has further capitalized on the increasing awareness of the FOSSIL
brand by entering into various license agreements for other categories of
fashion accessories and apparel, such as outerwear under the FOSSIL brand. In
addition, the Company licenses the brands of other companies in order to further
leverage its infrastructure. For example, the Company during 1997 entered into a
multi-year license agreement with Giorgio Armani to design, manufacture,
distribute and market a line of EMPORIO ARMANI(R) watches.
The Company's products are sold to department stores and specialty retail stores
in over 70 countries worldwide through Company-owned foreign sales subsidiaries
and through a network of approximately 50 independent distributors. The
Company's foreign operations include a presence in Europe, South and Central
America, the Caribbean, Canada, the Far East, Australia, and the Middle East. In
addition, the Company's products are offered at Company-owned retail locations
throughout the United States and in independently-owned, authorized FOSSIL
retail stores and kiosks in major airports in the United States, on cruise ships
and in certain international markets. The Company's successful expansion of its
product lines and leveraging of its infrastructure has contributed to its
increasing net sales and operating profits.
- 9 -
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1998 Highlights
o During April 1998, the Company effected a three-for-two stock split in the
form of a 50% stock dividend to stockholders of record at the close of
business on March 25, 1998.
o During April 1998, the Company signed a five-year agreement with Eddie
Bauer, Inc. appointing the Company as the exclusive supplier of Eddie Bauer
brand watches.
o During May 1998, the Company completed a secondary offering of 2,150,000
shares of its $0.01 par-value common stock (plus an additional 152,500
shares in June 1998 pursuant to an underwriter's over-allotment allocation)
of which the Company sold 215,000 shares.
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 of the
prior year.
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Percentage of Percentage of
Net Sales Net Sales
For the 13 For the 26 For the 26
Weeks Weeks 1/2 Weeks
Ended Ended Ended
----- ----- -----
July 4, July 5, Percentage July 4, July 5, Percentage
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
Net sales 100.0% 100.0% 13.1% 100.0% 100.0% 16.2%
Cost of sales 50.4 53.8 6.0 50.7 52.6 12.0
----- ----- ---- ----- ----- ----
Gross profit margin 49.6 46.2 21.3 49.3 47.4 20.8
Selling and distribution
expenses 23.5 23.1 15.0 23.9 24.1 15.1
General and administrative
expenses 10.7 11.2 8.2 10.8 11.6 8.3
----- ----- ----- -----
Operating income 15.4 11.9 45.9 14.6 11.7 44.9
Interest expense (0.1) (0.5) (77.7) (0.1) (0.5) (76.5)
Other income
(expense)- net (0.2) (0.6) (65.2) (0.0) (0.5) (92.7)
------ ------ ----- -----
Income before income taxes 15.1 10.8 58.0 14.5 10.7 57.2
Income taxes 6.2 4.4 59.5 5.9 4.4 57.8
----- ----- ----- -----
Net income 8.9% 6.4% 57.0% 8.6% 6.3% 56.9%
===== ===== ===== =====
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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):
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Amounts % of Total Amounts % of Total
------- ---------- ------- ----------
For the For the For the For the For the For the 26 For the For the 26
13 Weeks 13 Weeks 13 Weeks 13 Weeks 26 Weeks 1/2 Weeks 26 Weeks 1/2 Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
July 4, July 5, July 4, July 5, July 4, July 5, July 4, July 5,
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
International:
Europe $ 13.8 $ 9.8 21 % 17 % $ 26.0 $ 20.4 21 % 19 %
Other 6.2 11.6 10 21 11.8 16.4 10 16
------ ----- ------- ----- ------ ------ ------ -------
Total International 20.0 21.4 31 38 37.8 36.8 31 35
------ ----- ------- ----- ------ ------ ------ -------
Domestic:
Watch products 28.2 22.0 44 39 51.5 40.1 42 38
Other products 10.6 9.2 16 16 22.8 20.4 19 20
------ ----- ------- ----- ------ ------ ------ -------
Total 38.8 31.2 60 55 74.3 60.5 61 58
Stores 5.5 4.3 9 7 9.1 7.1 8 7
------ ----- ------- ----- ------ ------ ------ -------
Total Domestic 44.3 35.5 69 62 83.4 67.6 69 65
------ ----- ------- ----- ------ ------ ------ -------
Total Net Sales $ 64.3 $56.9 100 % 100 % $121.2 $104.4 100 % 100 %
====== ===== ======= ===== ====== ====== ====== =======
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Exclusive of a one-time international non-branded premium watch sale of $6
million in the Prior Year Quarter, net sales of $64 million in the Second
Quarter represented a $13 million increase (26% as a percentage of net sales)
over the Prior Year Quarter. Sales volume increases during the Second Quarter
and Half Year Period were principally derived from sales of FOSSIL brand watches
both domestically and internationally, in addition to sales generated from the
continued roll-out of the Company's EMPORIO ARMANI licensed brand watches. In
addition, continued volume growth in the Company's various leather and sunglass
product categories and retail businesses added to the sales increases during the
Second Quarter and Half Year Period. The sales generated from the Company's
FOSSIL Blue watch category, in addition to new watch lines introduced since
mid-1997, have been responsible for the majority of the FOSSIL brand watch sales
increases. European-based watch sales continued to increase by double digit
growth, on a U.S. dollar denominated basis, in comparison to the comparable
prior year periods despite the strength of the U.S. dollar compared to a year
ago. The process of aligning the Company's watch collection offered in Europe
with the Company's best selling styles in the U.S., which the Company began
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mid-year 1997, has resulted in significant increases in the European sales
momentum. Sales classified as "International - Other" decreased in the Second
Quarter compared to the Prior Year Quarter as a result of the significant
one-time international non-branded premium watch sale of $6 million in the Prior
Year Quarter. Management anticipates that sales volume over the balance of the
year will increase approximately 20% over the comparable period in 1997. In
addition, management believes that the areas of highest growth over the past
several fiscal quarters will continue to represent the greatest opportunities
for continued growth throughout 1998.
Gross Profit. The increase in gross profit margin during the Second Quarter and
Half Year Period was principally a result of the low gross profit margin
realized on the sale of the non-branded premium watches in the Prior Year
Quarter. Exclusive of that sale, gross profit margins were slightly higher than
the Company's historical rate due to the positive influence of EMPORIO ARMANI
watch sales and the impact the stronger U.S. dollar had on the purchase costs of
certain watch components. Management believes that the Company's gross profit
margin over the balance of the year will be in the 48% - 50% range.
Operating expenses. Selling, general and administrative expenses, as a
percentage of net sales, for the Second Quarter were similar to the Prior Year
Quarter. Leveraging of expenses off higher sales and from cost containment
experienced in the first quarter of 1998, were somewhat masked in the Second
Quarter, since the operating expense ratio in the Prior Year Quarter was aided
by the one-time non-branded premium sale.
Other income (expense) - net. Other income (expense) compared favorably in the
1998 periods when compared to their respective 1997 periods. The favorable
comparison was mainly due to increased interest income and a reduction in
minority interest expenses resulting from the Company's purchase of minority
interests in both an assembly facility and its Italy-based operations last year.
Year 2000 Compliance.
Computer programs that were written using two digits rather than four digits to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000. This result is commonly referred to as the "Year
2000" problem. The Year 2000 problem could result in information system failures
or miscalculations. Beginning in 1997, the Company initiated a program to
evaluate whether internally developed and/or purchased computer software that
utilizes embedded date codes could experience operational problems when the year
2000 is reached. The scope of this effort addressed internal computer systems
and supplier capabilities. The Company is completing an extensive review of its
businesses to determine whether or not purchased and internally developed
computer programs are Year 2000 compliant, as well as the remedial action and
related costs associated with any required modifications or replacements. A
significant amount of information has been collected and analyzed as part of
this review; however, the process will not be completed until the end of 1998.
The Company plans to complete all remediation efforts for its critical systems
prior to the year 2000. Based upon its evaluation to date, management currently
believes that, while the Company will incur internal and external costs to
address the Year 2000 problem, such costs will not have a material impact on the
operations, cash flows or financial condition of the Company in future years.
Liquidity and Capital Resources.
Historically the Company has not incurred substantial cash requirements during
the first several months of its fiscal year but has increased cash needs
starting in the second quarter, typically reaching its peak borrowing needs in
the September - November time frame. The additional cash needs have generally
been to finance the accumulation of inventory and the build-up in accounts
receivable. During 1997 and the Half Year Period of 1998, the Company has
significantly increased its cash flow from operations leaving the Company with
approximately $31 million in cash as of July 4, 1998 in comparison to $11
million at the same point in the prior year. In addition, the Company had
working capital of $87 million and borrowings of only $4 million against its
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combined $43 million bank credit facilities. On May 11, 1998, the Company
completed a secondary offering of 2,150,000 shares of Common Stock (plus an
additional 152,500 shares on June 9, 1998 pursuant to an underwriter's
over-allotment allocation) for an aggregate of 2,302,500 shares. The Company
received approximately $3.6 million in cash for working capital needs from the
proceeds of the offering. Management believes that cash on hand will allow the
Company to significantly reduce its financing needs during 1998 and combined
with the credit facilities available to the Company will be sufficient to
satisfy its working capital expenditure requirements for at least the next
eighteen months.
Forward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, including, but
not limited to statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical facts are
"forward-looking statements" and involve a number of uncertainties. The actual
results of the future events could differ materially from those stated in such
"forward-looking statements." Among the factors that could cause actual results
to differ materially are general economic conditions, competition, government
regulation and possible future litigation, as well as the risks and
uncertainties set forth in the Company's Current Report on Form 8-K dated March
31, 1997.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders (the "Meeting") on May 27,
1998. At the Meeting, the stockholders voted upon (i) a proposed amendment to
the Company's Amended and Restated Certificate of Incorporation to create a
classified Board of Directors ("Proposal 1"); (ii) a proposal to elect seven (7)
directors of the Company ("Proposal 2"); and (iii) a proposed amendment to the
1993 Long-Term Incentive Plan of Fossil to increase the number of shares of
common stock that may be made the subject of grants ("Proposal 3"). No other
matters were voted on at the Meeting. A total of 12,958,422 shares were
represented at the Meeting (prior to giving effect to a three-for-two stock
split effected as a fifty percent stock dividend paid on April 8, 1998 to
stockholders of record as of March 25, 1998).
The number of shares that were voted for, against and abstained from Proposal 1
is as follows:
For Against Abstain
---- ------- -------
10,126,550 2,569,534 4,265
The number of shares that were voted for, and that were withheld from, each of
the director nominees in Proposal 2 is follows:
Director Nominee For Withheld
---------------- --- --------
Tom Kartsotis 12,793,678 164,744
Kosta Kartsotis 12,793,718 164,704
Michael W. Barnes 12,793,718 164,704
Jal S. Shroff 12,793,678 164,744
Donald J. Stone 12,820,118 138,304
Kenneth W. Anderson 12,820,118 138,304
Alan J. Gold 12,820,318 138,104
The number of shares that were voted for, against and abstained from Proposal 3
is as follows:
For Against Abstain
---- ------- -------
9,889,206 3,047,544 4,775
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Second Amended and Restated Certificate of Incorporation of
Fossil, Inc.
4.1(1) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive
Plan
4.2(1) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive
Plan
10.1 Third Amended and Restated Loan Agreement dated June 29, 1998,
by and among Wells Fargo Bank (Texas), National Association, a
national banking association formerly known as First Interstate
Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc.,
Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc.,
Fossil Stores I, Inc., and Fossil Stores II, Inc. (without
exhibits)
27 Financial Data Schedule
(1) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
Report.
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<PAGE>
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.
Date: August 16, 1998 /s/ Randy S. Kercho
-------------------
Randy S. Kercho
Executive Vice President and
Chief Financial Officer
(Principal financial officer
duly authorized to sign on
behalf of Registrant)
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------ --------------------
3.1 Second Amended and Restated Certificate of Incorporation of Fossil, Inc.
4.1 (1) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
4.2 (1) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
10.1 Third Amended and Restated Loan Agreement dated June 29, 1998, by and
among Wells Fargo Bank (Texas), National Association, a national banking
association formerly known as First Interstate Bank of Texas, N.A.,
Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil
Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores
II, Inc. (without exhibits)
27 Financial Data Schedule
(1) Management contract or compensatory plan or arrangement.
- 17 -
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FOSSIL, INC.
Fossil, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify as follows:
1. The name under which the Corporation was originally
incorporated was Fossil Acquisition Corporation.
2. The date of filing of the original Certificate of
Incorporation of the Corporation (the "Original Certificate") with the Secretary
of State of the State of Delaware is December 26, 1991.
3. The date of filing of the first Certificate of Amendment of
the Original Certificate (the "First Amended Certificate") with the Secretary of
State of the State of Delaware is June 21, 1995.
4. This Second Amended and Restated Certificate of
Incorporation of the Corporation (the "Second Amended and Restated Certificate")
was duly adopted in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware ("DGCL").
5. This Second Amended and Restated Certificate restates and
integrates and amends the Original Certificate and the First Amended Certificate
to read in its entirety as follow:
ARTICLE I
The name of the Corporation is Fossil, Inc.
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, New Castle County, Wilmington, Delaware
19805. The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
ARIICLE III
The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the DGCL.
<PAGE>
ARTICLE IV
The aggregate number of shares of all classes of stock which
the Corporation shall have authority to issue is 51,000,000 shares, consisting
of 1,000,000 shares of preferred stock, par value $.0l per share ("Preferred
Stock"), and 50,000,000 shares of common stock, par value $.01 per share
("Common Stock").
The Preferred Stock may be issued, from time to time, in one
or more series as authorized by the Board of Directors. The Board of Directors,
by resolution, shall designate that series to distinguish it from other series
and classes of stock of the Corporation, shall specify the number of shares to
be included in the series, and shall fix the terms, rights, restrictions, and
qualifications of, the shares of the series, including any preferences, voting
power, dividend rights and redemption, sinking fund and conversion rights. The
relative powers, preferences and rights of each series of Preferred Stock in
relation to the powers, preferences and rights of each other series of Preferred
Stock shall be as fixed from time to time by the Board of Directors in the
resolution or resolutions authorizing the issuance of each series adopted by the
Board of Directors.
Except as otherwise required by law, this Certificate of
Incorporation or the provisions of any resolutions adopted by the Board of
Directors authorizing the issuance of Preferred Stock, each holder of shares of
Common Stock shall be entitled to one vote in respect of each share of Common
Stock held in his name on the books of the Corporation on each matter voted upon
by the stockholders. Cumulative voting of shares of Common Stock is expressly
prohibited.
ARTICLE V
The business affairs of the Corporation shall be managed by or
under the direction of a Board of Directors, except as otherwise provided by law
or by this Certificate of Incorporation.
The Board of Directors shall have the power to make, alter,
amend, change, add to or repeal the bylaws of the Corporation.
The Board of Directors shall consist of such number of
directors that, from time to time, shall be fixed by, or in the manner provided
in, the bylaws of the Corporation. Election of directors need not be by written
ballot unless the bylaws so provide.
The directors to be elected at the 1998 Annual Meeting of
Stockholders shall be divided into three classes as nearly equal in number as
possible, and designated as Class I, Class II and Class III. Class I directors
shall be elected initially for a term expiring at the 1999 Annual Meeting of
Stockholders, Class II directors shall be elected initially for a term expiring
at the 2000 Annual Meeting of Stockholders, and Class III directors shall be
elected initially for a term expiring at the 2001 Annual Meeting of
Stockholders. Members of each class shall hold office until their successors are
elected and qualified. At the 1999 Annual Meeting of Stockholders and at each
subsequent annual meeting of the stockholders of the Corporation, the successors
of the class of directors whose term expires at that meeting shall be elected by
a plurality vote of all votes cast at such meeting, to hold office for a term
expiring at the Annual Meeting of Stockholders held in the third year following
the year of their election, and until their successors are elected and
qualified.
<PAGE>
In addition to the powers and authority conferred upon the
Board of Directors by statute or by this Certificate of Incorporation, the Board
of Directors is hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation, subject to the
provisions of the DGCL, this Certificate of Incorporation and any bylaws adopted
by the stockholders; provided, however, that no bylaws adopted by the
stockholders shall invalidate any prior act of the Board of Directors that would
have been valid if such bylaws had not been adopted.
ARTICLE VI
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended after the date of filing of this Certificate of Incorporation to
authorize any corporate action which further eliminates or limits the personal
liability of directors, then the liability of a director of the Corporation, in
addition to the limitation on personal liability provided herein, shall be
limited to the fullest extent permitted by the DGCL as amended. Any repeal or
modification of this Article VI by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the personal
liability of a director of the Corporation existing at the time of such repeal
or modification.
IN WITNESS WHEREOF, the undersigned has executed this Second
Amended and Restated Certificate of Incorporation on behalf of the Corporation
on June 1, 1998.
Attest:
FOSSIL, INC.
- ----------------------------
T.R. Tunnell
<PAGE>
- ----------------------------
Tom Kartsotis
Senior Vice President, Chief Legal Officer
- -----------------------------
Chairman of the Board and Chief
& Secretary
- ------------------------------
Executive Officer
AMENDMENT NUMBER ONE
TO THE
1993 LONG-TERM INCENTIVE PLAN
OF
FOSSIL, INC.
The following Amendment to the 1993 Long-Term Incentive Plan of Fossil,
Inc. (The "Incentive Plan"), as authorized by the Board of Directors of Fossil,
Inc. (the "Company"), is adopted as of the effective date specified herein:
The first sentence of paragraph 4 of the Incentive Plan is amended to
read as follows:
"Common Stock Available for Award. There shall be available for Awards
granted wholly or partly in Common Stock (including rights or options
which may be exercised for or settled in Common Stock) during the term
of this Plan an aggregate of 1,750,000 shares of Common Stock."
This amendment shall become effective immediately upon the approval of
the Amendment by the Stockholders of the Company at the 1995 Annual Meeting of
Stockholders.
Adopted this 30th day of March 1995.
Fossil, Inc.
By: ____________________________________
Tom Kartsotis
Chairman and Chief Executive Officer
AMENDMENT NUMBER TWO
TO THE
1993 LONG-TERM INCENTIVE PLAN
OF
FOSSIL, INC.
The following Amendment to the 1993 Long-Term Incentive Plan of Fossil,
Inc. (The "Incentive Plan"), as authorized by the Board of Directors of Fossil,
Inc. (the "Company"), is adopted as of the effective date specified herein:
The first sentence of paragraph 4 of the Incentive Plan is amended to
read as follows:
"Common Stock Available for Award. There shall be available for Awards
granted wholly or partly in Common Stock (including rights or options
which may be exercised for or settled in Common Stock) during the term
of this Plan an aggregate of 3,525,000 shares of Common Stock."
This amendment shall become effective immediately upon the approval of
the Amendment by the Stockholders of the Company at the 1998 Annual Meeting of
Stockholders.
Adopted this 3rd day of March 1998.
Fossil, Inc.
By: ____________________________________
T.R. Tunnell
Senior Vice President, Development,
Chief Legal Officer & Secretary
THIRD AMENDED AND RESTATED
LOAN AGREEMENT
This Third Amended and Restated Loan Agreement (the "Agreement") is entered
into on June___, 1998, to be effective for all purposes as of June ___, 1998, by
and among WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking
association formerly known as 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") and FOSSIL STORES I, INC. ("Fossil
I"), and FOSSIL STORES II, INC. ("Fossil II") (the Company, Fossil Intermediate,
Fossil Trust, Fossil I and Fossil II, are sometimes referred to herein
individually as a "Guarantor" and collectively as the "Guarantors").
R E C I T A L S
WHEREAS, the Bank, the Borrower and the Guarantors are parties to that
certain Second Amended and Restated Loan Agreement, dated to be effective as of
April 30, 1995, as amended by (i) that certain First Amendment to Second Amended
and Restated Loan Agreement, dated as of March 27, 1996, (ii) that certain
Second Amendment to Second Amended and Restated Loan Agreement, dated as of May
3, 1996, (iii) that certain Third Amendment to Second Amended and Restated Loan
Agreement, dated as of September 11, 1996, (iv) that certain Fourth Amendment to
Second Amended and Restated Loan Agreement, dated as of April2, 1997, and (v)
that certain Fifth Amendment to Second Amended and Restated Loan Agreement,
dated June 30, 1997 (as amended, the "Amended Agreement"), pursuant to which the
Bank has agreed to make available to the Company a revolving line of credit of
up to $40,000,000.00; and
WHEREAS, the Bank, the Borrower and the Guarantors desire to amend and
restate the Amended Agreement as set forth herein to, among other things, extend
the final maturity date of the loans made by the Bank to the Borrower under the
revolving line of credit.
NOW, THEREFORE, in consideration of the foregoing, the Bank's making the
following described loans, the mutual covenants herein contained and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each of the parties hereto, the Bank, the Borrower and the
Guarantors agree as follows:
A G R E E M E N T
1. The Line of Credit. Subject to, and upon the terms, conditions,
covenants and agreements contained herein, the Bank agrees to loan the Borrower,
at any time, and from time to time prior to the maturity of the Borrower's
promissory note executed in conjunction with this Agreement such amounts as the
Borrower may request up to, but not exceeding, an aggregate principal sum at any
time outstanding equal to $40,000,000.00 (the "Total Commitment"); within such
limits and during such period, the Borrower may borrow, repay, and reborrow
hereunder (the "Line of Credit"). All loans under the Line of Credit shall be
evidenced by the Borrower's Ninth Amended and Restated Master Revolving Credit
Note (the "Revolving Note"), substantially in form and substance satisfactory to
the Bank, payable to the order of the Bank, and bearing interest upon the terms
provided therein (but in no event to exceed the maximum nonusurious interest
rate permitted by law). The principal of and interest on the Revolving Note
shall be due and payable as set forth on the face of the Revolving Note.
Notation by the Bank on its records shall constitute prima facie evidence of the
amount and date of any payment or borrowing thereunder.
(a) Renewals and Extensions. All renewals, extensions,
modifications and rearrangements of the Revolving Note, if any, shall
be deemed to be made pursuant to this Agreement, and accordingly, shall
be subject to the terms and provisions hereof, and the Borrower shall
be deemed to have ratified, as of such renewal, extension, modification
or rearrangement date, all of the representations, covenants and
agreements herein set forth.
<PAGE>
(b) Letters of Credit. Advances under the Line of Credit may
also be made to fund Documentary or Standby Letters of Credit (as
hereinafter defined) that are issued under the Revolving Note and are
drawn upon, provided, the Bank may, in its own discretion, advance
funds under the Line of Credit to fund such Documentary or Standby
Letters of Credit (as hereinafter defined) when the Borrower does not
reimburse the Bank for such funding. All such advances shall be added
to the principal amount of the Revolving Note.
2. Documentary and Standby Letters of Credit. Subject to the conditions
herein, the Bank shall (a) from time to time, at the request of the Borrower,
issue documentary or standby letters of credit to Borrower's vendors for the
acquisition of inventory for the Borrower (the "Inventory Acquisition Letters of
Credit") and (b) issue a stand-by letter of credit in an aggregate amount up to
(Y)600,000,000.00 in favor of any Japanese domestic bank for the account of the
Borrower (the "JDB Letter of Credit")(the Inventory Acquisition Letters of
Credit and the JDB Letter of Credit are hereinafter collectively referred to as
the "Documentary or Stand-by Letters of Credit"). The fees for issuance of all
Inventory Acquisition Letters of Credit shall be in accordance with the Bank's
schedule of fees for issuance of letters of credit existing as of the time of
issuance. No fees shall be charged directly by Bank to Borrower in connection
with the issuance of the JDB Letter of Credit. Immediately upon issuance, such
Documentary and Standby Letters of Credit shall be considered in computing the
amount of funds available to the Borrower, as provided in Section 6 herein. The
Bank shall not be obligated: (x) to issue Documentary or Standby Letters of
Credit if the issuance of same would cause the Outstanding Revolving Credit to
exceed the Total Commitment; (y) to issue such Letters of Credit with an
expiration date more than one hundred eighty (180) days after the maturity date
of the Revolving Note; and (z) to extend the expiration date of such Letters of
Credit to a date more than one hundred eighty (180) days after the maturity date
of the Revolving Note.
3. Foreign Currency Exchange Contracts. Subject to the conditions
contained herein, the Bank may, in its discretion, from time to time at the
request of the Borrower, issue foreign currency exchange contracts to Borrower
for use by Borrower in the ordinary course of its business. Immediately upon
issuance, such foreign currency exchange contracts shall be considered in
computing the amount of funds available to the Borrower, as provided in Section
6 hereof. The Bank shall not be obligated: (a) to issue any such foreign
currency exchange contract if the issuance of the same would cause the
Outstanding Revolving Credit to exceed the Total Commitment, (b) to issue any
foreign currency exchange contract with a settlement date after the maturity
date of the Revolving Note, or (c) to issue any such foreign currency exchange
contract if (i) the Bank's futures contract risk under such contract and all
other contracts then outstanding would exceed $15,000,000.00 or (ii) the Bank's
delivery risk under such contract and all other contracts then outstanding would
exceed $3,000,000.00.
4. The Term Loan. Borrower hereby represents and warrants that on
August 31, 1994, Bank made a term loan to the Borrower in the principal amount
of $5,000,000.00 (the "Term Loan"), which Term Loan was evidenced by the
Borrower's Commercial/Real Estate Note (the "Term Note"), dated August 31, 1994,
payable to the order of the Bank. Borrower and Bank hereby agree, represent and
acknowledge that the Term Loan has been repaid in full by Borrower and no
amounts remain outstanding under the Term Note.
5. Use of Proceeds. The proceeds of the Revolving Note shall be used by
the Borrower to provide working capital for the short term, seasonal working
capital needs of the Borrower and for general corporate purposes. No part of the
proceeds received hereunder will be used, directly or indirectly, for the
purpose of purchasing or carrying, or the payment in full or in part, of
indebtedness which was incurred for the purposes of purchasing or carrying
margin of stock, as such term is defined in Section 221.3 of Regulation U of the
Board of Governors of the Federal Reserve System 12 C.F.R., Chapter II, Part
221.
6. Availability.
(a) Revolving Note. The aggregate principal amount at any
time outstanding under the Revolving Note, plus, one
<PAGE>
hundred twenty percent (120%) of the face amount of
the JDB Letter of Credit (calculated by reference to
the amount of United States of America dollars into
which Bank determines it could, in accordance with
its practice from time to time in the interbank
foreign exchange market, convert such amount of Yen
at its spot rate of exchange in effect at approxi-
mately 8:00 a.m. (Dallas, Texas time) on the date of
determination), plus the face amount of all outstand-
ing Documentary and Standby Letters of Credit (other
than the JDB Letter of Credit) issued for the account
of the Borrower, plus twenty percent (20%) of the
aggregate amount of all foreign currency exchange
contracts issued by the Bank for the account of the
Borrower (said sum being herein referred to as the
"Outstanding Revolving Credit") shall not at any time
exceed the Total Commitment.
(b) Total Commitment Compliance. In the event the Out-
standing Revolving Credit at any time exceeds the
Total Commitment then, upon notice from the Bank, the
Borrower shall immediately make such payments to the
Bank necessary to reduce the Outstanding Revolving
Credit to an amount such that the Outstanding Revol-
ving Credit is less than or equal to the Total
Commitment.
7. Advances. Advances under the Line of Credit may be made by written
or telephone facsimile request signed by an authorized officer of the Borrower
or by telephone oral request by an employee authorized by an officer of the
Borrower, provided that any such advance shall be deposited in an account of the
Borrower, unless such authority for telephone oral request or telephone
facsimile request is revoked in writing by the President or an authorized
officer of the Borrower, and such revocation is actually received by the Bank
(the "Revocation"). In consideration of the Bank's permitting the Borrower to
make telephone oral requests and telephone facsimile requests for advances under
the Revolving Note until Revocation, the Borrower covenants and agrees to assume
liability for and to protect, indemnify and hold harmless the Bank, its
predecessors, agents, officers, directors, employees, successors and assigns
(individually and collectively, an "Indemnified Party") from any and all
liabilities, obligations, damages, penalties, claims, causes of action, costs,
charges and expenses, including attorneys' fees and expenses of employees, which
may be imposed, incurred by or asserted against any Indemnified Party by reason
of any loss, damage or claim howsoever arising or incurred because of or out of
or in connection with (i) any action of any Indemnified Party pursuant to
telephone oral requests or telephone facsimile requests for advances under the
Line of Credit, (ii) the breach of any provisions of this Agreement by the
Borrower, (iii) the transfer of funds pursuant to such telephone oral requests
or telephone facsimile requests, or (iv) any Indemnified Party's honoring or
failing to honor any telephone oral request or telephone facsimile request for
any reason. The Bank is entitled to rely upon and act upon telephone oral
requests and telephone facsimile requests made or purportedly made by any of the
officers or employees specified in the resolutions delivered to the Bank of even
date herewith, as supplemented in writing from time to time and accepted by the
Bank, and the Borrower shall be unconditionally and absolutely estopped from
denying (i) the authenticity and validity of any such transaction so acted upon
by the Bank once the Bank has advanced funds under the Line of Credit and
deposited or transferred such funds as requested in any such telephone oral
request or telephone facsimile request, and (ii) the Borrower's liability and
responsibility therefore.
8. Prepayments. Any prepayment on the Revolving Note shall be paid at
the offices of the Bank. The Borrower shall be entitled to prepay the Revolving
Note from time to time and at any time, in whole or in part, without notice or
penalty except as set forth in the Revolving Note. The Borrower may reborrow the
principal amount of the Line of Credit so prepaid subject to the terms of
Section 6(a) hereof. All prepayments on the Revolving Note shall be applied
first to accrued interest and then to principal in the order of maturity. No
prepayment shall relieve the Borrower of the obligation to pay the principal and
interest on the Revolving Note until such time as all obligations are paid in
full.
9. Collateral for the Loans. The Line of Credit shall be secured by the
"Collateral", as defined in that certain Amended and Restated Commercial
Security Agreement, dated as of August 31, 1994 (the "Security Agreement"),
executed by the Borrower in favor of the Bank.
10. Execution of Loan Documents. The Borrower shall execute and
deliver, or cause to be executed and delivered, to Bank the following described
documents:
<PAGE>
(a) In connection with advances under the Revolving
Note, the Borrower shall execute and deliver to the Bank the following
documents and instruments, provided the Bank shall have no obligation
to make any advance under the Revolving Note to the Borrower until each
of said documents and instruments are fully executed by the Borrower
and delivered to the Bank:
(i) This Agreement;
(ii) The Revolving Note;
(iii) The Security Agreement (the receipt
of which is hereby acknowledged by the Bank);
(iv) The Indemnity Agreement in the form of
Exhibit A to this Agreement (the receipt of which is hereby
acknowledged by the Bank);
(v) Ordinary and customary certificates,
documents and opinions satisfactory to the Bank and its
counsel including, without limitation, an opinion of the
Borrower's general counsel; and
(vi) Security agreements, financing
statements, and all other documents or instruments described
or contemplated herein or otherwise required by the Bank to
secure the payment of the Revolving Note and the performance
by the Borrower of its obligations hereunder and thereunder,
including, without limitation, the Security Agreement (the
"Security Instruments").
(b) In connection with the Bank's issuance of each
Documentary or Standby Letter of Credit, the Borrower shall, in
addition to the documents required in Section 10(a) above,
execute and deliver to the Bank a Letter of Credit Application and
Agreement (herein so called), provided the Bank shall have no
obligation to issue a Documentary or Standby Letter of Credit for the
account of the Borrower until a Letter of Credit Application and
Agreement has been executed by the Borrower and delivered to the Bank.
(c) The Borrower shall cause to be executed and
delivered to the Bank the following documents and instruments, provided
the Bank shall have no obligation to make any advance under the
Revolving Note to the Borrower until each of said documents and
instruments are fully executed by the applicable third party and
delivered to the Bank:
(i) Landlord's waivers from each landlord at
each location where the Borrower has any of its assets
(including inventory, equipment, and business records) and
where (a) such a waiver would be required in order to place
the Bank in a superior lien position to that of the landlord
and (b) the aggregate value of Borrower's tangible assets at
such location exceeds $1,000,000.00;
(ii) Guaranty Agreements, in form and
substance satisfactory to the Bank, from each of the
Guarantors, guaranteeing the prompt payment and performance by
the Borrower of its obligations hereunder (collectively, the
"Guaranty Agreements"); and
(iii) A Stock Pledge Agreement from the
Company, in form and substance satisfactory to the Bank,
pursuant to which the Company shall pledge to the Bank as
collateral security for the Borrower's obligations to the Bank
hereunder, a security interest in sixty-five percent (65%) of
any and all issued and outstanding shares of stock of Fossil
Europe B.V. and Fossil (East) Ltd., whether now or hereafter
issued by such subsidiaries of the Company (the "Stock Pledge
Agreement").
11. Conditions Precedent to each Loan and Issuance of each Documentary
or Standby Letter of Credit. Notwithstanding any other provision of this
Agreement or any other Loan Document to the contrary, it is understood and
<PAGE>
agreed that the Bank's obligation to make any advance or extension of credit
hereunder on any date (including the issuance of any Documentary or Standby
Letter of Credit) is subject to the satisfaction of the following conditions
precedent:
(a) The Borrower shall have executed and delivered,
or cause to have been executed and delivered, to the Bank this
Agreement and the other loan documentation referred to in Section 10
hereof.
(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.
(d) The representations and warranties contained
herein and in the other Loan Documents (as hereinafter defined) shall
be true and correct as of such date.
(e) No default or event of default shall have
occurred and be continuing hereunder or under any of the other Loan
Documents.
(f) 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 this Agreement.
12. Representations and Warranties. Until payment and performance in
full of the Revolving Note, unless the Borrower receives prior written approval
of a deviation therefrom from the Bank, the Borrower and each of the Guarantors
jointly and severally represent, warrant and covenant that:
(a) The Borrower and each of the Guarantors is a
limited partnership, corporation or business trust, as the case may be,
duly organized, validly existing and in good standing under the laws of
the state of its organization and is duly licensed, qualified to do
business and in good standing in each jurisdiction in which the
ownership of its property or the conduct of its business requires such
licensing and qualification and where the failure to be so licensed or
qualified would have a material adverse effect upon (i) its business,
operations, properties, assets or condition (financial or otherwise),
or (ii) its ability to perform or of the Bank to enforce its
obligations under the Loan Documents to which it is a party. Borrower
and each of the Guarantors has all powers and all permits consents and
authorizations necessary to own and operate properties and to carry on
its business as presently conducted. The execution, delivery and
performance of this Agreement and the Guaranty Agreements by the
Guarantors and the execution, delivery and performance of this
Agreement by the Borrower, the borrowings hereunder and the execution
and delivery of the Revolving Note, the Security Instruments
(hereinafter defined), the Letter of Credit Applications, the Guaranty
Agreements, the Stock Pledge Agreement, and the several agreements and
instruments contemplated thereby, (i) have been duly authorized by
proper corporate, partnership or trust proceedings, as appropriate, and
(ii) will not contravene, or constitute a default under, any provision
of applicable law or regulation or of the Agreement of Limited
Partnership, Articles of Incorporation, ByLaws 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. To the
best of Borrower's and Guarantors' knowledge, no consent or
authorization of, filing with or other act by or in respect of, any
governmental authority or any other person (other than the Bank) is
required in connection with the borrowings hereunder or with the
execution, delivery, performance, validity or enforceability of any of
the Loan Documents, except for such consents, authorizations, filings
or acts as have been obtained, filed or taken by the Borrower and the
Guarantors prior to the date hereof. This Agreement, the Revolving
Note, the Security Instruments, the Letter of Credit Applications, the
Guaranty Agreements, the Stock Pledge Agreement, and any other
agreements, documents and instruments contemplated
<PAGE>
herein and thereby, or in any way related thereto whether executed
simultaneously herewith or hereafter (all of same being hereinafter
sometimes called the "Loan Documents"), when duly executed and
delivered in accordance with this Agreement, will each constitute a
legal, valid and binding obligation of each of the Borrower and the
Guarantors, if a party thereto, enforceable against each such party in
accordance with its respective terms.
(b) The audited balance sheet of the Company at
January 3, 1998, the related statement of income and retained earnings
for the period then ended, copies of which have been delivered to the
Bank, accurately represent the financial position of the Company at
December 31, 1997, and the results of its operations for the periods
then ended materially prepared in conformity with generally accepted
accounting principles applied on a basis consistent with the preceding
year. No material adverse change has occurred since December 31, 1997
position or in the results of operations of the Company or in its
business.
(c) No approvals or consents of any governmental
department, administrative agency or instrumentality having
jurisdiction over the Borrower or any Guarantor are necessary to permit
the Borrower or any Guarantor to enter into the Loan Documents to which
it is a party or consummate the transactions contemplated by the
Conveyance Agreement, except for such approvals and covenants as have
been obtained.
(d) There is no action, suit or proceeding pending
or, to the knowledge of the Borrower or any Guarantor, threatened
against the Borrower or any Guarantor or the Collateral (hereinafter
defined) before any court, governmental department, administrative
agency or instrumentality which, if such action, suit or proceeding
were adversely determined, would materially affect the financial
position or the results of operations of the Borrower or any Guarantor
or its business or the ability of the Borrower or any Guarantor to
perform its obligations under the Loan Documents.
(e) To the best of the Company's management's
knowledge, no default or Event of Default (hereinafter defined) has
occurred and is continuing.
(f) To the best of the Company's management's
knowledge, each of the Borrower and the Guarantors has good and
indefeasible title to all of its assets and properties, free and clear
of all security interests, mortgages, liens or encumbrances, except as
otherwise permitted under this Agreement (including prior lender's
liens, which shall be released promptly upon the execution of this
Agreement) or reflected in the Company's financial statements submitted
to the Bank and dated as of January 3, 1998.
(g) Neither the Borrower nor any Guarantor is an
investment company within the meaning of the Investment Company Act of
1940.
(h) To the best of the Company's management's
knowledge, each of the Borrower and the Guarantors has filed all United
States federal tax returns and all material State and foreign tax
returns required to be filed by it and paid all sums required thereby
to the extent the same have become due and before they may have become
delinquent in accordance with such returns, or is contesting the
payment of same diligently and in good faith before the proper taxing
authority. To the best of the Company's management's knowledge, all
other material tax returns required to be filed by the Borrower and the
Guarantors with any taxing jurisdiction have been filed and all tax
liabilities shown thereon to be due have been paid to the extent the
same have become due and before they may have become delinquent in
accordance with such returns, or the payment of such tax liabilities is
being contested diligently and in good faith before the proper taxing
authority, and such returns properly reflect the taxes of the Borrower
and the Guarantors, as applicable, for the periods covered thereby in
all material respects.
(i) The security interests, mortgages and liens
attaching to the Collateral will at all times be eligible to constitute
valid, perfected and enforceable first priority security interests,
mortgages and liens in
<PAGE>
favor of the Bank, subject to no other security interests, mortgages,
liens or encumbrances, except as otherwise permitted under this
Agreement. Before any funding under the Revolving Note, the Borrower
and the Company will have participated with the Bank in taking, all
necessary action and will have assisted in making all necessary filings
for accounts and inventory and for other collateral including patents
and trademarks (with regard to which only financing statements will be
filed) to assist in providing the Bank with perfected, first priority
(except as otherwise permitted under this Agreement) security
interests, mortgages and liens in the Collateral under the laws of all
applicable jurisdictions, except with regard to those jurisdictions
where the aggregate book value of Borrower's tangible assets does not
exceed $2,000,000.00.
(j) Borrower and each Guarantor (a) is solvent and
will continue to be solvent after giving effect to the transactions
contemplated hereunder, and (b) is able to pay its debts as they mature
and has (and has reason to believe it will continue to have) sufficient
capital (and not unreasonably small capital) to carry on its business
and all businesses in which it is about to engage. The assets and
properties of Borrower and each Guarantor at a fair valuation and at
their present fair salable value are, and will be, greater than the
indebtedness of Borrower and each such Guarantor, respectively
(including subordinated and contingent liabilities computed at the
amount which, to the best of the Company's management's knowledge,
represents an amount which can reasonably be expected to become an
actual or matured liability).
13. Affirmative Covenants. The Borrower and the Company hereby agree
that, until payment and performance in full of the Revolving Note, unless the
Borrower receives prior written approval of a deviation therefrom from the Bank,
the Borrower and the Company shall, and except in the case of delivery of
financial information, reports and notices, shall cause each of the Guarantors
to:
(a) Annual Statements. Furnish the Bank, within one
hundred (100) days after the end of each fiscal year of the Company,
(i) a copy of the Company's audited consolidated financial statements,
consisting of at least a balance sheet and related statement of income,
retained earnings and changes in financial condition of the Company
prepared in conformity with generally accepted accounting principles,
applied on a basis consistent with that of the preceding year, and
certified by an independent certified public accountant selected by the
Company and reasonably satisfactory to the Bank, (ii) a copy of the
consolidating financial statements of the Company prepared by the
Company, and (iii) a copy of the Form 10-K of the Company for such
fiscal year.
(b) Quarterly Statements. Furnish the Bank within
fifty (50) days after the end of each fiscal quarter of the Company
during the term hereof, (i) a copy of its unaudited consolidating
financial statements for such fiscal quarter, consisting of at least a
balance sheet and related statement of income, materially prepared in
conformity with generally accepted accounting principles and certified
by an authorized officer of the Company, and (ii) a copy of the Form
10Q of the Company for such fiscal quarter.
(c) Compliance Certificate. Furnish the Bank
concurrently with the delivery of the financial statements required to
be delivered pursuant to clauses (a) and (b) above, a Compliance
Certificate in a form similar to the Compliance Certificate attached
hereto as Exhibit B, but including all representations and warranties
to the satisfaction of the Bank, signed by an authorized officer of
Borrower and the Company.
(d) Accounts Receivable Summary. Furnish the Bank
within fifty (50) days after the end of each fiscal quarter of the
Borrower during the term hereof a summary of the Borrower's accounts
receivable (including, without limitation, a list of the ten account
debtors who owe the Borrower the greatest amount of accounts
receivable), which summary shall be in form satisfactory to the Bank.
(e) Accounts Receivable Listing and Aging. Furnish
the Bank, (i) within ten (10) days of any request by the Bank, a
listing and aging of Borrower's domestic accounts receivable for a
period end not more than 45 days prior to such request by the Bank. The
previous month end, and (ii) within forty-five (45) days of any request
by the Bank, a listing and aging of Borrower's international accounts
receivable for the previous
<PAGE>
month end, in each case with aging of accounts receivable on the basis
of, but not limited to, current, 30, 60, and over 90 days from date of
original invoice, all to the satisfaction of the Bank.
(f) Accounts Payable Listing and Aging. Furnish the
Bank, (i) within ten (10) days of any request by the Bank, a listing
and aging of Borrower's domestic accounts payable for the previous
month end, and (ii) within thirty (30) days of any request by the Bank,
a listing and aging of Borrower's international accounts payable for
the previous month end, which listing and aging shall be in form
satisfactory to the Bank.
(g) Inventory Summaries. Furnish the Bank, (i) within
ten (10) days of any request by the Bank, a listing of Borrower's
domestic inventory, and (ii) within thirty (30) days of any request by
the Bank, a listing of Borrower's international inventory, which
listing shall be in form and detail acceptable to the Bank.
(h) Insurance. Maintain insurance with reasonable
companies in the amounts and types and against the risks, liabilities
and contingencies as is usually carried by a similar business in the
same general area and of similar size to the Borrower and the Company
with the Bank named as loss payee as its interest may appear, such
policies to be noncancelable without ten (10) days prior written notice
to the Bank.
(i) Taxes. Pay and discharge all taxes, assessments
and governmental charges or levies imposed on it or on its income or
profits or on any of its property prior to the date on which such
taxes, assessments and governmental charges or levies become due and
payable; provided, however, that neither the Borrower nor any Guarantor
shall be required to pay and discharge or cause to be paid and
discharged any such taxes, assessments and governmental charges or
levies so long as the validity or amount thereof shall be contested in
good faith by appropriate proceedings diligently pursued and
appropriate reserves have been provided therefor; and in any event, pay
and discharge all taxes, assessments and governmental charges or levies
imposed on the Borrower or any Guarantor or on its income or profits or
on any of its property prior to the date on which liens attach thereto
and become of public record for a period in excess of fifteen (15)
days.
(j) Litigation. Promptly give notice to the Bank of
all litigation and all proceedings before governmental or regulatory
agencies affecting the Borrower or any Guarantor except litigation or
proceedings that could not reasonably be expected to have material
adverse effect upon the financial condition of the Borrower or any such
Guarantor.
(k) Further Assurances. At any time and from time to
time, execute and deliver such further instruments and take such
further action as may reasonably be requested by the Bank, in order to
cure any defects in the execution and delivery of, or to comply with or
accomplish the covenants and agreements contained in the Loan
Documents, including, specifically but without limitation, the
perfection and maintenance of a perfected first lien and security
interest in and to the Collateral.
(l) Liens. Subordinate, on a best efforts basis, any
purchase money liens against Borrower's assets to Bank by a
Subordination Agreement in substance and form reasonably satisfactory
to the Bank.
(m) Books and Records. Make available to the Bank
during normal business hours at the Borrower's main office its books
and records, including, but not limited to, the subsidiary journals,
accounts receivable files, inventory records, general ledger, and
correspondence files. Bank shall have the right to examine its
collateral at any reasonable time without prior notice.
(n) Existence. Continue to be a limited partnership,
corporation or business trust, as the case may be, duly organized and
existing in good standing under the law of the jurisdiction under which
it is organized and continue to be duly licensed or qualified as a
foreign limited partnership, corporation or business trust, as the case
may be, in all jurisdictions wherein the character of the property
owned or leased by it or the nature of the business transacted by it
makes licensing or qualification necessary by a foreign limited
<PAGE>
partnership, corporation or business trust, as the case may be, except
where the failure to qualify would not have a material adverse affect
on its business or operations as a whole.
(o) Expenses. Pay reasonable expenses, including
reasonable legal expenses and attorney's fees, of the Bank which have
been or may be incurred by the Bank in connection with the preparation
of this Agreement and the lending and incurring of obligations or
liabilities hereunder, the collection of any note authorized hereby, or
for the enforcement of Borrower's or any Guarantor's obligations
hereunder and under any document executed to secure the payment of any
note authorized hereunder and for the recording and filing and
recording and refiling of any such document.
(p) Default, Name Change, Casualty. Give notice to
Bank in writing of the occurrence of any default or Event of Default
under this Agreement, any change in name, identity or structure of
Borrower or any Guarantor, and any uninsured or partially uninsured
loss in excess of $100,000 through fire, theft, liability or property
damage.
(q) Landlord's Waivers. Make a good faith effort to
obtain landlord's waivers, in form and substance reasonably
satisfactory to the Bank, from each landlord at each place of business
of the Borrower (i) where such a waiver would be required in order to
place the Bank in a superior lien position to that of the landlord, and
(ii) which is not otherwise required to be delivered by the Borrower to
the Bank pursuant to Section 10(c)(i) hereof.
(r) Guarantees/Domestic Subsidiaries Stock Pledges.
At the discretion of the Company, either (i) cause each subsidiary of
the Company which is incorporated or formed in the United States of
America and which owns or holds tangible assets having an aggregate
book value of $2,000,000.00 or more (each, a "Significant Domestic
Subsidiary") to execute a Guaranty Agreement in the form of Exhibit C
attached hereto and a Security Agreement in the form of Exhibit D
attached hereto, or (ii) pledge to the Bank, as collateral security for
the Borrower's obligations to the Bank hereunder, a security interest
in one hundred percent (100%) of the stock of each such Significant
Domestic Subsidiary by executing a Stock Pledge Agreement in the form
of Exhibit E attached hereto.
14. Negative Covenants. The Borrower and the Guarantors hereby agree
that, so long as the Revolving Note is outstanding and unpaid, unless the
Borrower receives prior written approval of a deviation therefrom from Bank, the
Borrower and the Guarantors shall not directly or indirectly:
(a) Debt. Create, incur, assume or suffer to exist any debt
for borrowed money, whether by way of loan, or the issuance or sale of
bonds, debentures, notes or securities, including deferred debt for the
purchase price of assets, except (i) the loans described herein, (ii)
revolving credit loans in an aggregate principal amount of up to
(Y)600,000,000.00 from any Japanese domestic bank; provided, that the
only security for such revolving credit loans shall be the JDB Letter
of Credit, (iii) loans from one or more Guarantors to the Borrower or
another Guarantor, so long as the indebtedness in respect of such loans
is unsecured and fully subordinated to the indebtedness owing to the
Bank pursuant to a written subordination agreement in form and
substance satisfactory to the Bank, and (iv) current accounts payable
and other current obligations (other than for borrowed money) arising
out of transactions in the ordinary course of business.
(b) Liabilities. Assume, guarantee, endorse, suffer
to exist or otherwise become liable upon, or agree to purchase or
otherwise furnish funds for the payment of, the obligations of any
person, firm or corporation, except for
(i) the obligations hereunder;
(ii) endorsement of negotiable instruments
for deposit or collection or similar
<PAGE>
transactions in the ordinary course of
business;
(iii) obligations under operating leases;
(iv) obligations for indebtedness secured by
purchase money liens, not to exceed
$1,000,000 in the aggregate;
(v) obligations under foreign currency
exchange contracts, so long as such
obligations are incurred in the
ordinary course of its business;
(vi) indebtedness to shareholders, officers
or partners, so long as such indebted-
ness is unsecured, fully subordinated
to the indebtedness owing to the Bank
in form and substance satisfactory to
the Bank, and evidenced by debt instru-
ments satisfactory in form and sub-
stance to the Bank; and
(vii) any other indebtedness subordinated to
the indebtedness owing to the Bank,
pursuant to a written subordination
agreement in form and substance satis-
factory to the Bank.
(c) Encumbrances. Create, incur, assume or suffer to
exist any mortgage, deed of trust, pledge, encumbrance, lien or
security interest of any kind, upon any of its property now owned or
hereafter acquired, except (i) liens, mortgages, encumbrances or
security interest to secure payment of the borrowings authorized
hereunder; (ii) pledges or deposits to secure obligations under
workmen's compensation laws or of similar legislation; (iii) deposits
to secure public or statutory obligations; (iv) statutory mechanics',
carriers', workmen's, repairmen's liens or other like items in the
ordinary course of business in respect to obligations which are not
overdue or are being contested in good faith; (v) existing liens not
contemplated under this Agreement as reflected by the financial
statements of the Company submitted to the Bank and dated as of January
3, 1998 or disclosed to Bank; (vi) liens for taxes, assessments or
other governmental charges or levies not yet due or liens which are
being contested in good faith by appropriate action but which are in an
amount less than $10,000; (vii) legal or equitable encumbrances not in
excess of $250,000 in the aggregate deemed to exist by reason of the
existence of any litigation or other legal proceeding or arising out of
a judgment or award with respect to which an appeal is being
prosecuted; and (viii) additional purchase of equipment and furniture
and fixtures not to exceed $4,000,000 per year.
(d) Subsidiaries. Form any new subsidiary or merge or
invest in or consolidate with any corporation or other entity, or sell,
lease, assign, transfer, or otherwise dispose of (whether in one
transaction or as a series of related transactions) all or
substantially all of its assets, whether now owned or hereafter
acquired; or acquire by purchase or otherwise, all or substantially all
of the assets of any corporation or other entity; provided, however,
that (i) the Borrower and the Company may form new subsidiaries, so
long as the Bank has given its prior, written approval, and (ii) the
Company may merge or consolidate one or more of its wholly owned
subsidiaries (other than Borrower) with or into (A) the Company
(provided that the Company shall be the surviving corporation) or (B)
any one or more of its wholly owned subsidiaries, and (iii) the Company
may merge or consolidate one or more of its wholly-owned subsidiaries
with or into Borrower (provided that Borrower shall be the surviving
corporation).
(e) Business. Change the nature of its business or
engage in a kind of business different from that which it presently
conducts.
(f) Loans to Officers. Make any loans or advances to
its shareholders or officers in excess of $200,000 to any individual
officer or shareholder or $500,000 in the aggregate to all officers and
shareholders.
(g) Sale/Leaseback Transactions. Except for transact-
ions involving property or assets with a
<PAGE>
fair market value in the aggregate less than $1,000,000, enter into (i)
any lease as a lessor which calls for the purchase or equivalence of a
purchase or rental materially below the fair market value of the
property or an option to purchase at a price below the fair market
value of the property; (ii) any agreement in which it sells and then
leases back any property or assets.
(h) Pledges. Pledge any of its assets without prior
consent of the Bank, including, but not limited to, any purchase money
liens in an amount in excess of $1,000,000, not already disclosed to
Bank.
15. Financial Covenants. The Company covenants and agrees that so long
as the Revolving Note is outstanding and unpaid, the Company will, on a
consolidated basis:
(a) Quick Ratio. Maintain a ratio of cash and account
receivables to current liabilities of not less than 0.75 to 1.0
throughout the term hereof. Cash, accounts receivable and current
liabilities are defined according to generally accepted accounting
principles, with the exception that current liabilities will include
all indebtedness of the Borrower under the Revolving Note.
(b) Net Worth. Maintain minimum net worth of not less
than
(1) $85,000,000 during the period
beginning the date hereof and ending January 2, 1999; and
(2) beginning January 3, 1999, and
during each subsequent fiscal year of the Company, the amount
of the minimum net worth required under this Agreement during
the immediately preceding fiscal year of the Company plus
seventy percent (70%) of the Company's net income after taxes,
on a consolidated basis, during such preceding fiscal year
(with net income after taxes being determined in accordance
with generally accepted accounting principles and no reduct-
ions being made to the minimum net worth for any fiscal year
during which the Company's net income after taxes, on a con-
solidated basis, is a negative number).
(c) Fixed Charge Coverage Ratio. Maintain a ratio of
Cash Flow to Fixed Charges of not less than 2.0 to 1.0 throughout the
term hereof. "Cash Flow" is defined as the Company's net income, plus
depreciation and amortization, plus interest expense, plus rental
expense, all on a consolidated basis, and each determined in accordance
with generally accepted accounting principles. "Fixed Charges" is
defined as the Company's current portion of long term debt and
capitalized leases, plus interest expense, plus rental expense, plus
dividends, all on a consolidated basis, and each determined in
accordance with generally accepted accounting principles. Cash Flow and
Fixed Charges shall be determined as of the end of the immediately
preceding fiscal quarter for the twelvemonth period ended as of the end
of such fiscal quarter for which the determination is being made (i.e.,
on a rolling fourquarter basis).
(d) Minimum Net Income. Achieve net income of not less than
$1,000,000.00 for each fiscal quarter of the Company, commencing with
the fiscal quarter ending October 3, 1998 (with net income to be
determined in accordance with generally accepted accounting
principles).
16. Default. The Borrower shall be in default hereunder if any one of
the following events of default ("Events of Default") shall occur and be
continuing, namely:
(a) Default by the Borrower, any Guarantor or any other party
to the Loan Documents in the payment of any sums owing to the Bank; or
(b) Default by the Borrower, any Guarantor or any other party
to the Loan Documents in the payment of any sums owing to others for
borrowed money or the deferred payment of goods or services
<PAGE>
(excluding trade payables) in excess of $100,000 (hereinafter referred
to as the "Other Indebtedness") or if the holder of any such Other
Indebtedness declares or may declare such Other Indebtedness due prior
to the stated maturity because of any default thereunder; or
(c) Any representation, statement, warranty,
projection, or certificate made by the Borrower or any Guarantor in the
Loan Documents, or in any agreement, document or instrument executed
pursuant hereto or concurrently herewith, or hereafter furnished to the
Bank in connection with any loan or loans hereunder, shall prove to
have been incorrect in any material respect at the time of making or
issuance thereof; or
(d) Borrower or any Guarantor, as applicable, shall
fail or neglect to perform, keep or observe any covenant contained in
Section 13(m), 13(n), 13(p) or 14 hereof on the date that Borrower or
any such Guarantor, as applicable, is required to perform, keep or
observe such covenant.
(e) Company shall fail or neglect to perform, keep or
observe any covenant contained in Section 3 of the Stock Pledge
Agreement on the date that Company is required to perform, keep or
observe such covenant.
(f) Borrower, any Guarantor or any other party to the
Loan Documents shall fail or neglect to perform, keep or observe any
covenant or agreements set forth in the Loan Documents or in any other
agreement, document or instrument executed pursuant hereto (other than
a covenant or agreement the performance of which is dealt with
specifically elsewhere in this Section 16), and such default is not
cured to the Bank's satisfaction within thirty (30) days of the
occurrence thereof; provided, however, that the provisions of this
Agreement shall control in the event that any of such provisions are in
conflict with the provisions of any other agreement, mortgage,
indenture or instrument executed pursuant hereto and all of such
provisions in such other instruments shall be deemed to be cumulative
of the provisions hereof to the extent such provisions are not
inconsistent herewith; or
(g) The Borrower, any Guarantor or any other party to
the Loan Documents shall apply for or consent to, or acquiesce in the
appointment of a receiver, trustee, or liquidator of itself or himself
or of its or his property, or admit in writing its or his inability to
pay its or his debts as they mature, or make a general assignment for
the benefit of creditors or an Order of Relief be entered with respect
to the Borrower, any guarantor or any other party to the Loan Documents
by any court having competent jurisdiction in the premises, or file a
voluntary petition in bankruptcy or a petition or answer seeking
reorganization, composition, readjustment or arrangement, or similar
relief with creditors, under any present or future statute, law or
regulation, or otherwise, or take advantage of any insolvency law or
file an answer admitting the material allegations of a petition filed
against it or him in bankruptcy, reorganization, or insolvency
proceedings, or corporate action shall be taken by it or him for the
purpose of effecting any of the foregoing, or it or he shall have a
receiver or trustee or assignee in bankruptcy or insolvency appointed
for it or him, or its or his property, without its or his application
or consent; or
(h) Except for liabilities permitted pursuant to
Sections 14 (a), (b), (c) or (d) hereof and the contingent liabilities
previously disclosed to the Bank or other liabilities not contemplated
by this Agreement which are incurred in the ordinary course of
business, the Borrower or any Guarantor shall become or remains liable,
directly or indirectly, for or in connection with obligations in excess
of $250,000, stock or dividends of any other person or entity, whether
by guaranty, endorsement, agreement to purchase or repurchase,
agreement to lease, agreement to supply or advance funds (including,
without limitation, agreements to maintain working capital, solvency or
other balance sheet conditions or agreements to purchase stocks or make
capital contributions), or otherwise.
Thereupon, in any such case, the obligation of the Bank to make any
advance or extend credit hereunder (including the issuance of Documentary or
Standby Letters of Credit) to or for the account of the Borrower pursuant
<PAGE>
hereto shall immediately terminate and the Bank shall be entitled to each and
every remedy and to take each and every action permitted by the Loan Documents.
17. Notice. All notices and other communications given to any party
hereto, in accordance with the provisions of this Agreement, shall be deemed to
have been given to any party when sent by registered or certified mail, if by
mail, or when delivered to the telegraph company, charges prepaid, if by
telegram, in each case addressed to the party as provided as follows:
if to the Bank: Wells Fargo Bank (Texas),
National Association
1445 Ross Avenue
MAC 5303-031, 3rd Floor
Dallas, Texas 75202
Attention: Carol Polasky
if to the Borrower: Fossil Partners, L.P.
2280 N. Greenville Avenue
Richardson, Texas 750824412
Attention: Randy S. Kercho
if to Guarantors: Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 750824412
Attention: Randy S. Kercho
Fossil Intermediate, Inc.
1105 N. Market Street
Suite 1300
P. O. Box 8985
Wilmington, Delaware 19899
Attention: Corporate Trust
Administration
with a copy to: Fossil Intermediate, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 750824412
Attention: Randy S. Kercho
Fossil Trust
1100 N. Market Street
Rodney Square North
Wilmington, Delaware 19890
Attention: Corporate Trust
Administration
with a copy to: Fossil Trust
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 750824412
Attention: Randy S. Kercho
<PAGE>
Fossil New York, Inc.
366 Fifth Avenue
New York, New York 10001
Attention: Randy S. Kercho
Fossil Stores I, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Randy S. Kercho
with a copy to: Fossil Stores I, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Randy S. Kercho
Fossil Stores II, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
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
18. Waiver. No failure to exercise and no delay in exercising on the
part of the Bank of any right, power or privilege hereunder, shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law or in any other agreement.
19. Survival of Agreements. All agreements, representations and
warranties herein made, shall survive the execution and delivery of the
Revolving Note, the Term Note and the Security Instruments and the making and
renewal thereof.
20. Amendment. This Agreement may not be amended except in writing
signed by the Borrower, the Guarantors and the Bank.
21. Successors. This Agreement shall be binding upon and inure to the
benefit of the Borrower, the Guarantors, the Bank and the successors and assigns
of each party hereto.
22. Severability. In the case any one or more of the provisions
contained in the Loan Documents should be invalid, illegal, or unenforceable, in
any respect, the validity, legality, and enforceability of the remaining
provisions contained therein shall not in any way be affected thereby.
23. Interest. It is the intention of the parties hereto to comply with
the laws of the State of Texas accordingly, it is agreed that notwithstanding
any provisions to the contrary in the Loan Documents, in no event shall said
Loan Documents require the payment or permit the collection of interest, as
defined under the laws of the State of
<PAGE>
Texas, in excess of the maximum amount permitted by such laws. If any such
excess of interest is contracted for, charged or received, under the Loan
Documents, or in the event the maturity of the indebtedness evidenced by the
Revolving Note or is accelerated in whole or in part, or in the event that all
or part of the principal or interest of the Revolving Note shall be prepaid, so
that under any of such circumstances the amount of interest contracted for,
charged, or received under the Loan Documents on the amount of principal
actually outstanding from time to time thereunder shall exceed the maximum
amount of interest permitted by the laws of the State of Texas, then in any such
event (a) the provisions of this section shall govern and control, (b) neither
the Borrower nor any other person or entity now or hereafter liable for the
payment of the Revolving Note shall be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum amount of interest
permitted to be contracted for by, charged to or received from the party
obligated thereon under the laws of the State of Texas, (c) any such excess
which may have been collected shall be either applied as a credit against the
then unpaid principal amount on the Revolving Note or refunded to the person
paying the same, at the holder's option, and (d) the effective rate of interest
shall be automatically reduced to the maximum lawful rate of interest permitted
to be contracted for by, charged to or received from the party obligated thereon
under the laws of the State of Texas as now or hereafter construed by the courts
having jurisdiction thereof. It is further agreed that without limitation of the
foregoing, all calculations of the rate of interest contracted for, charged or
received under the Loan Documents, for the purpose of determining whether such
rate exceeds the maximum lawful rate of interest, shall be made, to the extent
permitted by the laws of the State of Texas, by amortizing, prorating,
allocating and spreading in equal parts during the period of the full stated
terms of the Revolving Note all interest at any time contracted for, charged or
received from the undersigned or otherwise by the holder or holders thereof in
connection with such Revolving Note.
24. Participations, Etc. The Borrower expressly recognizes and agrees
that, so long as the total indebtedness of the Borrower to the Bank is
$50,000,000 or less, upon the mutual consent of the Borrower and the Bank
(unless an Event of Default has occurred hereunder in which case no consent of
the Borrower shall be necessary), the Bank may sell to other lenders
participations in the loans incurred by the Borrower pursuant hereto. The
Borrower expressly recognizes and agrees that, if the total indebtedness of the
Borrower to the Bank is more than $50,000,000, the Bank, without the consent of
the Borrower, may sell to other lenders participations in the loans incurred by
the Borrower pursuant hereto. Therefore, as security for the due payment and
performance of all indebtedness and other liabilities and obligations of the
Borrower to the Bank under the Loan Documents and any other obligation of the
Borrower to the Bank, whether now existing or hereafter arising, and to such
lenders arising now by reason of such participations or otherwise, the Borrower
hereby grants to the Bank and to such lenders, a lien on and security interest
in any and all deposits or other sums at any time credited by or due from the
Bank and such lenders or either or any of them to the Borrower, whether in
regular or special depository accounts or otherwise, and any and all monies,
securities and other property of the Borrower, and the proceeds thereof now or
hereafter held or received by or in transit to the Bank and such lenders or
either or any of them, from or for the Borrower whether for safekeeping,
custody, pledge, transmission, collection or otherwise and any such deposit,
sums, monies securities and other property may at any time after Default be
setoff, appropriated and applied by the Bank and by such lenders, or either or
any of them, against any indebtedness, liabilities or other obligations, whether
now existing or hereafter arising, of the Borrower or any of them, under this
Agreement, the Revolving Note, or otherwise whether or not such indebtedness,
liabilities or other obligation is then due or secured by any indebtedness,
liabilities or other obligation is then due or secured by any collateral or if
it is so secured whether or not such collateral held by the Bank or such lenders
is considered to be adequate.
25. Merger. This Agreement represents the final agreement between the
Borrower and the Bank pertaining the transactions contemplated by the Amended
Agreement. All prior agreements (including the Amended Agreement) between the
Borrower and the Bank pertaining to the Line of Credit, the Term Loan and the
other matters set forth in this Agreement are merged into and replaced by this
Agreement.
26. Ratification of Guaranties. Each of the Guarantors hereby
acknowledges and consents to all of the terms and conditions of this Agreement
and hereby ratifies and confirms the Guaranty Agreement to which it is a party
to or for the benefit of the Bank. Each of the Guarantors hereby acknowledges
that it has no claims, counterclaims, offsets, credits or defenses to the Loan
Documents or the performance of its obligations thereunder. Furthermore, each
<PAGE>
Guarantor agrees that nothing contained in this Agreement shall adversely affect
any right or remedy of the Bank under the Guaranty Agreement to which such
Guarantor is a party. Each Guarantor hereby agrees that with respect to the
Guaranty Agreement to which it is a party, all references in such Guaranty
Agreement to the "Guaranteed Obligations" shall include, without limitation, the
obligations of Borrower to Bank under this Agreement. Finally, each of the
Guarantors hereby acknowledges that the execution and delivery of this Agreement
and the other Loan Documents executed in connection herewith shall in no way
change or modify its obligations as a guarantor, debtor, pledgor, assignor,
obligor and/or grantor under its respective Guaranty Agreement except as
specifically provided in this Section 26 and shall not constitute a waiver by
the Bank of any of the Bank's rights against such Guarantor.
27. Ratification of Security Interests. The Borrower, the Company and
the Guarantors each hereby agree that the Commercial Security Agreement to which
it is a party to or for the benefit of the Bank is hereby expressly amended such
that the definition of "Obligations" contained therein includes, without
limitation, all indebtedness and other obligations of Borrower now or hereafter
existing hereunder this Agreement, the Revolving Note, and the other Loan
Documents, as amended hereby. Furthermore, the Borrower, the Company and the
Guarantors each hereby ratify and reaffirm all of their obligations under their
respective Commercial Security Agreements, as the same are amended hereby, and
acknowledge that the Commercial Security Agreement to which it is a party is not
subject to any claims, defenses or offsets. Finally, the Borrower, the Company
and the Guarantors each hereby acknowledge that the execution and delivery of
this Agreement and the other Loan Documents executed in connection herewith
shall in no way change or modify its obligations as a guarantor, debtor,
pledgor, assignor, obligor and/or grantor under its respective Commercial
Security Agreement except as specifically provided in this Section 27 and shall
not constitute a waiver by the Bank of any of the Bank's rights against the
Borrower, the Company, and such Guarantor, respectively.
28. AGREEMENT FOR BINDING ARBITRATION. The parties agree 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.
29. Judgment Currency.
(a) If, for the purposes of obtaining judgment in any
court, it is necessary to convert a sum due hereunder or under the
Revolving Note from a currency (the 'Original Currency') into another
currency (the 'Other Currency'), the parties hereto agree, to the
fullest extent that they may effectively do so, that the rate of
exchange used shall be the rate of exchange prevailing on the business
day immediately preceding the day on which final judgment is given.
(b) The obligation of Borrower in respect of any sum due in
the Original Currency from it to Bank hereunder or under the Revolving
Note shall, notwithstanding any judgment in any Other Currency, be
discharged only if and to the extent that on the business day following
receipt by Bank of any sum adjudged to be so due in such Other Currency
Bank may in accordance with normal banking procedures purchase such
amount of the Original Currency with such Other Currency at the rate of
exchange prevailing on the business day preceding the day on which the
final judgment referred to in Section 29 (a) is given; if the amount of
the Original Currency so purchased is less than the amount of the
Original Currency which the Bank could have purchased at the rate of
exchange prevailing on the business day preceding the day on which such
final judgment is given, Borrower agrees, as a separate obligation of
Borrower to Bank and notwithstanding any such judgment, to indemnify
Bank against such difference, and if the amount of the Original
Currency so purchased exceeds the amount of the Original Currency which
the Bank could have purchased at the rate of exchange prevailing on the
business day preceding the day on which such final judgment is given,
Bank agrees to remit to Borrower such excess.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
EXECUTED as of the day and year first above
written.
"BANK"
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION,
By: /s/ Carol Polasky
-------------------------
Name: Carol Polasky
Title:
"BORROWER"
FOSSIL PARTNERS, L.P.
By: Fossil, Inc., its general
partner
By: /s/ Randy S. Kercho
--------------------
Randy S. Kercho
Executive Vice
President and
Chief Financial
Officer
"GUARANTORS"
FOSSIL, INC.
By: /s/ Randy S. Kercho
-------------------------
Randy S. Kercho
Executive Vice President
and Chief Financial
Officer
FOSSIL INTERMEDIATE, INC.
By: /s/ Kosta N. Kartsotis
-------------------------
Kosta N. Kartsotis,
President
<PAGE>
FOSSIL TRUST
By: /s/ Randy S. Kercho
-------------------------
Randy S. Kercho,
Treasurer
FOSSIL STORES I, INC.
By: /s/ Randy S. Kercho
-------------------------
Randy S. Kercho,
Treasurer
FOSSIL STORES II, INC.
By: /s/ Randy S. Kercho
-------------------------
Randy S. Kercho,
Treasurer
FOSSIL NEW YORK, INC.
By: /s/ Randy S. Kercho
-------------------------
Randy S. Kercho,
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Part I Item - Financial Statements of Fossil, Inc. and Subsidiaries as of
and for the Twenty-Six Weeks ended July 4, 1998 filed on Form 10Q.
</LEGEND>
<CIK> 0000883569
<NAME> Fossil, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
<EXCHANGE-RATE> 1.0000
<CASH> 30,787,882
<SECURITIES> 0
<RECEIVABLES> 34,969,319
<ALLOWANCES> 5,397,159
<INVENTORY> 61,050,474
<CURRENT-ASSETS> 129,417,674
<PP&E> 33,285,395
<DEPRECIATION> 12,031,704
<TOTAL-ASSETS> 155,434,642
<CURRENT-LIABILITIES> 42,850,695
<BONDS> 0
0
0
<COMMON> 208,791
<OTHER-SE> 111,303,212
<TOTAL-LIABILITY-AND-EQUITY> 155,434,642
<SALES> 121,247,906
<TOTAL-REVENUES> 121,247,906
<CGS> 61,441,870
<TOTAL-COSTS> 103,511,166
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 697,328
<INTEREST-EXPENSE> 116,941
<INCOME-PRETAX> 17,578,940
<INCOME-TAX> 7,209,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,369,940
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.50
</TABLE>
