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: October 2, 1999
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
November 15, 1999: 32,051,656
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 2, JANUARY 2,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,996 $ 57,263
Accounts receivable - net 54,379 42,582
Inventories 76,609 57,295
Deferred income tax benefits 6,609 5,655
Prepaid expenses and other current assets 7,430 3,538
-------- --------
Total current assets 209,023 166,333
Investment in affiliate 3,947 -
Property, plant and equipment - net 26,802 23,117
Intangible and other assets - net 5,825 4,628
-------- --------
$245,597 $194,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,899 $ 4,537
Accounts payable 20,247 14,512
Accrued expenses:
Co-op advertising 10,761 13,311
Compensation 4,260 3,246
Other 13,071 11,201
Income taxes payable 16,973 10,487
-------- --------
Total current liabilities 70,211 57,294
Minority interest in subsidiaries 2,605 1,864
Stockholders' equity:
Common stock, shares issued and outstanding,
32,063,824 and 31,398,136, respectively 321 209
Additional paid-in capital 39,378 34,345
Retained earnings 135,299 102,859
Accumulated other comprehensive income (2,217) (1,037)
Treasury stock at cost, none and 155,518 shares,
respectively - (1,456)
-------- --------
Total stockholders' equity 172,781 134,920
-------- --------
$245,597 $194,078
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE 13 FOR THE 13 FOR THE 39 FOR THE 39
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 104,831 $ 82,394 $ 278,379 $ 203,642
Cost of sales 52,193 41,961 138,319 103,403
--------- -------- --------- ---------
Gross profit 52,638 40,433 140,060 100,239
Operating expenses:
Selling and distribution 22,649 18,253 61,825 49,328
General and administrative 7,675 6,575 21,285 17,569
--------- -------- --------- ---------
Total operating expenses 30,324 24,828 83,110 66,897
--------- -------- --------- ---------
Operating income 22,314 15,605 56,950 33,342
Interest expense 27 51 76 168
Other income (expense) - net (31) (98) (215) (139)
--------- -------- --------- ---------
Income before income taxes 22,256 15,456 56,659 33,035
Provision for income taxes 9,125 6,400 23,231 13,609
--------- -------- --------- ---------
Net income $ 13,131 $ 9,056 $ 33,428 $ 19,426
Other comprehensive income:
Currency translation adjustment 978 1,638 (852) 1,382
Unrealized loss on short term investments (135) - (328) -
--------- -------- --------- ---------
Comprehensive income $ 13,974 $ 10,694 $ 32,248 $ 20,808
========= ======== ========= =========
Net income per share:
Basic $ 0.41 $ 0.29 $ 1.05 $ 0.63
========= ======== ========= =========
Diluted $ 0.39 $ 0.28 $ 1.00 $ 0.60
========= ======== ========= =========
Weighted average common and common
equivalent shares outstanding:
Basic 31,978 31,362 31,785 31,016
========= ======== ========= =========
Diluted 33,513 32,776 33,409 32,546
========= ======== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
FOR THE 39 WEEKS FOR THE 39 WEEKS
ENDED ENDED
OCTOBER 2, OCTOBER 3,
1999 1998
---------------- ----------------
<S> <C> <C>
Operating activities:
Net income $ 33,428 $ 19,426
Noncash items affecting net income:
Minority interest in subsidiaries 1,531 690
Depreciation and amortization 4,042 2,459
Increase in allowance for doubtful accounts 362 1,962
Increase in allowance for returns -
net of related inventory in transit 1,015 1,083
Deferred income tax benefits (1,035) (943)
Changes in assets and liabilities:
Accounts receivable (11,074) (14,785)
Inventories (18,089) (22,283)
Prepaid expenses and other current assets (4,095) (678)
Accounts payable 3,520 10,636
Accrued expenses 333 6,431
Income taxes payable 8,220 7,017
-------- --------
Net cash from operations 18,158 11,015
Investing activities:
Additions to property, plant and equipment (7,283) (3,624)
Acquisition of distributor assets (2,732) -
Investment in affiliate (3,947) -
Increase in intangible and other assets (702) (133)
-------- --------
Net cash used in investing activities (14,664) (3,757)
Financing activities:
Issuance of common stock 3,411 6,507
Treasury stock issued for options exercised 469 (2,647)
Distribution of minority interest earnings (790) (390)
Increase (repayments) of notes payable-banks 362 (4,046)
-------- --------
Net cash from (used in) financing activities 3,452 (576)
Effect of exchange rate changes on cash and cash equivalents (213) 163
-------- --------
Net increase in cash and cash equivalents 6,733 6,845
Cash and cash equivalents:
Beginning of period 57,263 21,104
-------- --------
End of period $ 63,996 $ 27,949
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
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 that are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of October 2,
1999, and the results of operations for the thirteen-week periods ended October
2, 1999, and October 3, 1998. 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 2, 1999. Operating results for the thirteen-week period ended
October 2, 1999, are not necessarily indicative of the results to be achieved
for the full year.
On July 21, 1999, the Board of Directors of the Company declared a 3-for-2 stock
split ("Stock Split") of the Company's $0.01 par value common stock ("Common
Stock") which was effected in the form of a stock dividend which was paid on
August 17, 1999 to stockholders of record on August 3, 1999. Retroactive effect
has been given to the Stock Split in stockholders' equity accounts beginning as
of the fiscal year ended January 2, 1999, 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" and "RELIC" brands names.
The Company's products are sold primarily through department stores and other
major retailers, both domestically and internationally.
RECLASSIFICATIONS. Reclassifications of certain 1998 amounts have been made to
conform to the 1999 presentation.
2. INVESTMENT IN AFFILIATED COMPANY
During August 1999, the Company invested $4.0 million in cash to acquire a 20%
interest in SII Marketing International, Inc. ("SMI"). SMI, a joint venture
formed between the Company and Seiko Instruments, Inc. was formed to design,
market and distribute watches in the mass-market distribution channel. The
investment is carried on an equity basis, which approximates the Company's
equity in SMI's underlying net book value. In connection with the formation of
the joint venture, the Company signed a multi-year Service Agreement with SMI to
perform certain marketing, design and merchandising functions. The compensation
the Company receives under the Service Agreement is based primarily on a
percentage of SMI's net sales.
3. ACQUISITIONS
Effective September 1999, Fossil U.K., Ltd. acquired certain assets of Junghans
U.K., Ltd. ("Junghans UK") for approximately $2.7 million in cash. Junghans UK
acted as the Company's primary distributor in the United Kingdom and Ireland.
The acquisition was accounted for as a purchase and, in connection therewith,
the Company recorded goodwill of approximately $0.6 million.
-4-
<PAGE>
4. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
October 2, January 2,
(IN THOUSANDS) 1999 1999
---- ----
<S> <C> <C> <C>
Components and parts $ 5,247 $ 3,402
Work-in-process 1,910 1,445
Finished merchandise on hand 55,285 40,344
Merchandise at Company stores 7,032 5,340
Merchandise in-transit from estimated
customer returns 7,135 6,764
------- -------
$76,609 $57,295
======= =======
</TABLE>
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 October 2,
1999, the Company had hedge contracts to sell 6.6 million German Marks for
approximately $3.8 million, expiring through December 1999 and 2,278 million
Italian Lira for approximately $1.3 million, expiring through November 1999.
<TABLE>
<CAPTION>
5. GEOGRAPHIC INFORMATION
(IN THOUSANDS)
FOR THE 13 WEEKS ENDED FOR THE 13 WEEKS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998
-------------------------- -----------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
U.S.- exclusive of
Company Stores $ 75,387 $12,921 $ 59,814 $ 7,327
Stores 10,804 454 7,281 99
Europe 19,960 2,363 14,936 1,456
Far East 41,833 6,575 43,829 7,339
Japan 1,549 1 2,111 (616)
Intergeographic items (44,702) - (45,577) -
-------- ------- -------- -------
Consolidated $104,831 $22,314 $ 82,394 $15,605
======== ======= ======== =======
FOR THE 39 WEEKS ENDED FOR THE 39 WEEKS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998
--------------------------- -------------------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- ---------- ---------
U.S.- exclusive of
Company Stores $ 190,392 $25,758 $144,945 $14,284
Stores 22,951 166 16,365 (301)
Europe 56,948 9,848 40,896 4,707
Far East 133,081 21,750 97,075 15,912
Japan 5,061 (573) 5,920 (1,260)
Intergeographic items (130,054) 1 (101,559) -
--------- ------- -------- -------
Consolidated $ 278,379 $56,950 $203,642 $33,342
========= ======= ======== =======
</TABLE>
-5-
<PAGE>
6. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
<TABLE>
<CAPTION>
FOR THE 13 FOR THE 13 FOR THE 39 FOR THE 39
(IN THOUSANDS, EXCEPT PER SHARE DATA) WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
OCTOBER 2, 1999 OCTOBER 3, 1998 OCTOBER 2, 1999 OCTOBER 3, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
Numerator:
Net income $ 13,131 $ 9,056 $ 33,428 $ 19,426
-------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 21,533 20,921 21,249 20,678
Treasury stock (158) (13) (31) -
Effect of stock dividend 10,603 10,454 10,567 10,339
-------- -------- -------- --------
31,978 31,362 31,785 31,016
-------- -------- -------- --------
BASIC EPS $ 0.41 $ 0.29 $ 1.05 $ 0.63
======== ======== ======== ========
DILUTED EPS COMPUTATION:
Numerator:
Net income $ 13,131 $ 9,056 $ 33,428 $ 19,426
-------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 21,533 20,715 21,249 20,678
Stock option conversion 1,535 943 1,624 1,020
Treasury stock (158) (13) (31) -
Effect of stock dividend 10,603 11,131 10,567 10,848
-------- -------- -------- --------
33,513 32,776 33,409 32,546
-------- -------- -------- --------
DILUTED EPS $ 0.39 $ 0.28 $ 1.00 $ 0.60
======== ======== ======== ========
</TABLE>
7. DEBT
In June 1999, the Company renewed its U.S. short-term revolver for one year and
amended the interest rate the Company pays on LIBOR based borrowings. All
borrowings under the U.S. short-term revolver accrue interest at the bank's
prime rate less 0.50% or LIBOR plus 0.75% (LIBOR plus 1.00% prior to June 29,
1999). The U.S. short-term revolver is unsecured and requires the maintenance of
net worth, quarterly income, working capital and financial ratios.
8. STOCKHOLDER'S EQUITY
During the Third Quarter of 1999, the Company repurchased 21,500 shares of
treasury stock for $583,583.
-6-
<PAGE>
FOSSIL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the thirteen and thirty-nine week periods ended
October 2, 1999 (the "Third Quarter" and "Year to Date," respectively), as
compared to the thirteen and thirty-nine week periods ended October 3, 1998 (the
"Prior Year Quarter" and "Prior Year YTD Period," respectively). 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 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 Company
offering a diversified range of accessories. The Company's product offerings
include an extensive line of fashion watches sold under its FOSSIL and RELIC
brands as well as complementary lines of small leather goods, belts, handbags
and sunglasses. In addition to developing its own brands, the Company leverages
its development and production expertise by designing and manufacturing private
label and licensed products for some of the most prestigious companies in the
world, including national retailers, entertainment companies and fashion
designers.
The Company has further capitalized on the increasing awareness of the FOSSIL
brand by entering into various license agreements. FOSSIL brand optical frames
and underwear are currently available under license agreements.
The Company's products are sold to department stores and specialty retail stores
in over 80 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 Asia, Australia, Canada, the
Caribbean, Europe, Central and South America 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 located in several major airports, on cruise ships and in certain
international markets. The Company's successful expansion of its product lines
worldwide and leveraging of its infrastructure have contributed to its
increasing net sales and operating profits.
COMPANY HIGHLIGHTS
o Sales of FOSSIL brand watches worldwide continue to represent over half of
the Company's net sales.
o FOSSIL Blue, a line of sport watches; FOSSIL Steel, stainless steel
watches; and F2, women's dress bracelet watches, collectively accounted for
the majority of the Company's FOSSIL brand watch sales.
o FOSSIL Big Tic, a revolutionary part analog, part digital watch that
highlights the seconds on a backlite digital display, was introduced on a
test basis in late 1998. The style was extremely well received in the
marketplace and represented approximately 10% of the Company's FOSSIL brand
watch volume sales during the Third Quarter and Year to Date.
o FOSSIL brand handbag sales continued to record double-digit sales growth
during the Third Quarter and Year to Date in comparison to the comparable
periods in 1998.
o FOSSIL brand sunglasses gained market share as a result of the consumer
preference for quality brand name items at more moderate price levels, both
of which align nicely with the Company's sunglass program initiatives. This
category has shown double digit growth on the Year to Date comparison.
-7-
<PAGE>
o RELIC, the Company-owned brand sold in leading national and regional chain
department and specialty stores, recorded sales volume growth exceeding 50%
during the Third Quarter and Year to Date. As a result of increasing RELIC
brand recognition, the Company at the request of retailers began the
extension of the RELIC brand into leather products during late 1998.
o Sales momentum continued in Europe, which recorded net sales increases of
FOSSIL brand product in excess of 30% in the Third Quarter and Year to Date
in comparison to the same periods in 1998.
o The Company operated 31 outlet and 14 retail stores at the end of the Third
Quarter as compared to 28 outlet and 9 retail stores at the end of the
Prior Year Quarter.
o The Company entered into separate license agreements to design, produce and
market DKNY and Diesel brand watches. The Company plans to launch these
lines in the first quarter and second quarter of 2000, respectively.
o In August, the Company formed a joint venture with Seiko Instruments
America, Inc. in which the Company acquired a 20% equity interest. The
Joint Venture Company is responsible for manufacturing, marketing and
distributing watches principally to the mass market distribution channel.
o The Company's Common Stock was added to the Standard & Poor's SmallCap 600
Index in June 1999.
o The Company declared a 3-for-2 stock split (the "3-for-2 Stock Dividend")
in the form of a 50% stock dividend paid on August 17, 1999.
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.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE
NET SALES CHANGE NET SALES CHANGE
------ ------
FOR THE 13 FOR THE 13 FOR THE 39 FOR THE 39
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
----------- ----------- ----------- -----------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 2, OCTOBER 3, OCTOBER 2,
1999 1998 1999 1999 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>,
Net sales 100.0% 100.0% 27.2% 100.0% 100.0% 36.7%
Cost of sales 49.8 50.9 24.4 49.7 50.8 33.8
----- ----- ----- -----
Gross profit margin 50.2 49.1 30.2 50.3 49.2 39.7
Selling and distribution
expenses 21.6 22.2 24.1 22.2 24.2 25.3
General and administrative
expenses 7.3 8.0 16.7 7.6 8.6 21.2
----- ----- ----- -----
Operating income 21.3 18.9 43.0 20.5 16.4 70.8
Interest expense 0.0 0.0 (47.6) 0.0 0.1 (54.8)
Other income
(expense)- net (0.1) (0.1) (69.2) (0.1) (0.1) 54.7
----- ----- ----- -----
Income before income taxes 21.2 18.8 44.0 20.4 16.2 71.5
Income taxes 8.7 7.8 42.6 8.4 6.7 70.7
----- ----- ----- -----
Net income 12.5% 11.0% 45.0% 12.0% 9.5% 72.1%
===== ===== ===== =====
</TABLE>
-8-
<PAGE>
NET SALES. The following table sets forth certain components of the Company's
consolidated net sales and the percentage relationship of the components to
consolidated net sales for the periods indicated (in millions, except percentage
data):
<TABLE>
<CAPTION>
AMOUNTS % OF TOTAL
------- ----------
FOR THE 13 WEEKS ENDED FOR THE 13 WEEKS ENDED
---------------------- ----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
International:
Europe $ 20.0 $ 14.9 19 % 18 %
Other 8.1 7.9 8 10
------ ------ --- ---
Total International 28.1 22.8 27 28
------ ------ --- ---
Domestic:
Watch products 46.5 39.2 44 47
Other products 19.5 13.1 19 16
------ ------ --- ---
Total 66.0 52.3 63 63
Stores 10.8 7.3 10 9
------ ------ --- ---
Total Domestic 76.8 59.6 73 72
------ ------ --- ---
Total Net Sales $104.9 $ 82.4 100 % 100 %
====== ====== === ===
AMOUNTS % OF TOTAL
------- ----------
FOR THE 39 WEEKS ENDED FOR THE 39 WEEKS ENDED
---------------------- ----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---- ---- ---- ----
International:
Europe $ 56.4 $ 40.9 20 % 20 %
Other 33.0 19.7 12 10
------ ------ --- ---
Total International 89.4 60.6 32 30
------ ------ --- ---
Domestic:
Watch products 118.6 90.7 43 44
Other products 47.5 35.9 17 18
------ ------ --- ---
Total 166.1 126.6 60 62
Stores 22.9 16.4 8 8
------ ------ --- ---
Total Domestic 189.0 143.0 68 70
------ ------ --- ---
Total Net Sales $278.4 $203.6 100 % 100 %
====== ====== === ===
</TABLE>
Worldwide sales volume of FOSSIL branded watches continued to represent the
single largest factor in the Company's sales growth. Strong sales volume
increases in the watch category were principally a result of (a) increased sales
from the Company's core FOSSIL and RELIC brand watch assortments and (b) sales
from the recently introduced Big Tic line of watches. Offsetting the strength in
domestic watch sales during the Third Quarter was a weakness of approximately
39% in the sales of private label brand watches. Sales of the Company's leather
accessory products grew over 30% during both the Third Quarter and Year to Date
in comparison to the prior year comparable periods. Particularly strong in the
Third Quarter were sales of FOSSIL brand handbags, small leather goods and men's
belts. These categories increased their market share through increased
penetration of existing points of sale and new points of sale, principally in
men's belts. Also fueling the leather category sales was the continued roll-out
of RELIC brand and private label goods to national and regional chain department
and specialty stores. Net sales during the first half of 1999 was abnormally
impacted by (a) refilling of certain retailer's watch inventories after a very
successful 1998 holiday season and (b) a $7.2 million sale of non-branded
premium incentive
-9-
<PAGE>
watches during the second quarter. Management believes that comparable sales
increases will be approximately 20% during the fourth quarter of 1999 as the
Company anniversaries significant sales increases achieved during the comparable
period of 1998.
GROSS PROFIT. In comparison to the comparable 1998 periods, gross profit margins
increased about 100 basis points during both the Third Quarter and Year to Date
periods. The increases in gross profit margins are partially due to the positive
gross margin influence stemming from an increase in the Company's sales mix of
FOSSIL brand watches, European-based sales and Fossil-owned retail store sales.
These sales categories generally result in higher gross profit margins than the
Company's consolidated average. Management believes that the Company's gross
profit margins for the remainder of 1999 will be approximately 50%.
OPERATING EXPENSES. The aggregate increases in operating expenses were due
primarily to costs necessary to support increased sales volumes. Total selling,
general and administrative expenses as a percentage of net sales decreased
significantly in the Year to Date period and to a lesser extent during the Third
Quarter as compared to the prior year comparable periods. Leveraging expenses
against higher sales volumes was the principal reason for this decrease. In
addition, during the Year to Date period, operating expense ratios were
positively impacted by a $7.3 million sale of non-branded premium incentive
watches in the second quarter that had relatively little associated operating
expenses. The Company increased media brand advertising during the Third Quarter
reducing the amount of operating expense leverage realized. Management believes
the operating expense ratio for the remainder of 1999 will approximate the
comparable 1998 levels as the Company continues to increase advertising
expenditures to heighten the awareness of the FOSSIL brand.
OTHER INCOME (EXPENSE). Other expense - net increased during the Year to Date
period as compared to the Prior Year YTD Period. The increase in expense was
primarily due to (a) the minority interests share of increased profits generated
in the Company's assembly facilities and (b) foreign currency losses stemming
from a weaker U.S. dollar in relation to the local currencies of several of
Company's foreign operations during the Year to Date period. Offsetting these
increases during the Third Quarter and partially offsetting the additional
expenses in the Year to Date period, was higher interest income generated on
increased cash holdings.
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 programs that
utilize 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 has significantly completed an extensive
review of its businesses to determine whether or not purchased and internally
developed computer programs are Year 2000 compliant, as well as determine the
extent of any remedial action and associated costs. Management believes it has
substantially completed the review of the Company's internal computer systems
and substantially either made modifications or purchased new hardware and
software to make the Company's internal computer systems Year 2000 compliant. In
addition, the Company has significantly completed the testing phase of its main
frame and desktop computer systems and applications and while no absolute
assurances can be provided, management believes these systems and applications
will function properly in handling Year 2000 related date calculations. Based on
the Company's evaluation to date, management believes that the Company will
incur approximately $2.4 million in internal and external costs to address the
Year 2000 problem of which $2.3 million has been expended as of the end of the
Year-to Date Period. The Company plans to complete all remediation efforts for
its critical systems prior to Year 2000. The financial impact of the Year 2000
reviews, modifications, testing, replacements or related purchases are not
expected to have a material adverse effect on the Company's business or its
consolidated financial position, results of operations or cash flows. The
Company is continuing to contact its key suppliers and customers to determine
their Year 2000 readiness in order to ensure a steady flow of goods and services
to the Company and continuity with respect to customer service. The Company has
no information that indicates that a significant vendor may be unable to sell to
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<PAGE>
the Company; that a significant customer may be unable to purchase from the
Company; or that a significant service provider may be unable to provide
services to the Company. The Company has significantly completed its contingency
plan in the event of failure of production operations, the inability of major
suppliers to fulfill their commitments and the inability of major customers to
submit orders and receive product. Notwithstanding the above, the effect, if
any, on the Company's future results of operations, due to the Company's major
suppliers and customers not being Year 2000 compliant, cannot be reasonably
estimated. Management believes that this latter risk is mitigated somewhat by
the Company's broad base of customers and suppliers and the worldwide nature of
its operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's general business operations historically have not required
substantial cash needs during the first several months of its fiscal year.
Generally starting in the second quarter the Company's cash needs begin to
increase, typically reaching its peak 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 the Third Quarter the
Company's cash holdings decreased slightly to $64 million in comparison to $71
million as of the end of the Company's 1999 second quarter. At the end of the
Third Quarter the Company had working capital of $139 million and borrowings of
only $5 million against its combined $43 million bank credit facilities.
Management believes that cash flow from operations combined with existing cash
on hand will be sufficient to satisfy its working capital expenditures for at
least the next eighteen months.
FORWARD-LOOKING STATEMENTS
Included within management's discussion of the Company's operating results,
"forward-looking statements" were made within the meaning of the Private
Securities Litigation Reform Act of 1995 regarding expectations for 1999. The
actual results may differ materially from those expressed by these
forward-looking statements. Significant factors that could cause the Company's
1999 operating results to differ materially from management's current
expectations include, among other items, significant changes in consumer
spending patterns or preferences, competition in the Company's product areas,
international in comparison to domestic sales mix, changes in foreign currency
valuations in relation to the United States dollar, principally the European
Union's Euro and Japanese Yen, an inability of management to control operating
expenses in relation to net sales without damaging the long-term direction of
the Company and the risks and uncertainties set forth in the Company's current
report on Form 8-K dated March 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational enterprise, the Company is exposed to changes in foreign
currency exchange rates. The Company employs a variety of practices to manage
this market risk, including its operating and financing activities and, where
deemed appropriate, the use of derivative financial instruments. Forward
contracts have been utilized by the Company to mitigate foreign currency risk.
The Company's most significant foreign currency risks relate to the Euro and the
Japanese Yen. The Company uses derivative financial instruments only for risk
management purposes and does not use them for speculation or for trading. There
were no significant changes in how the Company managed foreign currency
transactional exposures during the Third Quarter and management does not
anticipate any significant changes in such exposures or in the strategies it
employs to manage such exposures in the near future.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Joint Venture Agreement between Fossil, Inc. and Seiko
Instruments America, Inc. dated June 1, 1999 (without exhibits)
10.2 Form of Service Agreement between SII Marketing International,
Inc. and Fossil Partners, L.P. dated August 9, 1999.
10.3 Asset Purchase Agreement by and between Junghans UK Limited and
Fossil (UK) Ltd. dated August 1999 (without schedules)
27 Financial Data Schedule
(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: November 15, 1999 /s/ Randy S. Kercho
----------------------------------------------------
Randy S. Kercho
Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer duly
authorized to sign on behalf of Registrant)
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<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
10.1 Joint Venture Agreement between Fossil, Inc. and Seiko Instruments America,
Inc. dated June 1, 1999 (without exhibits)
10.2 Form of Service Agreement between SII Marketing International, Inc. and
Fossil Partners, L.P. dated August 9, 1999.
10.3 Asset Purchase Agreement by and between Junghans UK Limited and Fossil (UK)
Ltd. dated August 1999 (without schedules)
27 Financial Data Schedule.
-14-
JOINT VENTURE AGREEMENT
BY AND BETWEEN
SEIKO INSTRUMENTS AMERICA, INC.
AND
FOSSIL, INC.
DATED AS OF JUNE 1, 1999
<PAGE>
EXHIBIT 10.1
JOINT VENTURE AGREEMENT
This Joint Venture Agreement is entered into as of the 1st day of June,
1999, by and between Fossil, Inc. ("Fossil"), a corporation organized and
existing under the laws of the State of Delaware, U.S.A., with its principal
offices at 2280 N. Greenville Avenue, Richardson, Texas 75082 and Seiko
Instruments America, Inc. ("SIA"), a corporation organized and existing under
the laws of the State of California, with its principal offices located at 2990
West Lomita Blvd., Torrance, California 91505.
RECITALS
WHEREAS, Fossil is engaged in the business of manufacturing, marketing
and distributing fashion watches and accessories in the United States and
throughout the world; and
WHEREAS, SIA is the sole shareholder of SII's U.S. subsidiary, which
is engaged in the business of distributing, in the United States, certain
products manufactured by SII; and
WHEREAS, SIA and Fossil desire to form SII International, Inc., a
Delaware corporation, with its principal offices to be located at 1309
Rutherford, Suite 160, Austin, Texas, which shall be engaged in the business of
manufacturing, marketing, distributing, importing and exporting watches,
including, but not limited to, watches under the LORUS Brand and/or the DISNEY
Brand (subject to the satisfactory negotiation of the terms and conditions of
the SC License Agreement and the Disney License Agreement by and among SC,
Disney and SII International), mass market distribution of watches, clocks and
toys and such other matters as approved from time to time by the Board or as
contemplated within the scope of this Agreement; and
WHEREAS, SIA and Fossil desire to enter into this Agreement in order to
define their respective rights and obligations hereunder.
NOW, THEREFORE, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
respective meanings indicated below:
"Affected Stockholder" has a meaning set forth in Section 13.1(f) hereof.
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"Affiliate" means any person or entity that directly or indirectly
through one of more intermediaries controls, is controlled by or is under the
common control with such first person or entity.
"Agreement" means this Joint Venture Agreement, as it may be amended
from time to time in accordance with the terms hereof.
"Ancillary Agreements" means (a) the SC License Agreement, (b) the
Service Agreement, (c) the Asset Purchase Agreement, (d) the Manufacturing,
Supply and Purchase Agreement, and (e) the Disney License Agreement.
"Asset Purchase Agreement" means the Asset Purchase Agreement, to be
dated as of the Closing, by and between TKC and SII International, substantially
in the form attached as Exhibit F hereto.
"Board" means the Board of Directors of SII International.
"Business" has the meaning set forth in Section 3.1 hereof.
"Bylaws" means the bylaws of SII International, substantially in the
form attached hereto as Exhibit B.
"Certificate of Incorporation" means the certificate of incorporation
of SII International, substantially in the form attached hereto as Exhibit A.
"Closing" means the consummation of the transactions set forth in
Section 11.2 of this Agreement.
"Closing Date" shall mean August 1, 1999, or such other date as may be
agreed upon by the Parties.
"Deadlock" has the meaning set forth in Section 12.1 hereof.
"Defaulting Stockholder" has the meaning set forth in Section 13.1(b)
hereof.
"Director" means any member of the Board.
"Disney" means Walt Disney Corporation or its affiliate.
"DISNEY Brand" means each trademark owned by Disney or its Affiliate,
which is licensed by Disney to SII International under the terms of the Disney
License Agreement.
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"Disney License Agreement" means the Trademark License Agreement, to be
dated as of a date prior to the Closing, by and between Disney and SII
International, substantially in the form attached as Exhibit H hereto.
"Fair Market Value" means the fair value in the open market as between
a willing seller and a willing buyer as determined by an independent third party
mutually acceptable to the Stockholders.
"GAAP" means generally accepted accounting principles in the United
States of America.
"Government Approval" of any action to be taken by a Party under this
Agreement means such approval of, or consent to such action, together with such
licenses, authorizations, or permits as will be reasonably required for such
action, as the laws, statutes, decrees, regulations and rulings of the
appropriate government authorities in the United States of America may require
to be obtained in connection with such action. Whenever the term "Government
Approval" is used herein, it shall be interpreted and construed to include the
requirements that such approval be in form and substance reasonably acceptable
to the Parties.
"Initial Capital" has the meaning set forth in Section 4.2 hereof.
"Insolvent Stockholder" has the meaning set forth in Section 13.1(c)
hereof.
"LORUS Brand" means each "Lorus" brand owned by SC, which is licensed
by SC to SII International under the terms of the SC License Agreement.
"Manufacturing, Supply and Purchase Agreement" means the Manufacturing,
Supply and Purchase Agreement, to be dated as of the Closing, by and between SII
and SII International, substantially in the form attached as Exhibit G hereto.
"Merging Stockholder" has the meaning set forth in Section 13.1(d)
hereof.
"Net Book Value" means net book value in accordance with GAAP as of any
date of determination.
"Non-Transferring Stockholder" has the meaning set forth in Section
6.1(b) hereof.
"Operating Plan" means the plan for the operations of SII International
to be prepared by management and approved by the Board pursuant to Section 3.2
hereof.
"Party" means either of Fossil or SIA, and collectively, the "Parties".
"Person" means any natural person, partnership, corporation, limited
liability company, association, trust, estate or any other legal entity.
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<PAGE>
"Prevented Stockholder" has the meaning set forth in Section 13.1(e)
hereof.
"Products" means the products distributed by SII International from
time to time, including, but not limited to, watches, clocks and toys bearing
the Lorus Brand and/or the DISNEY Brand.
"Prospective Purchaser" has the meaning set forth in Section 6.1(b)
hereof.
"Purchase Notice" has the meaning set forth in Section 6.1(b) hereof.
"Resolution Date" has the meaning set forth in Section 12.3 hereof.
"Sale Notice" has the meaning set forth in Section 6.1(b) hereof.
"SC" means Seiko Corporation, a Japanese corporation.
"SC License Agreement" means the Trademark License Agreement, to be
dated as of the Closing, by and between SC and SII International, substantially
in the form attached as Exhibit D hereto.
"Service Agreement" means the Service Agreement, to be dated as of
the Closing, by and between Fossil L.P. and SII International, substantially in
the form attached as Exhibit E hereto.
"Shareholding Percentage," with respect to either Stockholder, means
the percentage represented by dividing (a) the number of shares in SII
International issued to such Stockholder, by (b) the number of all shares in SII
International issued to all of the Stockholders.
"SH" means Seiko Instruments (H.K.) Ltd., a Hong Kong corporation.
"SII" means Seiko Instruments Inc., a Japanese corporation.
"SII International" means SII International, Inc., to be established
under the laws of the State of Delaware and in accordance with this Agreement.
"Stockholder" means either of Fossil or SIA, and collectively, the
"Stockholders".
"Stockholder Loans" has the meaning set forth in Section 4.4(c) hereof.
"Subject Shares" has the meaning set forth in Section 6.1(b) hereof.
"Third Party Loans" has the meaning set forth in Section 4.4(a) hereof.
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<PAGE>
"TKC" means B & G Arnold, Inc., d/b/a/ The King Company, a Texas
corporation.
"Transfer" has the meaning set forth in Section 6.1(b) hereof.
"Transferring Stockholder" has the meaning set forth in Section 6.1(b)
hereof.
"Vendor Financing" has the meaning set forth in Section 4.4(c) hereof.
ARTICLE II
THE COMPANY
Section 2.1 Incorporation. As soon as reasonably possible after execution of
this Agreement, but in no event longer than five (5) days after the date of this
Agreement, Fossil and SIA shall cause a new corporation, to be named "SII
International, Inc.", to be formed under the laws of the State of Delaware. The
Certificate of Incorporation of SII International shall be in the form attached
as Exhibit A hereto. The principal office of SII International shall be at 1309
Rutherford, Suite 160, Austin, Texas, or at such other location as agreed by the
Parties in accordance with this Agreement.
Section 2.2 Bylaws and First Board Meeting. At or prior to the Closing, the
Parties shall cause SII International to adopt Bylaws in the form attached as
Exhibit B hereto, and the Directors to hold a first meeting of the Board at
which actions shall be adopted substantially in the form attached as Exhibit C
hereto. The Parties agree to execute such documents, and take such other
actions, and to cause all Affiliates and SII International to execute such
documents and take such other actions, as may be necessary to effect the
formation of SII International and to carry out the intent of this Agreement.
ARTICLE III
BUSINESS OF THE COMPANY
Section 3.1 General Description of SII International. The business (the
"Business") of SII International will be the design, manufacturing, marketing,
distribution, importing and exporting of watches, clocks and toys, including,
but not limited to, watches under the LORUS Brand and/or the DISNEY Brand
(subject to the satisfactory negotiation of the terms and conditions of the SC
License Agreement and the Disney License Agreement), mass market distribution of
watches, clock and toys and such other matters as may be approved from time to
time by the Board or as may be contemplated within the scope of this Agreement.
Section 3.2 Operating Plan. In order to implement the Business, at least thirty
(30) days prior to the beginning of each fiscal year, the officers of SII
International shall present an Operating Plan to the Board for approval by the
Board. The Operating Plan shall set forth the plans according to which SII
International shall be operated for such fiscal year and shall include, at a
minimum, the following:
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(i) operating budgets;
(ii) budgets for working capital requirements;
(iii) three-year summary budget projections;
(iv) projected stock keeping unit ("SKU") count levels by
product category and introduction dates for the
upcoming year; and
(v) the manner (third party financing, additional capital
contribution, Vendor Financing or Stockholder
financing) by which to raise the working capital
requirements and detailed terms and conditions
thereof.
Notwithstanding the foregoing, within thirty (30) days after the Closing, the
officers of SII International shall present to the Board an Operating Plan for
the remainder of fiscal year 1999 and fiscal year 2000 for approval by the
Board. Any Operating Plan approved by the Board may be amended from time to time
by the Board.
ARTICLE IV
CAPITALIZATION OF THE COMPANY AND FINANCING
Section 4.1 Authorized Financing. SII International shall have an initial
authorized capital consisting of 100,000 shares of common stock with par value
of $0.01 per share. All of SII International's shares shall be the same class
and otherwise alike in all respects and the holders thereof shall be entitled to
identical rights and privileges including, without limitation of the foregoing,
identical rights and privileges with respect to dividends, voting power and
distribution of assets in the event of any voluntary or involuntary liquidation,
dissolution or winding-up of SII International.
Section 4.2 Initial Capital Contributions. The initial capital of SII
International (the "Initial Capital") shall be one thousand five hundred dollars
($1,500). Within five (5) days after the date of this Agreement, SIA shall
subscribe to eighty percent (80%) of the Initial Capital and Fossil shall
subscribe to twenty percent (20%) of the Initial Capital by respectively
contributing one thousand two hundred dollars ($1,200) and three hundred dollars
($300) in cash to SII International. Upon contribution of the Initial Capital by
the Parties pursuant to the foregoing sentence, SII International shall issue
four (4) shares to SIA and one (1) share to Fossil and deliver share
certificates representing such shares in accordance with the laws of the State
of Delaware.
Section 4.3 Subsequent Capital Contributions.
(a) Capital Contributions at Closing. At Closing, SIA shall make an
additional capital contribution in cash in the amount of $15,999,000 and Fossil
shall make an additional capital contribution in cash in the amount of
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<PAGE>
$3,999,900. Upon contribution of the capital by the Parties pursuant to the
foregoing sentence, SII International shall issue fifty three thousand three
hundred thirty (53,330) shares to SIA and thirteen thousand three hundred
thirty-three (13,333) shares to Fossil and deliver share certificates
representing such shares in accordance with the laws of the State of Delaware.
(b) Capital Contributions after Closing. Following Closing, and at a
minimum at the beginning of each fiscal year of SII International following
Closing (or calendar year, with respect to calendar year 2000), the Parties
shall make a capital contribution in amount sufficient to meet the working
capital requirements of SII International as contained in the Operating Plan as
approved by the Board for the upcoming fiscal year, provided, however, that (i)
such additional capital contribution is made in cash; (ii) each Stockholder
shall make such additional capital contribution in an amount equal to the total
amount of such additional capital contribution, multiplied by such Stockholder's
Shareholding Percentage; and (iii) such additional capital contribution shall
otherwise be made in accordance with the resolution of the Board. Upon
contribution of the capital by the Parties pursuant to this Section, SII
International shall issue additional shares at three hundred dollars ($300) per
share to SIA and to Fossil in proportion to such subsequent capital contribution
and deliver share certificates representing such shares in accordance with the
laws of the State of Delaware. Notwithstanding any other provisions hereof to
the contrary, the maximum aggregate capital contributions required to be made by
the Stockholders shall in no event exceed thirty million dollars ($30,000,000),
unless otherwise resolved unanimously by the vote of the Board pursuant to
Section 4.4(b).
Section 4.4 Additional Capital.
(a) Third Party Financing. Any additional working capital requirements
of SII International shall primarily be met, to the extent possible, by
obtaining third party financing (the "Third Party Loan"). In the event the Board
unanimously determines that all or part of the working capital requirements of
SII International shall be met through obtaining Third Party Loan, such Third
Party Loan shall be in such amounts and subject to such terms as the Board may
determine (including, but not limited to, after discussing the conditions of
obtaining Third Party Loan, such as any requirements by any third party lender
to subordinate the Stockholder Loan to the Third Party Loan). To the extent one
of the conditions of the extension of the Third Party Loan so approved by the
Board is the subordination of any Stockholder Loans to such Third Party Loan,
then the Stockholders agree to take such action as necessary to subordinate such
Stockholder Loan. To the extent that the Board determines that it is necessary
to provide a guaranty of the Stockholders to obtain such Third Party Loan, then
each of SIA and Fossil shall negotiate in good faith to provide a guaranty in
favor of the lender of such Third Party Loan so that SIA guarantees an amount
equal to seventy percent (70%) of the guaranteed amount and Fossil guarantees
thirty percent (30%) of the guaranteed amount. The percentage of the amount so
guaranteed by each Stockholder shall be adjusted in accordance with Section
14.13 hereof.
7
<PAGE>
(b) Additional Capital Contribution. In the event the Board determines
that the working capital requirements of SII International may not be raised by
obtaining Third Party Loan pursuant to Section 4.4(a), then the working capital
requirements of SII International may be met through additional capital
contribution by the Stockholders. In the event the Board determines that all or
part of the working capital requirements of SII International shall be met
through additional capital contributions of the Stockholders, then the
Stockholders shall provide such additional capital contributions to SII
International, provided, however, that (i) such additional capital contribution
is made in cash; (ii) each Stockholder shall make such additional capital
contribution in an amount equal to the total amount of such additional capital
contribution, multiplied by such Stockholder's Shareholding Percentage; and
(iii) such additional capital contribution shall otherwise be made in accordance
with the resolution of the Board.
(c) Stockholder Loans. In the event the Board determines that the
working capital requirements of SII International should not be raised by
obtaining Third Party Loan pursuant to Section 4.4(a), then the working capital
requirements of SII International may be met by obtaining financing (together
with the Vendor Financing (as hereinafter defined), the "Stockholder Loan") from
the Stockholders. In the event the Board unanimously determines that all or part
of the working capital requirements of SII International shall be met by
obtaining Stockholder Loan, then the Stockholders shall provide such Stockholder
Loan to SII International, provided, however, that (i) such Stockholder Loan is
made and repaid in United States Dollars; (ii) each Stockholder shall provide
such Stockholder Loan in an amount equal to the total amount of such Stockholder
Loan, multiplied by the applicable percentage set forth in Section 14.13; and
(iii) such Stockholder Loan shall otherwise be made in accordance with the
resolution of the Board. SIA may provide its portion of the Stockholder Loan by
causing SII or SIH to extend the payment date of any invoice issued for the
products sold to SII International under the Manufacturing, Supply and Purchase
Agreement ("Vendor Financing"). In such event, SIA shall be deemed to have
extended a Stockholder Loan for the term by which the payment was extended and
for the amount of such payment. Unless otherwise determined by the Board, the
interest rate of such Stockholder Loan shall not exceed the interest rate
available to SII International through Third Party Loans with similar terms,
conditions and principal amounts as the Stockholder Loan in question, and shall
be payable only at such times as the principal amount of such Stockholder Loan
shall become payable in accordance with Section 5.1 hereof.
ARTICLE V
DIVIDENDS AND REPAYMENTS OF STOCKHOLDER LOANS
Section 5.1 Stockholder Loan Repayment Policy. Except as otherwise determined by
the Board, SII International shall covenant to repay all of the outstanding
principal and interest on all Stockholder Loans pursuant to the terms of the
loan agreement before SII International is permitted under the terms of such
loan agreement to make distributions of any dividends to the Stockholders.
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Section 5.2 Dividend Policy. Subject to Section 5.1, dividends may be
distributed to the Stockholders from time to time as determined by a majority of
the Board.
ARTICLE VI
TRANSFER OF SHARES
Section 6.1 Transfer Restrictions.
(a) Transfer to Affiliates. With the prior written consent of the other
Stockholder, which consent shall not be unreasonably withheld, and without the
application of Section 6.1(b) hereof, either Stockholder may transfer all or any
portion of its shares in SII International to any Affiliate of such Stockholder.
(b) Transfer to Non-Affiliates.
(i) Except as provided in Section 6.1(a), Section 12.3 or
Section 13.2, (1) neither Stockholder shall sell, assign, transfer, encumber,
pledge or grant a security interest in any of its shares of SII International
(collectively, a "Transfer") other than in accordance with this Section 6.1(b),
and (2) notwithstanding this Section 6.1(b), neither Stockholder shall Transfer
any of its shares of SII International for a period until December 31, 2002,
without the prior written consent of the other Stockholder. In the event either
Stockholder (the "Transferring Stockholder") desires to sell all or part of its
shares (the "Subject Shares") of SII International to a third party, the
Transferring Party shall give written notice (the "Sale Notice") to the other
Stockholder (the "Non-Transferring Stockholder") which Sale Notice shall state
(1) the identity of the person or entity (the "Prospective Purchaser") to which
the Transferring Stockholder desires to dispose of such Subject Shares, which
Prospective Purchaser shall not be acting in concert with the Transferring
Stockholder to circumvent the provisions of this Section or shall be in
competition with SII International or the Non-Transferring Stockholder, (2) the
price to be paid for such Subject Shares, which price must be payable in cash
upon consummation of such disposition, (3) the date on which such disposition is
scheduled to occur (which date shall be no later than ninety (90) days after the
date of the Sale Notice), and (4) that the offer of the Prospective Purchaser
has been accepted by the Transferring Stockholder, subject to the rights of the
Non-Transferring Stockholder contained herein.
(ii) Upon receipt of the Sale Notice, the Non-Transferring
Stockholder shall have the right to purchase, upon the same terms and conditions
as contained in the Sale Notice, the Subject Shares, by providing a written
notice (the "Purchase Notice") to the Transferring Stockholder within sixty (60)
days after receipt of the Sale Notice. The closing of the purchase of the
Subject Shares pursuant to this Section 6.2(b)(ii) shall be held within thirty
(30) days after delivery of the Purchase Notice.
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(iii) In the event the Non-Transferring Stockholder elects not
to exercise its rights pursuant to Section 6.2(b)(ii) above, then the
Transferring Stockholder may transfer the Subject Shares to the Prospective
Purchaser in accordance with the terms and conditions set forth in the Sale
Notice. If the Transferring Stockholder does not complete the sale of the
Subject Shares to the Prospective Purchaser within ninety (90) days after the
date of the Sale Notice, the provisions of Section 6.1(b) shall again be
applicable.
(iv) In the event the Non-Transferring Stockholder is
prevented from exercising its right to purchase the Subject Shares pursuant to
Section 6.1(b)(ii) as a result of applicable rule, law or regulation, then,
notwithstanding anything to the contrary contained herein, within an additional
sixty (60) days, the Non-Transferring Stockholder shall elect, in its sole and
absolute discretion and by notifying the Transferring Stockholder, whether the
Transferring Stockholder shall sell the Subject Shares to (1) the Prospective
Purchaser, (2) the Non-Transferring Stockholder or (3) a party designated by the
Non-Transferring Stockholder, in each case on terms and conditions set forth in
the Sale Notice, provided that the Transferring Stockholder shall consummate the
transaction within thirty (30) days from the end of such sixty (60) day period.
In the event the sale to the Prospective Purchaser pursuant to Section
6.1(b)(iv)(1) is not consummated within such thirty (30)-day period, then the
provisions of Section 6.1(b) shall again be applicable.
Section 6.2 Agreement to be Bound. As a condition to the valid transfer of any
shares to any party hereunder, the transferor shall be responsible for obtaining
from the transferee prior to such transfer, written agreement of the transferee
to comply with, be bound by and perform all of the terms and conditions of this
Agreement. Thereafter, the transferee shall be a party to this Agreement.
Section 6.3 Transfer in Violation of Transfer Restrictions. Any purported
Transfer of shares in SII International not expressly authorized by the terms of
this Agreement shall be void and of no force and effect.
Section 6.4 Stock Certificate Legends. All certificates evidencing shares of
SII International shall bear the following legend:
"The shares of stock represented by this certificate are restricted as
to transfer in accordance with, and are otherwise subject to the terms
of, an agreement dated as of June 1, 1999, by and between the
stockholders of SII International, Inc. on that date."
Each certificate representing shares of SII International shall be stamped or
otherwise imprinted with legends substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The securities
may not be sold, offered for sale, transferred, pledged or hypothecated
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in the absence of an effective registration statement related thereto
or an opinion of counsel satisfactory to SII International that such
registration is not required under the Securities Act of 1933, as
amended."
ARTICLE VII
ACTIONS OF STOCKHOLDERS
Section 7.1 Meeting. The meetings and resolutions of the Stockholders shall be
conducted or obtained according to the Bylaws.
Section 7.2 Restricted Actions. The Stockholders agree that during the term of
this Agreement they will not, nor will they allow any of their employees,
representatives or Affiliates to:
(a) Commingle SII International funds with the funds of any other
Person or use SII International funds for other than SII International purposes
or as directed by the Board;
(b) Take any action or allow the Directors or SII International to
take any action that would result in any violation of this Agreement, the
Certificate of Incorporation, the Bylaws or the laws of the United States of
America, including, but not limited to, the U.S. Foreign Corrupt Practices Act;
or
(c) Enter into any agreement (other than the applicable Ancillary
Agreements) or establish any relationship with SII International except as
specified herein, unless such agreement or relationship is on terms and
conditions that would be established between unrelated parties dealing at arm's
length.
Section 7.3 Further Assurance. Fossil and SIA additionally shall execute such
further documents and cooperate in taking such further actions as may be
necessary to give effect to this Agreement, the Ancillary Agreements and the
transactions contemplated hereby and to obtain any Government Approval or other
government action necessary therefor.
ARTICLE VIII
BOARD OF DIRECTORS
Section 8.1 Power. The Board shall carry out the resolutions passed at the
meetings of the Stockholders and of the Board, including, but not limited to,
the implementation of the Operating Plan. The Board shall decide by resolution
all other important matters relating to the policies and management of the
business of SII International, except those matters which are reserved by this
Agreement, the Certificate of Incorporation, the Bylaws or by law to the
decision of the Stockholders.
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Section 8.2 Election of Directors. The Directors shall be duly elected at
general meetings of the Stockholders in accordance with the Bylaws, and the
Board shall consist of five (5) Directors. Subject to the provisions of Section
14.13, four (4) of the Directors shall be nominated by SIA and one (1) Director
shall be nominated by Fossil. The Stockholders hereby agree to cast their votes
from time to time to elect or re-elect each of such nominees.
Section 8.3 Chairman. The Chairman of the Board shall represent SII
International and administer the affairs of SII International in accordance with
the policies and programs established by the Stockholders and the Board from
time to time. Subject to the provisions of Section 14.13, the Stockholders agree
that SIA may designate the director that shall serve as the Chairman of the
Board from time to time. SIA shall designate Tom Kartsotis as the initial
Chairman of the Board. Notwithstanding the foregoing, any director nominated by
Fossil but designated to serve as the Chairman of the Board by SIA shall
nonetheless be deemed to be the nominee of Fossil.
Section 8.4 Vacancy on Board. In case the position of a Director becomes vacant
for any reason, the Stockholders agree to elect as a replacement any such person
as may be nominated by the Stockholder who nominated the person whose office is
vacant. In the event that the Stockholder who nominated the person whose office
is vacant does not nominate a replacement within thirty (30) days after such
office becoming vacant, then the other Stockholder shall have the right to
nominate such replacement. The Stockholders agree to cast their votes to elect
such replacement nominee.
Section 8.5 Meetings. The meetings of the Board shall be held at such times
and with such notice as is specified in the Bylaws.
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ARTICLE IX
BASIC CORPORATE AND OPERATING POLICIES
Section 9.1 Officers. The officers of SII International shall be elected by the
Board from time to time. The initial President of SII International following
Closing shall be David Arnold who shall be responsible for the day-to-day
management of SII International. The Stockholders hereby agree to cause their
nominated Directors to vote for his election as the initial President of SII
International.
Section 9.2 Operating Plan. The Stockholders hereby agree to cause their
nominated Directors and other representatives to effectuate the Operating Plan
adopted by the Board, to implement such other basic corporate and operating
policies established by the Stockholders or the Board during the continuance of
this Agreement, and to act in accordance with the Certificate of Incorporation,
the Bylaws, this Agreement and the Ancillary Agreements.
Section 9.3 Financial Statements. The financial statements of SII International
shall be prepared in accordance with GAAP, consistently applied. SII
International will make and keep books and records and accounts which, in
reasonable detail, accurately and fairly reflect the business transactions of
SII International (including, but not limited to, any asset disposition), and
SII International shall devise and maintain a system of internal financial
control sufficient to provide reasonable assurances that the financial
statements of SII International are maintained according to GAAP and by
applicable law. In addition, SII International shall have its financials audited
by an independent public accountant at the end of every year.
ARTICLE X
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 10.1 Fossil's Representations, Warranties and Covenants. Fossil repre-
sents, warrants and covenants to SIA as follows:
(a) Fossil is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into this Agreement, perform its
obligations hereunder and consummate the transactions contemplated hereby.
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<PAGE>
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action of Fossil. This Agreement has been duly
executed and delivered by a duly authorized officer of Fossil and constitutes
the legal, valid and binding obligation of Fossil. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not conflict with or result in any violation of any provisions of the
certificate of incorporation or bylaws of Fossil or conflict with, or result in
any violation of or default under any provision of any mortgage, indenture,
lease, instrument, agreement, judgment, order, decree, statute, law, ordinance,
rule, regulation, or other governmental authorization or approval applicable to
Fossil.
(c) Fossil will cause the Directors nominated by Fossil to operate SII
International in strict compliance with this Agreement and all applicable
provisions of the laws of the United States of America.
(d) Fossil hereby agrees to indemnify and hold SIA harmless from and
against all losses, damages and costs resulting from any breach of any of the
provisions of this Agreement by Fossil.
Section 10.2 SIA's Representations, Warranties and Covenants. SIA represents,
warrants and covenants to Fossil as follows:
(a) SIA is a corporation duly organized, validly existing and in good
standing under the laws of California and has all requisite corporate power and
authority to enter into this Agreement, perform its obligations hereunder and
consummate the transactions contemplated hereby.
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated thereby have been duly authorized
by all necessary corporate action of SIA. This Agreement has been duly executed
and delivered by a duly authorized officer of SIA and constitutes the legal,
valid and binding obligation of SIA enforceable in accordance with its terms.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or result in any
violation of any provisions of the articles of incorporation or bylaws of SIA or
conflict with, or result in any violation of or default under any provision of
any mortgage, indenture, lease, instrument, agreement, judgment, order, decree,
statute, law, ordinance, rule, regulation, or other governmental authorization
or approval applicable to SIA.
(c) SIA will cause the Directors nominated by SIA to operate SII
International in strict compliance with this Agreement and all applicable
provisions of the laws of the United States of America.
(d) SIA hereby agrees to indemnify and hold Fossil harmless from and
against all losses, damages and costs resulting from any breach of any of the
provisions of this Agreement by SIA.
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<PAGE>
ARTICLE XI
CLOSING AND CONDITIONS THEREOF
Section 11.1 Closing. The Closing of the transactions contemplated by this
Agreement shall take place on the Closing Date at the offices of Fossil. The
Parties agree that this Agreement and the Ancillary Agreements may be executed
in any number of counterparts, each of which shall be an original.
Section 11.2 Events of Closing. At or prior to the Closing, the Parties shall
take the following actions:
(a) The Stockholders shall cause the sole incorporator to elect the
Board of Directors nominated by the Stockholders and to transact such other
business as may be necessary or proper to be transacted at said meeting;
(b) Each Director shall accept his position as director of SII Interna-
tional;
(c) The Board shall hold a meeting for the purposes of electing
officers of SII International and to transact such other business as may be
necessary or proper to be transacted at said meeting, as provided in the minutes
of the organizational meeting of the Board, in the form attached as Exhibit C
hereto;
(d) David Arnold shall accept the position as President of SII
International under terms and conditions reasonably acceptable to the Parties;
(e) SIA and Fossil shall each make the additional capital contribution
required by Section 4.3 hereof, and in exchange for such capital contributions,
SII International shall issue to SIA and Fossil, respectively, certificates
evidencing ownership by such Party of the number of shares of stock of SII
International specified in Section 4.3 hereof.
(f) Each of SII International, SIA and Fossil shall execute and deliver
each of the Ancillary Agreements to which it is a party.
Section 11.3 Closing Date. Unless otherwise agreed by the Stockholders, the
Closing shall take place within five (5) days after satisfaction of the
conditions set forth in Section 11.4 hereof but in no event later than the
Closing Date. If the Closing does not occur on or before the Closing Date, then
this Agreement shall thereupon terminate automatically and shall be of no
further force or effect, without any further liability or obligation of either
Stockholder to the other Stockholder.
Section 11.4 Conditions to the Closing. All obligations of each Stockholder
hereunder to take the actions contemplated by this Agreement and otherwise take
the action necessary to consummate the Closing, are subject to the fulfillment
of each of the following conditions:
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<PAGE>
(a) The final terms and conditions of each of the Ancillary Agreements
shall have been agreed upon by each of the parties signatories thereto;
(b) All actions, proceedings, instruments, opinions and documents
required to carry out this Agreement and the Ancillary Agreements or incidental
hereto or thereto, and all other related legal matters, shall be reasonably
satisfactory to the respective legal counsel of the Parties;
(c) All other terms, covenants and conditions of this Agreement and the
Ancillary Agreements to be complied with and performed by the respective parties
hereto and thereto prior to or at the Closing shall have been complied with and
performed in all material respects (with the right of such parties in compliance
with such terms, covenants and conditions to waive the non-compliance by the
other Party);
(d) No action, suit, proceeding or investigation by or before any
court, administrative agency or other governmental authority shall have been
instituted or threatened to restrain, prohibit or invalidate any of the
transactions contemplated by this Agreement or any Ancillary Agreements;
(e) All Governmental Approvals required for the performance by each
Party of this Agreement, including the execution and delivery of the Ancillary
Agreements, the consummation of the transactions herein or therein contemplated
and the fulfillment of and compliance with the terms and conditions hereof and
thereof, by either Party shall have been obtained, and all filings and other
formalities completed; and
(f) All consents and approvals of third parties required for the
performance by each Party and the Ancillary Agreements, the consummation of the
transactions herein or therein contemplated and the fulfillment of and
compliance with the terms and conditions hereof and thereof, shall have been
obtained or valid waivers or consents obtained.
Neither Party shall deliberately cause any condition set forth in this Article
XI not to be satisfied, and each Party shall, as to events, causes and
circumstances within its control, take such action as shall be reasonably
necessary to cause such condition to be satisfied and shall keep the other Party
currently informed as to the status of such actions. In the event the Closing
takes place, each Party shall be deemed to have represented and warranted to the
other Party as of the Closing Date that all of the aforementioned conditions
precedent to such Party's obligations hereunder shall have been fulfilled prior
to or as of the Closing Date.
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ARTICLE XII
DEADLOCK
Section 12.1 Definition. As used in this Agreement the term "Deadlock" shall
mean any circumstance in which the Stockholders or the Board of SII
International are unable, by reason of lack of a quorum or inability to achieve
the votes that are required under this Agreement, the Certificate of
Incorporation and/or the applicable law to arrive at a decision on any matter or
issue which, under this Agreement, the Certificate of Incorporation and/or
applicable law requires action, provided that an inability of the Stockholders
or the Board to arrive at such a decision or take such action shall not
constitute a Deadlock unless the Board or the Stockholders shall have failed
within a forty-five (45) day period to decide the matter or shall have failed
within such period to implement such decision.
Section 12.2 Notice of Deadlock. No Deadlock shall be deemed to have occurred
until either Stockholder gives the other Stockholder a written notice of
Deadlock. Such notice of Deadlock shall specify in reasonable detail the nature
of the issue giving rise thereto. Within twenty (20) business days after the
delivery of the notice of Deadlock, the chief executive officers of both SIA and
Fossil shall meet for the purpose of amicably resolving the Deadlock.
Section 12.3 Rights in Event of Deadlock. In the event after good faith
discussions the Deadlock is not resolved within twenty (20) business days from
the date of the notice of Deadlock is delivered (the "Resolution Date"), then
the following procedure shall apply: (a) within thirty (30) days after the end
of such twenty (20) business day period, SIA shall have the option to acquire
all, but not less than all, of the shares in SII International owned by Fossil
at a purchase price equal to the Fair Market Value thereof; (b) in the event
that SIA shall have failed to exercise its option to acquire Fossil's shares
pursuant to the foregoing (a), then, within an additional thirty (30) day
period, Fossil shall have the option to acquire all, but not less than all, of
the shares owned by SIA in SII International at a purchase price equal to the
Fair Market Value thereof. In the event neither SIA nor Fossil exercises its
rights pursuant to the foregoing sentence, then SII International shall be
dissolved and liquidated pursuant to Section 13.3 and in accordance with
applicable law. In the event the transfer of shares in SII International
pursuant to this Section 12.3 results in the imposition of a transfer fee under
the SC License Agreement or the Disney License Agreement, then such transfer fee
shall be paid equally by Fossil and SIA. Notwithstanding the foregoing, in the
event that Fossil's Stockholder Percentage on the Resolution Date is greater
than fifty percent (50%), then the first option described in Section 12.3(a)
shall belong to Fossil, and the second option described in Section 12.3(b) shall
belong to SIA.
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ARTICLE XIII
TERMINATION
Section 13.1 Events Permitting Termination. This Agreement shall become
effective as of the date of this Agreement and shall continue for an indefinite
period thereafter, until terminated as follows:
(a) By mutual consent of the Stockholders to terminate this Agreement
in writing;
(b) By either Stockholder upon giving written notice to the other
Stockholder (the "Defaulting Stockholder") if the Defaulting Stockholder is in
default hereunder or under any of the Ancillary Agreements and such default is
not cured within thirty (30) days after written notice of such default;
(c) By either Stockholder upon giving written notice to the other
Stockholder (the "Insolvent Stockholder") if (i) the ownership, management or
control of such Insolvent Stockholder or all or substantially all of such
Insolvent Stockholder's assets are transferred to a person or entity other than
the person or entity exercising ownership, management or control at the date of
this Agreement, or (ii) a court having jurisdiction in the premises shall enter
a decree or order for relief in respect of the Insolvent Stockholder in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereinafter in effect, or appoint a receiver, liquidator, assignee,
custodian, trustee, sequestrator of such Insolvent Stockholder or for any
substantial part of its property, or order the winding up or liquidation of its
affairs, and such decree or order shall remain unstayed and in effect for a
period of sixty (60) consecutive days, or (iii) the Insolvent Stockholder shall
commence a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or shall consent to the entry of an
order for relief in any involuntary case under any such law, or shall consent to
the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator of such other Party or for any substantial part
of its property, or shall make any general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due or shall
take any action in furtherance of any of the foregoing;
(d) By either Stockholder upon giving written notice to the other
Stockholder (the "Merging Stockholder") if, without the prior written consent of
the other Stockholder, the Merging Stockholder is merged or consolidated with
another entity;
(e) By either Stockholder upon giving written notice to the other
Stockholder (the "Prevented Stockholder") if the Prevented Stockholder is
prevented from performing its obligations under this Agreement for a continuous
period of six (6) months or more as a result of any intervention, direct or
indirect, by any government or governmental authority;
(f) By either Stockholder upon giving written notice to the other
Stockholder (the "Affected Stockholder") if the Affected Stockholder is
18
<PAGE>
prevented from performing its obligations under this Agreement for a continuous
period of six (6) months or more as a result of an event of Force Majeure.
(g) Automatically upon the sale of all of the shares in SII
International to a third party unrelated to the Stockholders;
(h) Automatically upon the acquisition of one hundred percent (100%)
of the shares in SII International by one of the Stockholders;
(i) Automatically in the event the Closing does not occur on or before
the Closing Date;
(j) By SIA upon giving written notice to Fossil if SII International is
in default under the Manufacturing, Supply and Purchase Agreement and such
default is not cured within thirty (30) days after written notice of such
default; or
(k) By Fossil upon giving written notice to SIA if SII International is
in default under the Service Agreement and such default is not cured within
thirty (30) days after written notice of such default.
Section 13.2 Rights Upon Termination.
(a) Survival. Termination of this Agreement shall not extinguish debts
and other obligations created or arising between the Stockholders by virtue of
this Agreement or by virtue of contracts entered into hereunder before the date
of termination. Without limiting the generality of the foregoing, the respective
obligations of the Parties under Sections 13.2 and 13.3 shall survive
termination of this Agreement.
(b) Rights. Without limiting the generality of Section 13.2(a), if this
Agreement is terminated pursuant to Section 13.1(b), Section 13.1(c), Section
13.1(d), Section 13.1(e) or Section 13.1(f) hereof, the non-Defaulting
Stockholder, the non-Insolvent Stockholder, the non-Merging Stockholder, the
non-Prevented Stockholder or the non-Affected Stockholder, as applicable, shall
be entitled to, in addition to any other remedies it may have in law, equity or
contract: (i) require the other Stockholder to purchase any or all of the shares
in SII International of the non-Defaulting Stockholder, non-Insolvent
Stockholder, non-Merging Stockholder, non-Prevented Stockholder or non-Affected
Stockholder, as applicable, at the Fair Market Value, (ii) purchase all, but not
less than all of the shares in SII International held by the other Stockholder
at the Net Book Value, or (iii) require SII International to be dissolved and
liquidated pursuant to Section 13.3 hereof, and (iv) terminate the
Manufacturing, Supply and Purchase Agreement, to the extent it is SIA, or
terminate the Service Agreement, to the extent it is Fossil. In the event the
transfer of shares in SII International pursuant to this Section 13.2(b) results
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<PAGE>
in the imposition of a transfer fee under the SC License Agreement or the Disney
License Agreement, then such transfer fee shall be paid by the Defaulting
Stockholder, Insolvent Stockholder, Merging Stockholder, Prevented Stockholder
or the Affected Stockholder, as applicable.
Section 13.3 Liquidation. Upon the occurrence of a dissolution event set forth
in Section 12.3, the termination of the Agreement pursuant to Section 13.1(i) or
in the event either Stockholder elects to require to dissolve SII International
pursuant to Section 13.2(b)(iii), then in no event later than one hundred twenty
(120) days after the occurrence of such dissolution event or such election, as
applicable, the Stockholders shall vote for and otherwise take all requisite
actions to cause the dissolution and liquidation of assets of SII International
as follows:
(a) All assets of SII International (including, but not limited to, all
Products remaining at SII International) shall be sold within such one hundred
twenty (120) day period at the best price offered by any party therefor;
(b) The proceeds of such sale shall be used as follows: (i) first, to
pay in full all third party creditors (including, but not limited to, any
amounts outstanding under the Third Party Loan); (ii) second, to pay any
outstanding accounts receivable owed by Fossil under the Manufacturing, Supply
and Purchase Agreement and the Service Agreement, pro rata according to the
respective amounts due to each such party; (iii) third, to pay any outstanding
loan liability of SII International (including, but not limited to, any amounts
outstanding under the Stockholders Loans and any amount paid by SIA and Fossil
in guaranteeing Third Party Loan) to SIA and Fossil pro rata according to the
respective amounts of loans and/or liabilities due to each such Party; and (iv)
fourth, any remaining proceeds shall be distributed to the Stockholders pro rata
in accordance with their respective Shareholding Percentages.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 Force Majeure. Any delay or failure by either Party to perform any
of its obligations hereunder shall be excused if and to the extent caused by
occurrences beyond such Party's reasonable control, including, but not limited
to, acts of God, strikes or other labor disturbances, war, whether declared or
not, sabotage, civil insurrections or commotion, acts by governmental
authorities and any other cause or causes whether similar of dissimilar to those
herein specified which cannot reasonably be controlled by such Party.
Section 14.2 Governing Law. The validity, performance, construction and effect
of this Agreement shall be governed by the laws of Delaware without regard to
principles of conflict of laws.
Section 14.3 Assignment. Except in accordance with the transfer provisions set
forth in Article VI, this Agreement and the rights and obligations hereunder
shall not be assigned by either Party hereto, by contract or by operation of
law, without the prior written consent of the other Party.
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Section 14.4 Expenses and Enforcement Costs. Each Party agrees to pay its own
costs and expenses incurred in connection with the preparation, negotiation and
execution of this Agreement and in obtaining the necessary Government Approvals
and other governmental action contemplated herein. Each Party hereto agrees to
pay and discharge all reasonable costs, attorney fees and expenses (including,
but not limited to the costs of arbitration and litigation) that are incurred by
the other Party in enforcing the terms of this Agreement or in defending itself
in an action to enforce the terms of this Agreement provided that such other
Party shall substantially prevail in such proceedings as determined by the
arbitrator(s) or judges, as applicable.
Section 14.5 Severability; Waiver. If any provision of this Agreement is or
becomes illegal, invalid or unenforceable under applicable law, such provision
shall be fully severable, and the remaining provisions hereof shall not be
affected thereby and shall remain in full force and effect. Failure of either
Party at any time to require performance by the other of any provision of this
Agreement shall not affect its rights to require full performance thereof at any
time thereafter, and a waiver by either Party of a breach of any provision shall
not constitute a waiver of rights arising from any subsequent breach or nullify
the effectiveness of such provision.
Section 14.6 Notices. Unless otherwise agreed in writing, all notices required
hereunder shall be in writing and in English. Such notices shall be delivered
personally, or sent by telex, telegram, registered airmail, return receipt
requested, or by facsimile with a confirmation copy to be sent by registered
mail, return receipt requested, addressed as follows:
If to SIA: Seiko Instruments America, Inc.
c/o Seiko Instruments U.S.A., Inc.
1130 Ringwood Court
San Jose, CA 95131-1726
Attention: Mr. Katsuhiko Morita, President and Chief
Executive Officer
Facsimile: 408-922-5840
If to Fossil: Fossil, Inc.
2280 N. Greenville
Richardson, Texas 75082
U.S.A.
Attention: T.R. Tunnell, Chief Legal Officer
Facsimile: 214-498-9639
Said notice shall be deemed to have been received on the first business day
following the date the telex, telegram or facsimile is dispatched. Notice sent
by registered airmail, return receipt requested, properly addressed and posted,
shall be deemed to have been received not later than seven (7) business days
after posting. Nothing contained herein shall justify or excuse failure to give
oral notice for the purposes of informing the other Party thereof when prompt
notification is appropriate, but such notice shall not satisfy the requirement
of written notice.
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Section 14.7 Language. This Agreement may be translated into other languages,
but the English language version shall be the official version and shall control
the construction and interpretation hereof.
Section 14.8 Amendment. This Agreement may be amended only by a written
document signed by the Parties.
Section 14.9 Headings. Headings or Articles in this Agreement are for conven-
ience only and do not substantively affect the terms of this Agreement.
Section 14.10 Inconsistencies. In case of any inconsistency or conflict between
this Agreement, on the one hand, and the Certificate of Incorporation or Bylaws
of SII International, on the other hand, this Agreement shall govern, and the
Parties agree to take all necessary steps to amend the Certificate of
Incorporation or Bylaws, as applicable, to conform to this Agreement promptly
upon the discovery of any such inconsistency or conflict.
Section 14.11 Ownership of Intellectual Property; Non-Compete; Corporate
Opportunity. Except as otherwise provided in the Ancillary Documents, the
proprietary designs, trademarks, tradenames, processes and systems created by
SII International shall remain the property of SII International. The Parties
agree that during the term of this Agreement, they shall not, directly or
indirectly, knowingly manufacture, market or sell products confusingly similar
to the products manufactured, marketed and distributed by SII International and
shall refer and cause to be referred all business prospects pertaining to mass
market distribution of watches, clocks and toys in the United States to SII
International. In the event SII International elects not to proceed with such
business prospect, then the referring Party may proceed with such business
prospect itself. Mass market distribution includes, but is not limited to,
distribution to retailers comparable to Wal-Mart, K-Mart, drug stores and
grocery stores. It is agreed and understood by the Parties that products sold or
offered for sale by the Parties or their respective Affiliates (other than SII
International) as of Closing, shall not be deemed to be "products confusingly
similar to the products" for purposes of this paragraph.
Section 14.12 Arbitration of Disputes. In the event that any dispute or
controversy arising out of, in relation to, or in connection with this
Agreement, such dispute or controversy shall be finally settled under the
Commercial Arbitration Rules of the American Arbitration Association by three
(3) arbitrators appointed as set forth below. The arbitration venue shall be New
York, New York. Arbitration shall be conducted by a panel of three (3) members,
one member selected by SIA, one member selected by Fossil and the third member
selected by agreement between the other two members. Such arbitration shall be
conducted in the English language, but either Party shall be free to make any
submission in English or Japanese without providing a translation thereof. The
Parties' obligations under this Section shall survive termination or expiration
of this Agreement. The provisions herein shall not be construed as prohibiting
any Party to this Agreement from applying to any court of competent jurisdiction
for such injunctive or other provisional relief as may be necessary to protect
that Party from irreparable harm or injury or to preserve the status quo pending
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resolution of a dispute or controversy. As part of the arbitration award, the
prevailing Party shall be entitled to recover its reasonable costs and expenses
(including attorney's fees) incurred in connection with the arbitration.
Section 14.13 Change of Shareholding Percentage. In the event that either Party
acquires some, but not all, of the other Party's equity ownership in SII
International pursuant to this Agreement, including, but not limited to,
pursuant to Article VI, then the following shall apply:
(a) The following changes shall be made in the number of Directors each
Party may nominate on the Board pursuant to Section 8.2 based upon the
respective Shareholding Percentages of SIA and Fossil following such
acquisition:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fossil Shareholding Percentage SIA Shareholding Percentage No. of Fossil No. of SIA
Directors Directors
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than 10% 90% or more 0 5
- -----------------------------------------------------------------------------------------------------------------
10% or more but less than 40% 60% or more but less than 90% 1 4
- -----------------------------------------------------------------------------------------------------------------
40% or more but less than 50% 50% or more but less than 60% 2 3
- -----------------------------------------------------------------------------------------------------------------
50% or more but less than 80% 20% or more but less than 50% 3 2
- -----------------------------------------------------------------------------------------------------------------
80% or more but less than 90% 10% or more but less than 20% 4 1
- -----------------------------------------------------------------------------------------------------------------
90% or more Less than 10% 5 0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(b) In the event the Shareholding Percentage of Fossil becomes more
than fifty percent (50%), Fossil shall be entitled to designate the Chairman of
the Board pursuant to Section 8.2.
(c) The following changes shall be made in the percentage of the
guaranteed amount each Party shall guarantee pursuant to Section 4.4(a) and in
the percentage of the Stockholder Loan each Party shall be obligated to provide
pursuant to Section 4.4(c) based upon the respective Shareholding Percentages of
SIA and Fossil following such acquisition:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fossil Shareholding Percentage SIA Shareholding Fossil Guarantee/ SIA Guarantee/
Percentage Stockholder Loan Stockholder Loan
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than 10% 90% or more 10% 90%
- -----------------------------------------------------------------------------------------------------------------
10% or more but less than 90% Fossil's Shareholding 100% minus Fossil's
Percentage plus 10% Shareholding Percentage
minus 10%
- -----------------------------------------------------------------------------------------------------------------
90% or more Less than 10% 100% 0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, from and after the termination or expiration of
the Service Agreement, the percentage of the amount to be guaranteed by Fossil
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<PAGE>
pursuant to Section 4.4(a) and the percentage of the Stockholder Loan to be
provided by Fossil pursuant to Section 4.4(c) shall be in accordance with
Fossil's Shareholding Percentage at such time.
Section 14.14 Confidentiality.
(a) Definition. As used in this Section 14.14, the term "Confidential
Information" shall mean any information disclosed by one Party to the other
pursuant to this Agreement which is in written, graphic, machine readable or
other tangible form and is marked "Confidential," "Proprietary" or in some other
manner to indicate its confidential nature, or is otherwise known by the
recipient to be information of a type generally maintained in confidence by the
disclosing Party. Confidential Information may also include oral information
disclosed by one Party to the other pursuant to this Agreement, provided that
such information is either (a) directly related to written Confidential
Information, or (b) designated as confidential at the time of disclosure and
reduced to a written summary by the disclosing Party, within a reasonable time
(not to exceed sixty (60) days) after its oral disclosure, which is marked in a
manner to indicate its confidential nature and delivered to the receiving Party.
(b) Confidentiality Obligations. Each Party shall treat as confidential
all Confidential Information of the other Party, shall not use such Confidential
Information except as set forth herein, shall implement reasonable procedures to
prohibit the disclosure, duplication, misuse or removal of the other Party's
Confidential Information and shall not disclose such Confidential Information to
any non-Affiliate third party. Without limiting the foregoing, each of the
Parties shall use at least the same procedures and degree of care which it uses
to prevent the disclosure of its own confidential information of like importance
to prevent the disclosure of Confidential Information disclosed to it by the
other Party under this Agreement, but in no event less than the care exercised
by the disclosing Party with respect to its own Confidential Information. Each
Party shall use its best efforts to enforce compliance with the provisions of
this Section 14.14 by its directors, officers, employees, agents and any third
party having access to the other Party's Confidential Information.
(c) Non-Confidential Information. Notwithstanding the above, neither
Party shall have liability to the other with regard to any Confidential
Information of the other which:
(i) was generally known and available in the public domain at
the time it was disclosed, or which becomes generally known and available in the
public domain through no fault of the receiver;
(ii) was known to the receiver at the time of disclosure as
shown by the files of the receiver in existence at the time of disclosure;
(iii) is disclosed with the prior written approval of the
initial disclosing Party;
(iv) was independently developed by the receiver without any
use of the disclosing Party's Confidential Information or by employees or other
agents of (or independent contractors hired by) the receiver who have not been
exposed to the disclosing Party's Confidential Information;
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<PAGE>
(v) becomes known to the receiver from a source other than the
disclosing Party without breach of this Agreement by the receiver and otherwise
not in violation of the disclosing Party's rights; or
(vi) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; provided, that the
receiver shall provide prompt, advance notice thereof to enable the disclosing
Party to seek a protective order or otherwise prevent such disclosure.
In addition, neither Party shall be restricted in any way by this Agreement as
to that Party's use of any Confidential Information of the other described in
subsections (a), (b), (d) and (e) above.
(d) Equitable and Other Relief. Each Party acknowledges that the other
Party's Confidential Information is an extremely valuable business asset, the
misuse or improper disclosure of which would cause irreparable harm to the
business interests of such Party. Accordingly, if either Party breaches any of
its obligations with respect to confidentiality and unauthorized use of
Confidential Information hereunder, the other Party shall be entitled to
equitable relief to protect its interest therein, including, but not limited to,
injunctive relief, as well as money damages.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date of this
Agreement.
FOSSIL, INC. SEIKO INSTRUMENTS AMERICA, INC.
By: _____________________ By: _____________________
Name: _____________________ Name: _____________________
Title: _____________________ Title: _____________________
26
<PAGE>
EXHIBIT A
Certificate of Incorporation
<PAGE>
EXHIBIT B
Bylaws
<PAGE>
EXHIBIT C
Minutes of the Organizational Meeting of the Board
<PAGE>
EXHIBIT D
SC License Agreement
<PAGE>
EXHIBIT E
Service Agreement
<PAGE>
EXHIBIT F
Asset Purchase Agreement
<PAGE>
EXHIBIT G
Manufacturing, Supply and Purchase Agreement
<PAGE>
EXHIBIT H
Disney License Agreement
EXHIBIT 10.2
SERVICE AGREEMENT
This Service Agreement ("Agreement") is entered into as of the ____ day
of August, 1999 (the "Effective Date"), by and between SII Marketing
International, Inc., a Delaware corporation ("SMI"), and Fossil Partners, L.P.,
a Texas limited partnership ("Fossil").
W I T N E S S E T H
WHEREAS, SMI is engaged in the business of purchasing, distributing and
wholesaling various watches, including, but not limited to LORUS Brand watches
(pursuant to the SC License Agreement) and DISNEY Brand watches (pursuant to the
Disney License Agreement) (the "Business"); and
WHEREAS, Fossil is a leading designer and distributor of fashion
watches and accessories to department and specialty stores throughout the world;
and
WHEREAS, SMI desires to retain Fossil to engage in certain marketing,
design, merchandising and sourcing activities on its behalf in connection with
the Business.
NOW, THEREFORE, in consideration of the foregoing recitals, and the
following mutual promises, covenants, terms, conditions, and agreements, the
parties do hereby agree as follows:
Section 1. Definitions. For the purposes of this Agreement, the following terms
shall have the respective meanings indicated below:
(a) "Bankrupt Party" has the meaning set forth in Section 9(b)
hereof.
(b) "Business" has the meaning set forth in the first recital hereof.
(c) "Business Records" has the meaning set forth in Section 8 hereof.
(d) "Confidential Information" has the meaning set forth in Section 7
hereof.
(e) "Contract Period" shall have the following meaning: the first
"Contract Period" shall be a period beginning on the Effective
Date of this Agreement and ending on March 31, 2000; and there-
after the term "Contract Period" shall mean a period of 12 conse-
cutive fiscal months.
(f) "Defaulting Party" has the meaning set forth in Section 9(a)
hereof.
(g) "DISNEY Brand" means each trademark licensed by Disney
Enterprises, Inc. to SMI under the Disney License Agreement.
<PAGE>
(h) "Disney License Agreement" shall mean the Trademark License
Agreement, dated as of August __, 1999, by and between Disney
Enterprises, Inc. and SMI.
(i) "LORUS Brand" means each "Lorus" brand licensed by Seiko
Corporation to SMI under the SC License Agreement.
(j) "Net Sales" shall mean the amounts invoiced or otherwise charged,
"ex-warehouse" (i.e., excluding any freight or delivery charges
separately stated), by SMI for Products sold during the
applicable period, less (i) quantity discounts, (ii) refunds and
credits actually made to, or accrued for the account of,
customers, (iii) usual and customary trade discounts, and (iv)
federal, state and local taxes. In calculating Net Sales, except
as provided herein, no deduction shall be made for discounts,
allowances of any kind or for any purpose, or costs incurred by
SMI.
(k) "Net Income" shall mean SMI's net income after taxes prior to the
payment of the Annual Payment pursuant to paragraph 4(b)
determined in accordance with United States generally accepted
accounting principles consistently applied.
(l) "Payment Date" has the meaning set forth in Section 4(a) hereof.
(m) "Products" shall mean all products sold by SMI related to the
Business.
(n) "SC License Agreement" shall mean the Trademark License
Agreement, dated as of August 9, 1999, by and between Seiko
Corporation and SMI.
(o) "Service Fee" has the meaning set forth in Section 4(a) hereof.
(p) "Services" has the meaning set forth in Section 3 hereof.
(q) "Term" has the meaning set forth in Section 2 hereof.
Section 2. Term. This Agreement shall commence on the Effective Date and, except
as earlier terminated pursuant to Section 9 hereof, shall continue in full force
and effect for an initial term of three (3) Contract Periods and for one (1)
additional Contract Period thereafter (the first three (3) Contract Periods,
together with the additional Contract Period, the "Term") unless SMI provides a
notice of termination to Fossil at least sixty (60) days prior to the beginning
of the fourth Contract Period.
Section 3. Performance of Services.
(a) General. Fossil shall perform such marketing, design, merchandising
and sourcing services in the manner, at the location, and through the personnel,
as may be reasonably requested by SMI from time to time or as may be necessary
and proper to effectuate the Business (the "Services"), including, but not
limited to, the following:
2
<PAGE>
(i) design and development of all product and packaging for such
products;
(ii) approve samples;
(iii) coordinate production with factories;
(iv) negotiate pricing with factory and establish specification sheets
on each model;
(v) establish yearly product development plans and timelines;
(vi) evaluate retail sell-through and determine future line direction
on all brands;
(vii) brand development and brand license business;
(viii) ensure brand integrity is maintained in all collateral
materials;
(ix) coordinate all marketing efforts, (collateral materials, point of
sale materials, catalogs, advertising, communication with
retailers); and
(x) design and develop all fixturing, point of purchase materials and
tradeshow exhibits;
(xi) develop and advise on inventory management systems;
(xii)interface and negotiate with brand licensors, with a view to
obtaining brand licenses for SMI, and obtain all approvals
necessary from the licensor (including, but not limited to,
approvals for designs) in order to comply with the terms of the
licenses obtained by SMI from such licensor;
(xiii) conduct market research;
(xiv)coordinate applications for the registration and maintenance of
SMI's intellectual property rights;
(xv) develop distributors and distribution channel for SMI products
within and outside the United States.
(b) Establishment of Specific Department. For the purpose of, and in
order to, carry out the Services, Fossil shall establish a separate department
or division within Fossil, which shall be responsible for performing the
Services. Fossil shall assign such number of its employees to exclusively
provide the Services as reasonably necessary in order to carry out in full the
business plan of SMI established by SMI's board of directors from time to time,
including, but not limited to the number of employees in the positions indicated
on Attachment 1 during the first Contract Period. Fossil shall provide SMI with
an updated list of the number of employees by position responsible for
performing the Services at least annually.
Section 4. Service Fee.
(a) Quarterly Payment. For the period from the Effective Date until
December 31, 1999 during the first Contract Period, SMI shall pay Fossil a flat
fee of $1,775,000 in consideration of the Services to be performed hereunder.
Such amount shall be paid in equal monthly installments within fifteen (15) days
following the end of each fiscal month during such period. From January 1, 2000
until March 31, 2000 during the first Contract Period (the "Partial Period"),
and in each Contract Period thereafter, in consideration of the Services to be
performed hereunder, SMI shall pay Fossil within sixty (60) days following the
Partial Period or each fiscal quarter in such Contract Period, as the case may
be, (a "Payment Date," and if such day is not a
3
<PAGE>
business day, then on the next succeeding business day) a service fee (the
"Service Fee") as follows:
(i) Two percent (2%) of Net Sales of the Product sold by SMI
during the Partial Period or such fiscal quarter during the Contract Period, as
the case may be, for as long as the aggregate Net Sales for the then current
Partial Period or Contract Period equals, or is less than, $75 million; and
(ii) Three percent (3%) of Net Sales of the Products sold by
SMI, from and after the aggregate Net Sales for the Partial Period or the then
current Contract Period exceeds $75 million.
(b) Annual Payment. Within thirty (30) days following receipt of the
audit report from SMI's independent accountants following the end of the second
Contract Period and each Contract Period thereafter, SMI shall pay Fossil an
additional Service Fee equal to ten percent (10%) of the Net Income of SMI
during such Contract Period. Beginning with the second Contract Period, if the
actual Net Income for such Contract Period is more or less than fifty percent
(50%) of SMI's budgeted Net Income for such Contract Period, then the parties
hereto shall negotiate in good faith and in a reasonable manner to make such
increase or decrease in the percentage of the Net Income Fossil is entitled to
receive pursuant to Section 4(b), as may be necessary to equitably compensate
Fossil for its Services hereunder. The parties shall take into account the
portion of the Service Fee paid pursuant to Sections 4(a)(i) and 4(a)(ii) in
making any such adjustments. SMI covenants and agrees, prior to the beginning of
each Contract Period beginning with the second Contract Period, to certify to
Fossil, SMI's budgeted Net Income figures for the upcoming Contract Period,
together with SMI's budgeted Net Income figure for each quarter of such Contract
Period.
(c) Reconciliation. Notwithstanding Section 4(a) above, in the event
that the Net Income of SMI during the period from the Effective Date until
December 31, 1999 is in the negative, then Fossil shall reimburse such loss to
SMI on a dollar for dollar basis, provided that such amount to be reimbursed by
Fossil shall in no event exceed the amount of the Service Fee paid pursuant to
Section 4(a) during such period.
In addition, notwithstanding Section 4(b) above, in the event that the
Board of Directors of SMI resolves to liquidate SMI during the Term, and further
in the event that the cumulative Net Income of SMI during the Term is in the
negative, then Fossil shall reimburse ten percent (10%) of such loss to SMI
prior to completion of such liquidation as a reimbursement of the Service Fee
paid hereunder, provided that such amount to be reimbursed by Fossil shall in no
event exceed the amount of the Service Fee paid pursuant to Section 4(b).
Section 5. Payment of Service Fee. On or before each Payment Date, SMI shall
deliver to Fossil a statement signed by a duly authorized officer of SMI and
certified by him as accurate indicating (a) the cumulative invoice price of all
Products sold during the preceding fiscal quarter, and (b) the amount of
discounts, credits and deductions from gross sales which properly
4
<PAGE>
may be deducted therefrom, and (c) a computation of the Service Fee payable
thereunder for such fiscal quarter, in such form as reasonably requested by
Fossil.
Section 6. Independent Contractor. It is understood that the Services to be
performed by Fossil in connection with this Agreement are to be performed as an
independent contractor and Fossil shall bear all of its expenses in connection
with the performance of the Services. Fossil shall not have any authority to
assume or create any obligation, express or implied, on behalf of SMI. Nothing
herein shall create or be deemed to create a relationship of principal and
agent, joint venture or other relationship other than that of an independent
contractor service provider. Accordingly, the Service Fee shall not be reduced
by income tax withholding, social security withholding, unemployment
withholding, insurance withholding, or worker's compensation withholding. In
addition, Fossil shall indemnify and hold SMI harmless from and against any
damages or losses incurred by SMI as a result of any obligation assumed or
created by Fossil on behalf of SMI without the prior written consent of SMI.
Section 7. Nondisclosure of Business Information. Each of Fossil and SMI (a)
acknowledges that all information relating to the Business and operations of the
other party ("Confidential Information") which it acquires, learns or has
learned during or prior to the Term is the valuable property of such party, (b)
acknowledges the need to preserve the confidentiality and secrecy of
Confidential Information, and (c) agrees that, it shall not use or disclose
Confidential Information, except to the extent expressly provided herein or
except as may be required pursuant to applicable law, regulation or legal
process, in which case it shall promptly notify the other party of such request
or requirement and furnish only that portion of such Confidential Information
which is legally required to be furnished. The provisions of this Section and
the parties' respective obligations hereunder shall survive the expiration or
termination of the Term. The term "Confidential Information" does not include
information which (i) is already in a party's possession, provided that such
information is not known by such party to be subject to another confidentiality
agreement with or other obligations of secrecy, or (ii) becomes generally
available to the public other than as a result of a disclosure in violation of
this Agreement by a party or its officers, directors and employees, or (iii)
becomes available to a party on a non-confidential basis from a third party,
provided that such third party is not known to be bound by a confidentiality
agreement or other obligation of secrecy.
Section 8. Business Records. All business records, papers, files, other
documents and copies, and all other information related or pertaining to the
Business ("Business Records") shall be and shall remain the property of SMI.
During the Term and during normal business hours of SMI, SMI shall afford Fossil
the opportunity to review and copy the Business Records necessary for the
performance of the Services, provided that Fossil shall turn over all such
copies to SMI upon termination of this Agreement.
Section 9. Termination. In the event:
(a) a party (the "Defaulting Party") breaches a material term of this
Agreement, which breach is not remedied within 30 days after written notice of
cure by the other party;
5
<PAGE>
(b) a party (the "Bankrupt Party") is subject to issuance of an order
for dissolution or liquidation, is appointed a receiver in respect of all or any
part of its assets, or becomes unable to pay its debts as they come due;
then, the party not the Defaulting Party (with respect to Section 9(a)) or the
Bankrupt Party (with respect to Section 9(b)) may at its option terminate this
Agreement on written notice to the Defaulting Party or the Bankrupt Party, as
applicable.
Section 10. Construction. This Agreement shall be construed and interpre-
ted in accordance with the laws of the State of Texas.
Section 11. Amendments. This Agreement may be amended or modified only by
a written instrument executed by the parties to this Agreement.
Section 12. Binding Effect. This Agreement shall inure to the benefit of,
and be binding upon, the parties, and their respective representatives,
successors and permitted assigns.
Section 13. Assignment. This Agreement may not be assigned without the
prior express written consent of the other party hereto.
Section 14. Entirety of Agreement. This Agreement constitutes the entire
agreement between the parties respecting the subject matter contained herein.
There are no oral or other agreements or understandings between the parties that
are not contained in this Agreement.
Section 15. Arbitration of Disputes. In the event that any dispute or
controversy arising out of, in relation to, or in connection with this
Agreement, such dispute or controversy shall be finally settled under the
Commercial Arbitration Rules of the American Arbitration Association by three
(3) arbitrators appointed as set forth below. The arbitration venue shall be
Dallas, Texas. Arbitration shall be conducted by a panel of three (3) members,
one member selected by Fossil, one member selected by SMI and the third member
selected by agreement between the other two members. Such arbitration shall be
conducted in the English language. The parties' obligations under this Section
shall survive termination or expiration of this Agreement. The provisions herein
shall not be construed as prohibiting any party to this Agreement from applying
to any court of competent jurisdiction for such injunctive or other provisional
relief as may be necessary to protect that party from irreparable harm or injury
or to preserve the status quo pending resolution of a dispute or controversy. As
part of the arbitration award, the prevailing party shall be entitled to recover
its reasonable costs and expenses (including attorney's fees) incurred in
connection with the arbitration.
Section 16. Intellectual Property; Confidential Information. The proprietary
designs, trademarks, tradenames, processes and systems created by those
providing the Services shall be owned exclusively by, and shall become the
property of, SMI. All information and material prepared or disclosed by Fossil
to SMI as part of the Services, including, but not limited to, any marketing
planned by Fossil, shall become the Confidential Information of SMI, subject to
the terms of Section 7 hereof.
6
<PAGE>
IN WITNESS WHEREOF, the parties have each executed this Agreement as of
the Effective Date.
SII MARKETING INTERNATIONAL, INC.
By: __________________________________
Name: Kunio Kamata
Title: Director
FOSSIL PARTNERS, L.P.
By: Fossil, Inc., General Partner
By: __________________________________
Name: Tom Kartsotis
Title: CEO
EXHIBIT 10.3
Asset Purchase Agreement
between
Junghans UK Limited
and
Fossil (UK) Ltd.
<PAGE>
Page 2
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement"), dated as of August ___, 1999
is made by and between Junghans UK Limited, a United Kingdom corporation
("Seller"), and Fossil (UK) Ltd., a United Kingdom corporation ("Purchaser").
WITNESSETH:
WHEREAS, Seller desires to sell, and Purchaser desires to purchase, certain of
Seller's assets relating to its business (the "Business"), on the terms and
subject to the conditions and limitations set forth herein.
NOW, THEREFORE, in consideration of the mutual representations, warranties and
covenants contained in this Agreement, and on the terms and subject to the
conditions herein set forth, the parties hereto agree as follows:
Article 1 Purchase and Sale
1.1 Sale and Purchase of Assets. Subject to and upon the terms and conditions
contained herein, at the Closing (as defined below), Seller shall sell,
transfer, assign, convey and deliver to Purchaser, and Purchaser shall
purchase, accept and acquire from Seller, the following assets that relate
to the Business as they exist as of the Closing Date (as defined below),
identified in Schedule 1.1 hereto (the "Assets").
1.2 Assumption of Liabilities. The Purchaser assumes the liabilities which are
identified in Schedule 1.2.1.
In addition, the Purchaser assumes the contractual obligations as
identified in Schedule 1.2.2..
Except the obligations and liabilities as enumerated in Schedule 1.2.1. and
1.2.2. (the "Assumed Obligations"), Purchaser shall not assume or agree to
pay, perform or discharge any liabilities or obligations of Seller, of the
Assets or the Business, whether accrued, absolute, contingent or otherwise,
including without limitation, liabilities based on or arising out of or in
connection with (a) any defects in products sold by Seller, (b) any implied
or express warranties relating to such products, or (c) any pension or
other benefit liability (except legal obligations -- if existing --)
<PAGE>
Page 3
relating to Seller's employees which may be hired by Purchaser. In
addition, Purchaser shall not be obligated to assume or agree to pay,
perform or discharge any liabilities or obligations with respect to the
Assumed Obligations which arose, or the cause of which arose, prior to the
Closing Date.
1.3 Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall be deemed to be effective as of September 1, 1999,
unless another such date is agreed upon in writing by the parties hereto
(the "Closing Date"). The Closing shall take place on the Closing Date at
the offices of Seller at 24 Alston Drive, Bradwell Abbey, Milton Keynes
MK13 9HA, United Kingdom, or at such other place as shall be mutually
agreed to by the parties.
1.4 Purchase Price. Subject to the adjustments contained in this section 1.4,
as shown in schedule 1.4 the total purchase price for the Assets (the
"Purchase Price") shall be (pound)1,000,000 (Sterling one million) based on
the balance sheet as of July 31, 1999. The Purchase Price shall be paid to
Seller at closing by wire transfer confirmed by a first class UK bank.
In addition to the payment of the Purchase Price to Seller, Purchaser also
agrees to assume the Assumed Obligations.
All assets and liabilities -- except fixed assets and warranties -
transferred hereunder shall be revalued to their actual value at the
Closing Date (August 31, 1999). The amount of net asset value ensuing from
such revaluation which is owed by either party to the other party hereto as
per August 31, 1999 shall be paid by the respective party within fifteen
(15) days after the Closing Date. The final balance of assets and
liabilities of Junghans UK as of the Closing Date may be audited by the
Purchaser or its respective nominees within fifteen (15) days after such
date for which the Purchaser shall bear the expense.
1.5 Seller Employees: Noncompetition. Effective as of the Closing Date,
Purchaser shall offer employment to the employees of Seller listed on
Schedule 1.5 (the "Employees"). If the Employees accept such offers,
Purchaser will employ those Employees on terms and conditions not less
favorable than those applicable to their employment by Seller prior to the
Closing Date. Seller shall not, for a period of at least 18 months
following Closing, employ or offer employment to Employees who have
accepted Purchaser's offers of employment under this Section 1.5 unless
such Employees have received the written consent of Purchaser prior to such
offer. Effective as of the Closing, Seller shall release each of the
Employees hired by
<PAGE>
Page 4
Purchaser from all non-competition agreements relating to their
employment with Seller.
1.6 Leases. (a) Effective as of the Closing Date, Seller shall be obligated
to cause its sister company Diehl Controls Limited to terminate the
existing sub lease agreement with the Seller and assign to Purchaser
the lease agreement (the "Lease") for the real property and
improvements (the "Real Estate") which is attached as Schedule 1.6.
During the period of time beginning on the Closing Date and continuing
for one hundred and twenty (120) days thereafter (the "Transition
Period"), Purchaser shall provide to Seller and its sister company
Diehl Controls Limited reasonable access to the Real Estate for the
purposes of (i) removing any properties owned by Diehl Controls Limited
from the premises; (ii) allowing Seller to transfer its continuing
operations, including all non-Business related records and corporate
documentation of Seller, to a new facility; and (iii) allowing the
employees of Seller to effect items (i) and (ii) above; provided,
however, that any activities conducted under this Section 1.6 (b) shall
not substantially hinder the operations of Purchaser.
1.7 Seller's Instruments of Transfer: Further Assurances. In order to
consummate the transactions contemplated by this Agreement, the
following documents shall be delivered by Seller to Purchaser at the
Closing:
(a) a Bill of Sale covering the Assets;
(b) an assignment of the Lease for the Real Estate to Purchaser,
executed and delivered by Seller;
(c) written instruments evidencing all consents necessary for
Seller to consummate the transaction contemplated hereby,
including consents relating to the assignment of the Lease of
the Real Estate and the assignment of the Assumed Contracts;
(d) a certificate duly executed by the President of Seller that
certifies the due adoption by the Board of Directors of Seller
of corporate resolutions, which shall be attached to such
certificate, authorizing the transactions and the execution
and delivery of this Agreement and the other agreements and
documents contemplated hereby and the taking of all actions
contemplated by this Agreement and such other agreement and
documents.
(e) original copies of all Assumed Contracts and all amendments,
supplements or modifications thereto; together with original
written assignments thereof to Purchaser, where applicable;
<PAGE>
Page 5
(f) all of Seller's business records to the extent such records
constitute a part of the Assets;
(g) possession of the Assets.
At the Closing, and at all times thereafter as may be necessary, Seller
shall execute and deliver to Purchaser such other instruments of
transfer as shall be reasonably necessary or appropriate to vest in
Purchaser good and indefeasible title to the Assets and to comply with
the purposes and intent of this Agreement.
1.8 Purchaser's Instruments of Transfer: Further Assurances. In order to
consummate the transactions contemplated by this Agreement, Purchaser
shall deliver to Seller at the Closing the Purchase Price, in cash or
by wire transfer confirmed by first class UK bank of immediately
available funds. At the Closing, and at all times thereafter as may be
reasonably necessary, Purchaser shall execute and deliver to Seller
such other instruments as shall be reasonably necessary or appropriate
to comply with the purposes and intent of this Agreement.
1.9 Certain Contracts. Notwithstanding any other provision of this
Agreement, to the extent that the assignment by Seller of any Assumed
Contract to be assigned hereunder shall require the consent or approval
of another party thereto, the consummation of the transactions
contemplated by this Agreement shall not constitute an assignment or an
attempted assignment thereof if such assignment or attempted assignment
would constitute a breach thereof. Seller shall obtain the written
consent or approval to the assignment to the Purchaser of each such
Assumed Contract with respect to which such consent is required for
such assignment.
Article 2 Representations and Warranties of Purchaser
Purchaser represents and warrants that the following are true and correct as of
the date of this Agreement and will be true and correct through the Closing Date
as if made on that date:
2.1 Incorporation and Good Standing. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of
the United Kingdom, with all requisite power and authority to carry on
the business in which it is engaged, to own the properties it owns and
to execute and delivery this Agreement and to consummate the
transactions contemplated hereby.
2.2 Authorization and Validity. The execution, delivery and performance
of this Agreement and the other agreements contemplated hereby by
Purchaser and the
<PAGE>
Page 6
consummation of the transactions contemplated hereby and thereby, have
been duly authorized by Purchaser. This Agreement has been and each
other agreement contemplated hereby will be prior to Closing duly
executed and delivered by Purchaser and this Agreement constitutes and
each agreement contemplated hereby will constitute legal, valid and
binding obligations of Purchaser, enforceable against Purchaser in
accordance with their respective terms.
2.3 No Violation. Neither the execution and performance of this Agreement
or the other agreements contemplated hereby, nor the consummation of
the transactions contemplated hereby or thereby, will (a) conflict
with, or result in a breach of the terms, conditions and provisions of,
or constitute a default under, the Certificate of Incorporation or
Bylaws of Purchaser or any agreement or other instrument under which
Purchaser is bound, or (b) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over
Purchaser or the properties or assets of Purchaser.
2.4 Consents and Regulatory Compliance. No authorization, consent,
approval, permit or license of, or filing with, any governmental or
public body or authority, any lender or lessor or any other person or
entity is required to authorize, or is required in connection with, the
execution, delivery and performance of this Agreement or the agreements
contemplated hereby on the part of Purchaser.
2.5 Finders' Fee. Purchaser has not incurred any obligation for any
finder's, broker's or agent's fee in connection with the transactions
contemplated hereby in a manner that will result in liability on the
part of Seller.
Article 3 Representations and Warranties of Seller
Seller represents and warrants that the following are true and correct as of the
date of this Agreement and will be true and correct through the Closing Date as
if made on that date:
3.1 Incorporation and Good Standing. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of
the United Kingdom, with all requisite power and authority to carry on
the business in which it is engaged, to execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
Seller is duly qualified and licensed to do business and is in good
standing in all jurisdictions where the nature of its business makes
such qualification necessary.
<PAGE>
Page 7
3.2 Vote Required. The approval of this Agreement, and the transactions
contemplated hereby, by the holders of all of the outstanding shares of
Seller's common stock is the only vote of holders of any class or
series of the capital stock of Seller required to approve this
Agreement, the sale of Assets and the other transactions contemplated
hereby.
3.3 Financial Information: Absence of Changes.
a) The balance sheets and the statements of income as of December
31, 1998 (audited) and as of July 31, 1999 (unaudited) have been
prepared as far as the assets and liabilities of the contemplated
transaction are concerned in all material respects in accordance
with Generally Accepted Accounting Principles consistently
applied by Seller throughout the periods indicated. All financial
information provided to Purchaser by Seller in connection with
the transactions contemplated by this Agreement, including the
financial statements of Seller is true, correct and complete and
fairly reflects the financial condition and results of operations
of Seller as of the dates and for the periods indicated in all
material respects.
b) No changes. Since July 31, 1999, there has not been any
(i) transaction by Seller except in the ordinary course of
business;
(ii) material adverse change in the financial condition,
liabilities, assets business or prospect of Seller;
(iii) changes in accounting methods or practices by Seller;
(iv) material, non-scheduled, increase in the salary or other
compensation payable or to become payable by Seller to any
of its employees, directors or officers.
3.4 Assets: Title: Leased Assets.
(a) Real Property. Seller owns no real property. The only real
property leased to Seller is the Real Estate, and the Lease is
a true and correct copy of the lease agreement for the Real
Estate.
(b) Accounts Receivable. Schedule 1.1 sets forth a complete and
accurate schedule of the accounts receivable of Seller as of
July 31 1999, as reflected in the balance sheet as of the
date, together with an accurate aging of these accounts.
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These accounts receivable, and all accounts receivable of the
Seller created after that date, arose from valid sales in
Seller's ordinary course of business.
(c) Assumed Contracts. Each Assumed Contract attached hereto as
Schedule 1.2.2 is a true and correct copy thereof.
(d) Title. Except as set forth on Schedule 3.4(d), Seller owns the
Assets (not including those Assets that are leased by Seller
as of the date of this Agreement), free and clear of all
liens, claims and encumbrances. Upon consummation of the
transactions contemplated hereby and receipt of the required
consents, Purchaser shall receive good, valid and marketable
title to the Assets, and will be entitled to use all of the
Assets that are currently leased to Seller, including the Real
Estate, as lessee, free and clear of all liens, claims and
encumbrances, other than statutory landlord liens on the
leased Real Estate.
(e) Software. Purchaser has a valid right and license to use all
software currently utilized in the conduct of Business, and
such software is adequate for the proper conduct of Business.
3.5 Commitments. Seller has not received notice of any plan or intention of
any of its customers or suppliers to exercise any right to cancel or
terminate any present arrangement or agreement with Seller as a result
of the transactions contemplated by this Agreement, and Seller does not
know of any fact that would justify the exercise of such right. Seller
does not currently contemplate, nor have reason to believe any other
person or entity currently contemplates, any amendment or change to any
arrangement or agreement. None of the customers or suppliers of Seller
has refused, or communicated that it will or may refuse to purchase or
supply goods or services, as the case may be, or has communicated that
it will or may substantially reduce the amounts of goods or services
that it is willing to purchase from, or sell to, Seller as a result of
the transactions contemplated by this Agreement.
3.6 Insurance. All the insurable properties of Seller are insured for their
respective benefit under valid and enforceable policies, issued by
insurers of recognized responsibility in amounts and against such risks
and losses as is customary in Seller's industry. True, complete and
correct copies of all such policies as they relate to the Assets have
been made available to Purchaser prior to the date hereof. Seller will
maintain such insurance until the Closing Date, after which time Seller
shall provide written notice to Purchaser of the elimination of such
insurance.
3.7 No Violation. Neither the execution and performance of this Agreement
or the agreements contemplated hereby nor the consummation of the
transactions
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contemplated hereby or thereby will (a) materially conflict with, or
result in a breach of the terms, conditions and provisions of, or
constitute a default under, the Articles of Incorporation or Bylaws of
Seller or any agreement or other instrument under which Seller is bound
or to which any of the Assets are subject, or result in the creation of
imposition of any lien, charge or encumbrance upon any of the Assets,
or (b) materially violate or conflict with any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over Seller or the
properties or assets of Seller or the Business.
3.8 Taxes. There is no material deficiency or delinquency for the payment
of any tax, assessment or governmental charge asserted against Seller
with respect to the Real Estate, nor are there any unpaid assessments
or taxes or governmental charges, or any deficiency or delinquency in
the payment of any of the taxes, assessments or governmental charges of
Seller that could be asserted by any taxing authority against the
purchaser.
3.9 Consents. Except with respect to the assignment of Seller's current
lease for the Real Estate and the assignment of the Assumed Contracts,
no authorization, consent, approval, permit or license of, or filing
with, any governmental or public body or authority, any lender or
lessor or any other person or entity is required to authorize, or is
required in connection with the execution, delivery and performance of
this Agreement or the agreements contemplated hereby on the part of
Seller.
3.10 Compliance with Laws: Regulatory Compliance. There are no existing
violations by Seller of any applicable law or regulation that could
materially adversely affect the Assets, the Real Estate or the
Business. Seller has complied in all material respects with all
applicable laws, regulations and licensing requirements, and has filed
with the proper authorities, all necessary statements and reports
relating to the Business. Seller possesses all necessary licenses,
franchises, permits and governmental authorizations to own the Assets
and conduct the Business as now conducted.
3.11 Finder's Fees. Seller has not incurred any obligation for any finder's,
broker's or agent's fee in connection with the transactions
contemplated hereby in a manner that will result in liability on the
part of Purchaser.
3.12 Litigation. Seller has not had any legal action or administrative
proceeding or investigation instituted or, to the best knowledge of
Seller, threatened against or affecting, or that could affect, any of
the Assets, the Real Estate or the Business. Seller is not subject to
any continuing court or administrative order, writ, injunction or
decree applicable to Seller or to the Assets, the Real Estate or the
Business.
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3.13 Accuracy of Information Furnished. All information furnished to
Purchaser by Seller in this Agreement or in any exhibit, schedule or
certificate related to this Agreement is true, correct and complete in
all material respects. Such information states all material facts
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements are
made, true, correct and complete in all material respects.
3.14 Condition of Assets and Equipment. All of the assets that are tangible
property are in the condition as inspected and accepted by the
Purchaser during the due diligence review.
3.15 Customers. Seller has provided Purchaser with a complete and accurate
list of Seller's customers and suppliers relating to the Business,
which is attached hereto as Schedule 3.15.
3.16 Pricing. Seller has provided Purchaser with a complete and accurate
list of Seller's standard prices and any applicable discounts by
customer name, which is attached hereto as Schedule 3.16.
3.17 Product Warranties. There is no claim against or liability of Seller on
account of product warranties or with respect to the manufacture, sale
or rental of defective products, and, to the actual knowledge of
Seller, there is no basis for any such claim on account of defective
products heretofore manufactured, sold or rented.
3.18 Year 2000. To Seller's knowledge, all of Seller's proprietary software
included in the Assets is in full compliance with the Year 2000
transition requirements and will be unaffected by the millennium date
change.
3.19 Intellectual Property Rights.
(a) Intellectual Property Rights. Seller owns, or is licensed or
otherwise possesses legally sufficient rights to use, all
trademarks, trade names, copyrights, and any applications
therefor, know-how, trade secrets, computer software programs
or applications (in both source code and object code form) and
tangible or intangible proprietary information or material
that are used or proposed to be used in the Business (the
"Intellectual Property Rights") free and clear of all liens,
claims and encumbrances.
(b) Seller has disclosed the Intellectual Property Rights to the
extent necessary for Purchaser to practice and utilize such
rights in its Business. Schedule 3.19(b) is a true and
complete list of Seller's trade secrets, including customer
lists and
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Page 11
computer systems and programs, together with all materials
documenting the trade secret to allow Purchaser the full and
proper use of the trade secret without reliance on the special
knowledge or memory of others.
(c) Purchaser's use of the Intellectual Property Rights will not
infringe upon the rights of any third party.
(d) To Seller's best knowledge, there has been no breach with
respect to any license or right relating to any of the
Intellectual Property Rights.
3.20 Employees. Schedule 3.20 sets forth the true and complete terms and
conditions of employment of the Employees, including, but not limited
to, their salaries, fringe benefits, bonuses and other benefits.
Article 4 Purchaser's Covenants
4.1 Consummation of Agreement. Purchaser agrees that on or prior to the
Closing, Purchaser agrees to use its best efforts to (i) cause the
Board of Directors of Purchaser to authorize all necessary corporate
action; and (ii) cause the consummation of the transactions
contemplated by this Agreement in accordance with its terms and
conditions.
4.2 Retention of Records. Purchaser shall retain all documents, books and
records of Seller which Purchaser receives from Seller for a period of
three (3) years following the Closing Date. Seller shall be provided an
opportunity to retain photostatic copies of those books, records,
corporate document. After the Closing, Seller and its representatives
shall have reasonable access to all such books, records and documents
during normal business hours.
4.3 Employees. On the Closing Date Purchaser shall assume the employment of
the Employees who are listed in Schedule 1.5 on the terms and
conditions stated in the Employment Contracts with Seller prior to the
Closing Date. Effective on the Closing Date, Purchaser shall assume all
payroll obligations with respect to the Employees for all pay periods
that (i) commenced prior to the Closing Date and (ii) will expire after
the Closing Date. The provisions of this Section 4.3 shall inure solely
to the benefit of Seller, and no third party (including, without
limitation, any Employee) shall be permitted to rely hereon as a third
party beneficiary or otherwise.
4.4 Information for Tax Returns. Purchaser shall cooperate with Seller
after the Closing Date by providing Seller, without any additional con-
sideration but at the expense of
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Page 12
Seller, promptly upon request, such records and other information
regarding the Assets, the Real Estate and/or the Business as may
reasonably be requested from time to time by Seller in connection with
the preparation or audit of its tax returns, and audits, disputes,
refund claims or litigation relating thereto. In connection therewith,
Purchaser will afford Seller's tax advisors, and such other persons as
may be mutually agreed upon, access to books and records relating to
the Assets, the Real Estate and the Business; provided. however, that
Seller shall cause its tax advisors and such other persons to hold in
strict confidence all such information (except as required to be
disclosed in connection with such tax returns and audits, disputes,
refund claims and litigation relating thereto).
Article 5 Seller's Covenants
Seller agrees that on or prior to the Closing:
5.1 Delivery of Assets. Upon payment of purchase price at Closing by the
Purchaser according to Section 1.4 above, Seller shall deliver to
Purchaser a Bill of Sale, or other appropriate documents, conveying
title to the Assets as set forth in Schedule 1.1, free and clear of all
liens, security interests, charges and encumbrances.
5.2 Business Operations. Seller shall operate the Business only in the
ordinary course, will not introduce any new method of management or
operation and Seller shall use its best efforts to preserve the
Business intact, to retain its present customers and suppliers so that
it will be available to Purchaser after the Closing and to cause
consummation of the transactions contemplated by this Agreement in
accordance with its terms and conditions. Seller shall not take any
action that might reasonably be expected to impair the Assets, the Real
Estate or the Businesses without the prior written consent of Purchaser
or take or fail to take any action that would cause or permit the
representations made in Article 3 hereof to be inaccurate at the time
of Closing or preclude Seller from making such representations and
warranties at the Closing.
5.3 Material Change. Prior to the Closing, Seller shall promptly inform
Purchaser in writing of any material adverse change in the condition of
the Assets, the Real Estate or the Business or any event that renders
the representations and warranties made in Article 3 to be inaccurate,
to the extent such change or event is known to Seller or should
reasonably be known to Seller in the ordinary course of its operation
of the Assets or the Business. Any such disclosure shall not be deemed
a waiver by Purchaser of any representation or warranty of Seller
contained in this Agreement.
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5.4 Approvals of Third Parties. As soon as practicable after the execution
of this Agreement, but in any event prior to the Closing Date, Seller
will secure the assignment of the lease for the Real Estate to the
Purchaser. For other assets Seller will use its best efforts to secure
all necessary approvals, assignments, releases and consents of all
third parties and governmental authorities required on the part of
Seller for the consummation of and contemplated by this Agreement.
5.5 Hiring Employees. Seller will cooperate with all reasonable requests
made by Purchaser for the purpose of allowing Purchaser to hire the
Employees.
5.6 Employee Compensation. Except with Purchaser's prior written consent,
no increase will be made in the compensation or rate of compensation
payable or to become payable to the Employees, and no bonus, profit
sharing, retirement, insurance, death, fringe benefit or other
extraordinary or indirect compensation shall accrue, be set aside or be
paid to, for or on behalf of any such Employees other than as required
by presently existing pension, profit sharing, bonus and similar
benefit plans as presently constituted, and no agreement or plan other
than those now in effect shall be adopted or committed for.
5.7 Contracts. Except with Purchaser's prior written consent, Seller shall
not waive any material right or cancel any of the Assumed Contracts,
debt or claim relating to the Assets, the Real Estate or the Business,
nor will Seller, except in the ordinary course of business, assume or
enter into any contract, lease, license, obligation, indebtedness,
commitment, purchase or sale relating to the Assets, the Real Estate or
the Business.
5.8 Liens. Except with Purchaser's prior written consent, Seller will not
enter into or assume any pledge, conditional sale or other title
retention agreement, permit any lien, encumbrance or claim of any kind
to attach to the Assets, the Real Estate or the Business, whether now
owned or hereafter acquired, except for transactions in the usual and
ordinary course of business.
5.9 Changes in Inventory. Seller will not alter the physical contents or
character of any of its inventory so as to affect the nature of the
Business other than normal adjustments in accordance with generally
accepted accounting principles and other than as a result of
transactions in the ordinary course of business.
5.10 No Disclosure or Negotiation with Others. Seller will prevent the
disclosure of any of the terms or conditions of this Agreement to any
other person, other than to its employees, legal counsel and
accountants, or as otherwise required by law or court order.
Additionally, Seller shall not, directly or indirectly, through
representatives or otherwise, solicit, entertain, or negotiate with
respect to, or in any manner encourage,
<PAGE>
Page 14
discuss or consider any offer or proposal to sell the Business, in whole or
in part, to any person or entity other than Purchaser or its affiliates,
whether directly or indirectly, through purchase, merger, consolidation or
otherwise and neither Seller nor any representative of Seller shall provide
information relating to the Business to any other person or entity in
connection with a possible transaction involving the Business. The
foregoing restrictions shall continue only until the Closing. Seller agrees
to immediately notify Purchaser in the event of any known contact among
Seller or Seller's representative and any other person or entity regarding
any such offer or proposal or any related inquiry.
5.11 Information for Tax Returns. Seller shall cooperate with Purchaser after
the Closing Date by providing Purchaser, without any additional
consideration but at the expense of Purchaser, promptly upon request, such
records and other information regarding the Assets, the Real Estate and/or
the Business as may reasonably be requested from time to time by Purchaser
in connection with the preparation or audit of its tax returns, and audits,
disputes, refund claims or litigation relating thereto. In connection
therewith, Seller will afford Purchaser's tax advisors, and such other
persons as may be mutually agreed upon, access to books and records
relating to the Assets, the Real Estate and the Business; provided,
however, that Purchaser shall cause its tax advisors and such other persons
to hold in strict confidence all such information (except as required to be
disclosed in connection with such tax returns and audits, disputes, refund
claims and litigation relating thereto).
Article 6 Purchaser's Conditions Precedent
Except as may be waived in writing by Purchaser, the obligations of
Purchaser hereunder are subject to the fulfillment by Closing of each of the
following conditions:
6.1 Representations and Warranties. The material representations and warranties
of Sellers contained herein shall be true and correct by Closing, and
Purchaser shall not have discovered any material error, misstatement or
omission therein.
6.2 Covenants. Sellers shall have performed and complied with all material
covenants and conditions required by this Agreement to be performed and
complied with by it prior to the Closing.
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6.3 Officer's Certificate. Sellers shall have delivered to Purchaser a
certificate duly executed by Sellers' respective President certifying as to
the statements contained in Section 6.1 and Section 6.2 to this Agreement.
6.4 Proceedings. No action, proceeding or order by any court or governmental
body or agency or third party shall have been threatened in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of
the transactions contemplated by this Agreement or which would materially
affect the ability of the Purchaser to consummate the transactions
contemplated by this Agreement.
6.5 Shareholder Approval. Sellers' respective shareholders shall have approved
this Agreement and the transactions contemplated hereby.
6.6 No Material Adverse Change. No material, adverse change in the Assets, the
Real Estate or the Business shall have occurred after the date hereof and
prior to the Closing.
6.7 Instruments of Transfer. Sellers shall have delivered to Purchaser each of
those documents enumerated in Section 1.7 of this Agreement.
Article 7 Sellers' Conditions Precedent
Except as may be waived in writing by Sellers, the obligations of
Sellers hereunder are subject to the fulfillment at or prior to the Closing of
each of the following conditions:
7.1 Representations and Warranties. The representations and warranties of
Purchaser contained herein shall be true and correct as of the Closing,
subject to any changes contemplated by this Agreement, and Sellers shall
not have discovered any error, misstatement or omission therein.
7.2 Covenants. Purchaser shall have performed and complied in all material
respects with all covenants or conditions required by this Agreement to be
performed and complied with by it prior to the Closing.
7.3 Corporate Approval. The execution and delivery of this Agree- ment by
Purchaser, and the performance of its covenants and obligations hereunder,
shall have been duly authorized by all necessary corporate and shareholder
action, and Purchaser shall have received copies of all resolutions
pertaining to that authorization, certified by the secretary of Purchaser.
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Page 16
7.4 Officer's Certificate. Purchaser shall have delivered to Sellers a
certificate duly executed by an officer of Purchaser certifying as to the
statements contained in Section 7.1 and Section 7.2 of this Agreement.
7.5 Proceedings. No action, proceeding or order by any court or governmental
body or agency or third party shall have been threatened in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of
the transactions con- templated by this Agreement or which would materially
affect the ability of Seller to consummate the transactions contem- plated
by this Agreement.
7.6 Instruments of Transfer. Purchaser shall have delivered to Sellers each of
those items enumerated in Section 1.8 of this Agreement.
Article 8 Indemnification
8.1 Seller's Indemnity. Subject to the terms and conditions of this Article 8,
Seller agrees to indemnify, defend and hold Purchaser and its officers,
directors, agents, attorneys and affiliates harmless from and against all
losses, claims, obligations, demands, assessments, penalties, liability,
costs, damages, reasonable attorneys' fees and expenses (collectively
"Damages"), asserted against or incurred by Purchaser by reason of or
resulting from any of the following:
(a) A breach by Seller of any representation, warranty or covenant
contained herein or in any agreement executed pursuant hereto;
(b) Any product liability or breach of warranty claims relating to
products sold by Seller, and all general liability claims
arising out of or relating to occurrences of any nature
relating to the Assets, the Real Estate or the Business prior
to the Closing, whether any such claims are asserted prior to
or after the Closing;
(c) Any obligation or liability with respect to the Employees
arising out of or relating to occurrences of any nature prior
to the Closing, whether any such claims are asserted prior to
or after the Closing; or
(d) Any tax filing or return or payment made, or position taken,
by Seller which any governmental authority challenges and
which results in an assertion of Damages against Purchaser.
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8.2 Purchaser's Indemnity. Subject to the terms and conditions of this Article
8, Purchaser agrees to indemnify, defend and hold Seller and its officers,
directors, agents, attorneys and affiliates harmless from and against all
Damages asserted against or incurred by Seller by reason of or resulting
from any of the following:
(a) A breach by Purchaser of any representation, warranty or cove-
nant contained herein or in any agreement executed pursuant
hereto;
(b) Any product liability or breach of warranty claims relating to
products sold by Purchaser, and all general liability claims
arising out of or relating to occurrences of any nature relating
to the Assets, the Real Estate or the Business after the Closing;
(c) Any obligation or liability with respect to the Employees arising
out of or relating to occurrences of any nature after the
Closing;
(d) Any tax filing or return or payment made, or position taken, by
Purchaser, after Closing, which any governmental authority
challenges and which results in an assertion of Damages against
Seller, or
(e) The failure of Purchaser to pay, perform and discharge any of the
Assumed Obligations.
8.3 Conditions of Indemnification. The respective obligations and liabilities
of Seller and Purchaser (the "indemnifying party") to the other (the "party
to be indemnified") under Sections 8.1 and 8.2, respectively, hereof with
respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
(a) Within 20 days (or such earlier time as might be required to
avoid prejudicing the indemnifying party's position) after
receipt of notice of commencement of any action evidenced by
service of process or other legal pleading, or with reasonable
promptness after the assertion in writing of any claim by a third
party, the party to be indemnified shall give the indemnifying
party written notice thereof together with a copy of such claim,
process or other legal pleading, and the indemnifying party shall
have the right to undertake the defense thereof by
representatives of its own choosing and at its own expense;
provided. however, that the party to be indemnified may
participate in the defense with counsel of its own choice and at
its own expense.
(b) In the event that the indemnifying party, by the 30 day after
receipt of notice of any such claim (or, if earlier, by the 10th
day preceding the day on which an
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Page 18
answer or other pleading must be served in order to prevent
judgment by default in favor of the person asserting such
claim), does not elect to defend against such claim, the party
to be indemnified will (upon further notice to the
indemnifying party) have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for
the account and risk of the indemnifying party and at the
indemnifying party's expense, subject to the right of the
indemnifying party to assume the defense of such claims at any
time prior to settlement, compromise or final determination
thereof.
(c) Anything in this Section 8.3 to the contrary notwithstanding,
the indemnifying party shall not settle any claim without the
consent of the party to be indemnified unless such settlement
involves only the payment of money and the claimant provides
to the party to be indemnified a release from all liability in
respect of such claim. If the settlement of the claim involves
more than the payment of money, the indemnifying party shall
not settle the claim without the prior consent of the party to
be indemnified.
(d) The party to be indemnified and the indemnifying party will
each cooperate with all reasonable requests of the other.
8.4 Indemnification Limitation. To the extent that a party seeks
indemnification for Damages under this Article 8 following the Closing, the
indemnified party's remedy will at all times be limited to the Purchase
Price. The indemnification provided for in this Article 8 will not apply
unless and until the aggregate amount of Damages for which the indemnified
party seeks indemnification exceeds (pound)50,000 in the aggregate, in
which event the indemnification provided for will include all Damages
exceeding the above mentioned amount of (pound)50,000 up to the Purchase
Price. The parties seeking indemnification pursuant to this Article 8 shall
only be entitled to be reimbursed for the actual indemnified expenditures
or Damages incurred by them for the above described losses.
Article 9 Termination
Either party may terminate this Agreement by written notice to the other party
if Closing has not occurred by October 1, 1999.
Article 10 Miscellaneous
10.1 Amendment. This Agreement may be amended, modified or supplemented only
by an instrument in writing executed by the party against which
enforcement of the amendment, modification or supplement is sought.
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10.2 Assignment and Denial of Third Party Rights. Except as otherwise
provided in this Section 10.2, neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof
nor any of the documents executed in connection herewith may be
assigned or delegated by any party without the written consent of the
other parties. Any attempted assignment or delegation of such rights in
violation of this Section 10.2 will be null and void and of no force
and effect. Nothing contained herein, express or implied, is intended
to confer upon any person or entity (including minority shareholders or
stockholders of the parties hereto) other than the parties indemnified
under Article 8 and parties hereto and their successors in interest and
permitted assignees any rights or remedies under or by reason of this
Agreement unless so stated herein to the contrary.
10.3 Notice. Any notice or communication must be in writing and given by
depositing the same in the mail, addressed to the party to be notified,
postage prepaid and registered or certified with return receipt
requested, or by delivering the same in person. Such notice shall be
deemed received on the date on which it is hand-delivered or on the
third business day following the date on which it is so mailed. For
purposes of notice, the addresses of the parties shall be:
If to Seller: Junghans UK Ltd.
24 Alston Drive, Bradwell Abbey
Milton Keynes, Buckinghamshire
MK139HA
Attn.: Alan Stone-Wigg
Telephone: 0044 1908 220311
Facsimile: 0044 1908 220411
with a copy to: Junghans Uhren GmbH
Geiahaldenstraae 49
78713 Schramberg
Attn.: Hans-Juergen Bublath
Telephone: 0049 7422 18200
Facsimile: 0049 7422 18666
If to Purchaser: Fossil (UK) Ltd.
14 Buttermere Drive,
Basingstoke, Hampshire, RG22 5LD
Attn.: Franz Scheurl
Telephone: 001 972 2342525
Facsimile: 001 972 6996971
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Page 20
with a copy to: Fossil
2280 N. Greenville Ave.
Richardson, Texas
Attn. T.R. Tunnell
Telephone: 972-699-2139
Facsimile: 972-498-9639
Any party may change its address for notice by written notice given to
the other parties.
10.4 Confidentiality. The parties shall keep this Agreement and its terms
confidential, but any party may make such disclosures after the Closing as
it reasonably considers are required by law, but each party will notify
the other party in advance of any such disclosure. In the event that the
transactions contemplated by this Agreement are not consummated for any
reason, the parties agree not to disclose or use any confidential
information they may have concerning the affairs of the other parties,
except for information which is required by law to be disclosed.
Confidential information includes, but is not limited to: customer lists
and files, prices and costs, business and financial records, surveys,
reports, plans, proposals, financial information, information relating to
personnel contracts, stock ownership, liabilities and litigation. Should
the transactions contemplated hereby not be consummated, nothing contained
in this Section 10.4 shall be construed to prohibit the parties from
operating a business in competition with each other, provided that such
party does not use the confidential information of the other party to
operate such business. After the Closing Date, neither party hereto shall
use in any way or disclose any of such confidential information, directly
or indirectly, except as required by law or court order. After the
Closing, all files, records, documents, information, data and similar
items relating to the Business shall remain the exclusive property of
Purchaser. The provisions of this Section 10.4 shall supplement, and shall
not supersede, any existing confidentiality agreement between the parties,
including, but not limited to, that certain Non-Disclosure Agreement,
dated July 9, 1999 between Junghans UK Limited and Fossil, Inc.
10.5 Entire Agreement. Except as set forth in Section 10.4 above, this
Agreement and the schedules hereto supersede all prior agreements and
understandings relating to the subject matter hereof, except that the
obligations of any party under any agreement executed pursuant to this
Agreement shall not be affected by this Section 10.5.
10.6 Costs, Expenses and LegaI Fees. Whether or not the transactions
contemplated hereby are consummated, each party shall bear its own costs
and expenses (including attorneys
<PAGE>
Page 21
fees) of preparation, negotiation and consummation of this Agreement and
the transactions contemplated hereby.
10.7 Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provisions or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of
this Agreement, a provision as similar in its terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid
and enforceable.
10.8 Specific Performance. The parties acknowledge that a refusal by either
party to consummate the transactions contemplated hereby, or a breach by
either party of the provisions of this Agreement, will cause irrevocable
harm to the other party, for which there may be no adequate remedy at law
and for which the ascertainment of damages would be difficult. Therefore,
such party shall be entitled, in addition to, and without having to prove
the inadequacy of, other remedies at law, to specific performance of this
Agreement, as well as injunctive relief (without being required to post
bond or other security).
10.9 Survival of Representations. Warranties and Covenants. Notwithstanding any
investigation by any party, the representations, warranties, covenants and
other agreements contained herein shall survive the Closing for a period
(such period being referred to as the "Survival Period") ending on the
expiration of twelve (12) calendar months following the month in which the
Closing shall occur, and all statements contained in any certificate,
exhibit or other instrument delivered by or on behalf of Seller or
Purchaser pursuant to this Agreement shall be deemed to have been
representations and warranties by Seller or Purchaser, as the case may be,
and shall survive the Closing and any investigation made by any party or
on its behalf for a period expiring upon completion of the Survival
Period; provided, however, that all such representations and warranties
shall survive indefinitely for all claims which are asserted on or before
the expiration of the Survival Period.
10.10 Governing Law. This Agreement and the rights and obligations of the
parties shall be governed, construed and enforced in accordance with the
laws of the United Kingdom.
<PAGE>
Page 22
10.11 Captions. The captions in this Agreement are for convenience of reference
only and shall not limit or otherwise affect any of the terms or
provisions hereof.
10.12 Counterparts: Facsimile Execution. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. A telecopy or
facsimile transmission of a signed counterpart of this Agreement shall be
sufficient to bind the party or parties whose signature(s) appear(s)
thereon.
10.13 Taxes. Each party shall be responsible for all sales, use, transfer or
other taxes applicable to such party resulting from the transactions
contemplated hereby.
10.14 Public Announcements. Seller and Purchaser shall cooperate with each other
in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public
announcement or statement with respect thereto prior to consultation with
the other party. The parties agree that the initial press release or
releases to be issued in connection with the execution of this Agreement
shall be mutually agreed upon prior to the issuance thereof.
10.15 Arbitration. The parties will submit any and all disputed issues to final
and binding arbitration. A disputed issue means any disagreement in regard
to any of the terms and conditions of this Agreement. Any such dispute
will not be subject to appeal to any court except to permit a party to
seek court enforcement of any arbitration award rendered hereunder.
Arbitration will be held in London in accordance with the Rules of
Conciliation and Arbitration of the Intentional Chamber of Commerce by one
or more arbitrators in accordance with said Rules. The language of
arbitration shall be English. Any award shall be enforceable in any court
of competent jurisdiction having cognizance over the persons or property
of the parties. The arbitrator(s) shall decide and award and decide costs
of the proceedings.
<PAGE>
Page 23
IN WITNESS WHEREOF, the undersigned parties have hereunto duly executed this
Agreement as of the date first written above.
PURCHASER: SELLER:
FOSSIL UK LTD. JUNGHANS UK LTD.
By: /s/ Franz Scheurl By: /s/ Hans-J Bublath
----------------------------- --------------------------------
<PAGE>
Page 24
Asset Purchase Schedules List
Junghans UK
1.1 Assets
a) Junghans UK Limited
b) Diehl Controls Limited
c) Prepayments
d) Inventory
e) Accounts Receivable
1.2 Assumption of Liabilities
1.2.1 Warranties, Trade Liabilities
1.2.2 Contracts
1.4 Purchase Price
1.5 Employees List
1.6 Lease Agreement (to be assigned Diehl UK)
3.4(d) Encumbered Assets
3.15 List of Sellers Customers and Suppliers
3.16 List of Sellers Standard Prices and Discounts by Customer
3.19(b) List of Seller's Trade Secrets including Customers List! Computer
Systems & Programs
3.20 Terms & Conditions of Employer/Employees
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Part I
Item Financial Statements of Fossil, Inc. and Subsidiaries as of and for
the thirty-nine weeks ended October 2, 1999 filed on Form 10-Q.
</LEGEND>
<CIK> 0000883569
<NAME> Fossil, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<EXCHANGE-RATE> 1
<CASH> 63,996
<SECURITIES> 0
<RECEIVABLES> 61,655
<ALLOWANCES> 7,276
<INVENTORY> 76,609
<CURRENT-ASSETS> 209,023
<PP&E> 43,804
<DEPRECIATION> 17,003
<TOTAL-ASSETS> 245,597
<CURRENT-LIABILITIES> 70,211
<BONDS> 0
0
0
<COMMON> 321
<OTHER-SE> 172,460
<TOTAL-LIABILITY-AND-EQUITY> 245,597
<SALES> 278,379
<TOTAL-REVENUES> 278,379
<CGS> 138,319
<TOTAL-COSTS> 221,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 362
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> 56,659
<INCOME-TAX> 23,231
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,428
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.00
</TABLE>
