UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 3, 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
August 13, 1999: 31,926,226 (after giving effect to the 3-for-2 stock split
payable in the form of a 50% stock dividend on August 17, 1999).
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JULY 3, JANUARY 2,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,648 $ 57,263
Accounts receivable - net 38,414 42,582
Inventories 74,359 57,295
Deferred income tax benefits 6,495 5,655
Prepaid expenses and other current assets 6,129 3,538
----- -----
Total current assets 196,045 166,333
Property, plant and equipment - net 26,567 23,117
Intangible and other assets - net 5,822 4,628
----- -----
$ 228,434 $ 194,078
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable $ 4,255 $ 4,537
Accounts payable 15,850 14,512
Accrued expenses:
Co-op advertising 13,605 13,311
Compensation 3,384 3,246
Other 12,570 11,201
Income taxes payable 18,095 10,487
------ ------
Total current liabilities 67,759 57,294
Minority interest in subsidiaries 2,102 1,864
Stockholders' equity:
Common stock, shares issued and outstanding,
31,916,700 and 31,398,136, respectively 213 209
Additional paid-in capital 38,741 34,345
Retained earnings 122,679 102,859
Accumulated other comprehensive income (3,060) (1,037)
Treasury stock at cost, none and 155,518 shares,
respectively - (1,456)
--------- ---------
Total stockholders' equity 158,573 134,920
------- -------
$ 228,434 $ 194,078
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
1
<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 26 FOR THE 26
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 90,271 $ 64,363 $ 173,548 $ 121,248
Cost of sales 45,521 32,458 86,126 61,442
------ ------ ------ ------
Gross profit 44,750 31,905 87,422 59,806
Operating expenses:
Selling and distribution 21,277 16,258 39,176 31,075
General and administrative 6,714 5,761 13,610 10,994
----- ----- ------ ------
Total operating expenses 27,991 22,019 52,786 42,069
------ ------ ------ ------
Operating income 16,759 9,886 34,636 17,737
Interest expense (24) (59) (49) (117)
Other income (expense) - net (43) (130) (184) (41)
---- ----- ----- ----
Income before income taxes 16,692 9,697 34,403 17,579
Provision for income taxes 6,826 3,993 14,106 7,209
----- ----- ------ -----
Net income $9,866 $5,704 $20,297 $10,370
Other comprehensive income:
Currency translation adjustment (1,623) (63) (1,830) (256)
Unrealized loss on short term investments (175) - (193) -
----- ----- ------ ------
Comprehensive income $8,068 $5,641 $18,274 $10,114
====== ====== ======= =======
Net income per share:
Basic $ 0.31 $ 0.18 $ 0.64 $ 0.34
======= ======= ======= =======
Diluted $ 0.29 $ 0.17 $ 0.61 $ 0.32
======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding:
Basic 31,809 31,072 31,611 30,826
====== ====== ====== ======
Diluted 33,449 32,694 33,267 32,425
====== ====== ====== ======
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
FOR THE 26 WEEKS FOR THE 26 WEEKS
ENDED ENDED
JULY 3, JULY 4,
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 20,297 $ 10,370
Noncash items affecting net income:
Minority interest in subsidiaries 1,027 148
Depreciation and amortization 2,593 1,701
Increase in allowance for doubtful accounts 501 697
Increase in allowance for returns -
net of related inventory in transit 636 212
Deferred income tax benefits (921) (537)
Changes in assets and liabilities:
Accounts receivable 3,203 3,542
Inventories (17,236) (9,453)
Prepaid expenses and other current assets (2,783) (534)
Accounts payable (56) 4,253
Accrued expenses 1,800 (2,795)
Income taxes payable 9,308 2,370
----- -----
Net cash from operations 18,369 9,974
Investing activities:
Additions to property, plant and equipment (5,786) (1,774)
Increase in intangible and other assets (1,371) (56)
------- ----
Net cash used in investing activities (7,157) (1,830)
Financing activities:
Issuance of common stock 2,700 6,135
Treasury stock issued for options exercised 981 -
Distribution of minority interest earnings (790) (327)
Repayments of notes payable-banks (282) (4,208)
----- -------
Net cash from financing activities 2,609 1,600
Effect of exchange rate changes on cash and cash equivalents (436) (60)
----- ----
Net increase in cash and cash equivalents 13,385 9,684
Cash and cash equivalents:
Beginning of period 57,263 21,104
------ ------
End of period $ 70,648 $ 30,788
======== ========
</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 which are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of July 3, 1999,
and the results of operations for the thirteen-week periods ended July 3, 1999,
and July 4, 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 July
3, 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 three-for-two
stock split of the Company's $0.01 par value common stock ("Common Stock") which
was effected in the form of a stock dividend to be 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. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
July 3, January 2,
(IN THOUSANDS) 1999 1999
---- ----
<S> <C> <C>
Components and parts $ 3,945 $ 3,402
Work-in-process 1,577 1,445
Finished merchandise on hand 54,095 40,344
Merchandise at Company stores 7,784 5,340
Merchandise in-transit from estimated
customer returns 6,958 6,764
----- -----
$74,359 $57,295
======= =======
</TABLE>
4
<PAGE>
The Company periodically enters into forward contracts principally to hedge the
payment of intercompany inventory transactions with its non-U.S. subsidiaries.
Currency exchange gains or losses resulting from the translation of the related
accounts, along with the offsetting gains or losses from the hedge, are deferred
until the inventory is sold or the forward contract is completed. At July 3,
1999, the Company had hedge contracts to sell 12.0 million German Marks for
approximately $7.0 million, expiring through December 1999.
<TABLE>
<CAPTION>
3. GEOGRAPHIC INFORMATION
(IN THOUSANDS)
FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED
ENDED JULY 3, 1999 JULY 4, 1998
------------------ ------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S.- exclusive of
Company Stores $ 56,117 $ 4,048 $ 44,494 $ 2,748
Stores 7,358 308 5,476 89
Europe 17,773 3,205 13,770 1,886
Far East 57,777 9,342 31,725 5,470
Japan 1,570 (144) 1,987 (307)
Intergeographic items (50,324) - (33,089) -
-------- -------- -------- -------
Consolidated $ 90,271 $ 16,759 $ 64,363 $ 9,886
======== ======== ======== =======
FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED
ENDED JULY 3, 1999 JULY 4, 1998
------------------ ------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S.- exclusive of
Company Stores $115,005 $ 12,838 $ 85,130 $ 6,958
Stores 12,147 (289) 9,084 (401)
Europe 36,988 7,485 25,960 3,251
Far East 91,248 15,176 53,246 8,573
Japan 3,512 (574) 3,810 (644)
Intergeographic items (85,352) - (55,982) -
-------- -------- -------- -------
Consolidated $173,548 $ 34,636 $121,248 $17,737
======== ======== ======== =======
</TABLE>
5
<PAGE>
4. EARNINGS PER SHARE
<TABLE>
<CAPTION>
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26
(IN THOUSANDS, EXCEPT PER SHARE DATA) WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 3, 1999 JULY 4, 1998 JULY 3, 1999 JULY 4, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
Numerator:
Net income $ 9,866 $ 5,704 $20,297 $ 10,370
------- ------- ------- --------
Denominator:
Weighted average common
shares outstanding 21,206 20,715 21,074 20,551
Treasury stock - - (30) -
Effect of stock dividend 10,603 10,357 10,567 10,275
------- ------- ------- --------
31,809 31,072 31,611 30,826
------- ------- ------- --------
BASIC EPS $ 0.31 $ 0.18 $ 0.64 $ 0.34
======= ======= ======= ========
DILUTED EPS COMPUTATION:
Numerator:
Net income $ 9,866 $ 5,704 $20,297 $ 10,370
------- ------- ------- --------
Denominator:
Weighted average common
shares outstanding 21,206 20,715 21,074 20,551
Stock option conversion 1,093 1,081 1,104 1,066
Treasury stock - - (30) -
Effect of stock dividend 11,150 10,898 11,119 10,808
------- ------- ------- --------
33,449 32,694 33,267 32,425
------- ------- ------- --------
DILUTED EPS $ 0.29 $ 0.17 $ 0.61 $ 0.32
====== ====== ====== ======
</TABLE>
5. DEBT
In June 1999, the Company renewed the 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.
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 Fossil, Inc. and it's majority owned subsidiaries ("the Company")
for the thirteen and twenty-six week periods ended July 3, 1999 (the "Second
Quarter" and "Year to Date", respectively), as compared to the thirteen and
twenty-six week periods ended July 4, 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
diversified company offering an extensive line of fashion watches that includes
its RELIC brand as well as complementary lines of small leather goods, belts,
handbags and sunglasses under certain of the Company's brands. In addition to
developing its own brands, the Company leverages its development and production
expertise by designing and manufacturing private label products for some of the
most prestigious companies in the world, including national retailers,
entertainment companies and theme restaurants.
The Company has further capitalized on the increasing awareness of the FOSSIL
brand by entering into various license agreements for other categories of
fashion accessories and apparel, such as optical frames and underwear under the
FOSSIL brand. In addition, the Company licenses the brands of other companies,
including the EMPORIO ARMANI brand, to further leverage its infrastructure.
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 continued to represent over half of
the Company's net sales.
o A line of stainless steel watches, FOSSIL Steel, chronograph look watches,
BLUE TEQ, and women's dress bracelet watches, F2, combined with FOSSIL Blue
continue to represent the Company's core watch assortment.
7
<PAGE>
COMPANY HIGHLIGHTS - CONTINUED
o FOSSIL Big Tic, a 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 represents one of the Company's best selling watch
lines in volume during the Second Quarter and Year to Date.
o FOSSIL brand handbag sales continued to record double-digit sales growth
during the Second 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 with the Company's sunglass program initiatives. During the
Second Quarter, FOSSIL brand sunglass sales were down in comparison to the
Prior Year Quarter but, based on strong sales during the 1999 first
quarter, showed double-digit growth on the Year to Date comparison.
o RELIC, the Company-owned brand sold in leading national and regional chain
department stores and specialty stores, recorded sales volume growth of
approximately 50% during the Second 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 of approximately 30% in the Second Quarter and Year to
Date in comparison to the same periods in 1998.
o The Company operated 30 outlet and 14 full price stores at the end of the
Second Quarter compared to 28 outlet and 7 full price stores at the end of
the Prior Year Quarter.
o The Company holds a worldwide license agreement with Giorgio Armani for the
rights to design, produce and market a line of EMPORIO ARMANI watches. Net
sales volume for this line of watches during the Second Quarter and Year to
Date periods amounted to $7.0 million and $13.7 million, respectively, in
comparison to $6.6 million and $9.7 million during the Prior Year Quarter
and Prior Year YTD Period, respectively.
o The Company entered into a license agreement with Safilo USA, Inc. and
Safilo B.V. to design, manufacture and market FOSSIL brand optical frames
in the United States, Canada and Italy as well as sunglasses in Italy. The
initial launch of the products is anticipated during fall 1999.
o The Company entered into an agreement with Seiko Instruments America, Inc.
to form a joint venture company in which the Company will hold a 20% equity
interest. The joint venture company will be responsible for manufacturing,
marketing and distributing watches principally to the mass market
distribution channel produced under various proposed licensing agreements
and private label brands. The Company will perform certain design,
marketing and sourcing services for the joint venture.
o The Company's 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 payable on August 17, 1999.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) the percentages
of the Company's net sales represented by certain line items from the Company's
condensed consolidated statements of income and (ii) the percentage changes in
these line items between the current period and the comparable period 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 26 FOR THE 26
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
----------- ----------- ----------- -----------
JULY 3, JULY 4, JULY 3, JULY 3, JULY 4, JULY 3,
1999 1998 1999 1999 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 40.3% 100.0% 100.0% 43.1%
Cost of sales 50.4 50.4 40.2 49.6 50.7 40.2
----- ----- ----- -----
Gross profit margin 49.6 49.6 40.3 50.4 49.3 46.2
Selling and distribution
expenses 23.6 25.2 30.9 22.6 25.6 26.1
General and administrative
expenses 7.4 9.0 16.5 7.9 9.1 23.8
--- --- --- ---
Operating income 18.6 15.4 69.5 19.9 14.6 95.3
Interest expense (0.0) (0.1) (60.1) (0.0) (0.1) (57.8)
Other income
(expense)- net (0.0) (0.2) (67.2) (0.1) 0.0 349.5
----- ----- ----- ---
Income before income taxes 18.6 15.1 77.7 19.8 14.5 95.9
Income taxes 7.5 6.2 70.9 8.1 5.9 95.7
--- --- --- ---
Net income 10.9% 8.9% 73.0% 11.7% 8.6% 95.7%
===== ===== ===== =====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
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):
AMOUNTS % OF TOTAL
------- ----------
FOR THE 13 WEEKS ENDED FOR THE 13 WEEKS ENDED
---------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
International:
Europe $ 17.1 $ 13.8 19% 21%
Other 16.9 6.2 19 10
---- --- -- --
Total International 34.0 20.0 38 31
---- ---- -- --
Domestic:
Watch products 35.8 28.2 40 44
Other products 13.1 10.6 14 16
---- ---- -- --
Total 49.9 38.8 54 60
Stores 7.3 5.5 8 9
--- --- - -
Total Domestic 56.2 44.3 62 69
---- ---- -- --
Total Net Sales $ 90.2 $ 64.3 100% 100%
====== ====== === ===
AMOUNTS % OF TOTAL
------- ----------
FOR THE 26 WEEKS ENDED FOR THE 26 WEEKS ENDED
---------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
International:
Europe $ 36.4 $ 26.0 21% 21%
Other 24.9 11.8 14 10
---- ---- -- --
Total International 61.3 37.8 35 31
---- ---- -- --
Domestic:
Watch products 72.1 51.5 42 42
Other products 28.0 22.8 16 19
---- ---- -- --
Total 100.1 74.3 58 61
Stores 12.1 9.1 7 8
---- --- - -
Total Domestic 112.2 83.4 65 69
----- ---- -- --
Total Net Sales $173.5 $121.2 100% 100%
====== ====== === ===
</TABLE>
10
<PAGE>
Worldwide sales volume of FOSSIL branded watches has continued to represent the
single largest factor in the Company's sales growth. Strong sales volume
increases in FOSSIL brand watches were principally a result of (a) increased
sales from the Company's core FOSSIL brand watch assortments and (b) sales from
the newly introduced Big Tic line of watches. Net sales during the first half of
1999 were 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 watches in the Second Quarter. Fueling top
line sales growth during the Year to Date period was double-digit sales growth
in the Company's other accessory product lines and sales increases in certain
private label and licensing watch lines. In addition, sales of the Company's
RELIC brand grew at a rate of approximately 50% during the Second Quarter and
Year to Date periods. Management believes the sales increases will average at or
above 20% during the last half of 1999.
GROSS PROFIT. In comparison to the comparable 1998 periods, gross profit margins
increased slightly to 50% during the Year to Date period while remaining even
during the Second Quarter. The gross profit margins during the Second Quarter
would have been approximately 52% without the gross margin impact of the
non-branded premium incentive sale, which sold at a low margin. 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. In addition, gross profit margins increased based on higher production
levels in the Company's foreign-based assembly facilities. Management believes
that the Company's gross profit margins for the remainder of 1999 will be
comparable to the Year to Date period.
OPERATING EXPENSES. The aggregate increases in operating expenses were due
primarily to costs necessary to support increased sales volumes. Total operating
expenses as a percentage of net sales ("operating expense ratios") decreased to
31%, in the Second Quarter and Year to Date periods, respectively, compared to
the prior year comparable periods. Leveraging expenses against higher sales
volumes was the principal reason for this decrease. In addition, during the
Second Quarter, operating expense ratios were positively impacted by the
non-branded premium incentive sale that had relatively little associated
operating expenses. Exclusive of that sale, the operating expense ratio for the
Second Quarter would have reflected only a minor improvement over the Prior Year
Quarter. Management believes the operating expense ratio for the remainder of
1999 will be the comparable to 1998 levels as a result of planned increases in
advertising expenditures to heighten the awareness of the FOSSIL brand.
OTHER INCOME (EXPENSE). Other expense - net increased during the Year to Date
period 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 the
Company's foreign operations during the Year to Date period. Higher interest
income generated on increased cash holdings offset these increases during the
Second Quarter, and partially offset the additional expenses in the Year to Date
period.
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
11
<PAGE>
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 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. The Company is now
involved in finalizing the review and testing phase of its internal computer
networks and applicable non-computer related areas to determine its ability to
handle 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 also contacting 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 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
is formulating a 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. The
Company expects to have the majority of its contingency plans formalized during
September 1999. 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 Second Quarter the
Company increased it's cash holdings slightly to $71 million in comparison to
$69 million as of the end of the Company's 1999 first quarter. At the end of the
second quarter, the Company had working capital of $128 million and borrowings
of only $4 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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 26, 1999. At
such meeting, the stockholders elected two (2) Class I directors of the Company
and no other matters were voted on at the meeting. A total of 20,130,083 shares
(prior to giving effect to the 3-for-2 Stock Dividend) were represented at the
meeting.
The tabulation of nominees is as follows (prior to given effect to the
3-for-2 Stock Dividend):
Director Nominee For Against Abstain Withheld
- --------------------------------------------------------------------------------
Kenneth W. Anderson 19,814,441 315,642
Michael W. Barnes 19,735,491 394,592
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fourth Amended and Restated Loan Agreement by and
among Wells Fargo Bank (Texas), National Association,
Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil Stores I,
Inc. and Fossil Stores II, Inc. dated as of June 28,
1999 (without exhibits).
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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOSSIL, INC.
Date: August 16, 1999 /s/ Randy S. Kercho
-------------------
Randy S. Kercho
Executive Vice President and Chief Financial Officer
(Principal financial officer duly authorized to sign on
behalf of Registrant)
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EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
10.1 Fourth Amended and Restated Loan Agreement by and among Wells Fargo Bank
(Texas), National Association, Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc. and Fossil Stores
II, Inc. dated as of June 28, 1999 (without exhibits).
27 Financial Data Schedule.
15
FOURTH AMENDED AND RESTATED
LOAN AGREEMENT
This Fourth Amended and Restated Loan Agreement (the "Agreement") is
entered into on June ___, 1999, to be effective for all purposes as of June 28,
1999, by and among WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national
banking association formerly known as First Interstate Bank of Texas, N.A. (the
"Bank"), FOSSIL PARTNERS, L.P. (the "Borrower"), FOSSIL, INC. (the "Company"),
FOSSIL INTERMEDIATE, INC. ("Fossil Intermediate"), FOSSIL TRUST ("Fossil
Trust"), FOSSIL STORES I, INC. ("Fossil I"), and FOSSIL STORES II, INC. ("Fossil
II") (the Company, Fossil Intermediate, Fossil Trust, Fossil I and Fossil II,
are sometimes referred to herein individually as a "Guarantor" and collectively
as the "Guarantors").
R E C I T A L S
- - - - - - - -
WHEREAS, the Bank, the Borrower and the Guarantors are parties to that
certain Third Amended and Restated Loan Agreement, dated to be effective as of
June 29, 1998 (the "Amended Agreement"), pursuant to which the Bank has agreed
to make available to the Company a revolving line of credit of up to
$40,000,000.00; and
WHEREAS, the Bank, the Borrower and the Guarantors desire to amend and
restate the Amended Agreement as set forth herein to, among other things, extend
the final maturity date of the loans made by the Bank to the Borrower under the
revolving line of credit.
NOW, THEREFORE, in consideration of the foregoing, the Bank's making
the following described loans, the mutual covenants herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each of the parties hereto, the Bank, the Borrower and the
Guarantors agree as follows:
A G R E E M E N T
- - - - - - - - -
1. The Line of Credit. Subject to, and upon the terms, conditions,
covenants and agreements contained herein, the Bank agrees to loan the Borrower,
at any time, and from time to time prior to the maturity of the Borrower's
promissory note executed in conjunction with this Agreement such amounts as the
Borrower may request up to, but not exceeding, an aggregate principal sum at any
time outstanding equal to $40,000,000.00 (the "Total Commitment"); within such
limits and during such period, the Borrower may borrow, repay, and re-borrow
hereunder (the "Line of Credit"). All loans under the Line of Credit shall be
evidenced by the Borrower's Tenth Amended and Restated Master Revolving Credit
Note (the "Revolving Note"), substantially in form and substance satisfactory to
the Bank, payable to the order of the Bank, and bearing interest upon the terms
provided therein (but in no event to exceed the maximum non-usurious interest
rate permitted by law). The principal of and interest on the Revolving Note
shall be due and payable as set forth on the face of the Revolving Note.
Notation by the Bank on its records shall constitute prima facie evidence of the
amount and date of any payment or borrowing thereunder.
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(a) Renewals and Extensions. All renewals, extensions,
modifications and rearrangements of the Revolving Note, if any, shall
be deemed to be made pursuant to this Agreement, and accordingly, shall
be subject to the terms and provisions hereof, and the Borrower shall
be deemed to have ratified, as of such renewal, extension, modification
or rearrangement date, all of the representations, covenants and
agreements herein set forth.
(b) Letters of Credit. Advances under the Line of Credit may
also be made to fund Documentary or Stand-by Letters of Credit (as
hereinafter defined) that are issued under the Revolving Note and are
drawn upon, provided, the Bank may, in its own discretion, advance
funds under the Line of Credit to fund such Documentary or Stand-by
Letters of Credit (as hereinafter defined) when the Borrower does not
reimburse the Bank for such funding. All such advances shall be added
to the principal amount of the Revolving Note.
2. Documentary and Stand-by Letters of Credit. Subject to the
conditions herein, the Bank shall (a) from time to time, at the request of the
Borrower, issue documentary or stand-by letters of credit to Borrower's vendors
for the acquisition of inventory for the Borrower (the "Inventory Acquisition
Letters of Credit") and (b) issue a stand-by letter of credit in an aggregate
amount up to (Y)600,000,000.00 in favor of any Japanese domestic bank for the
account of the Borrower (the "JDB Letter of Credit")(the Inventory Acquisition
Letters of Credit and the JDB Letter of Credit are hereinafter collectively
referred to as the "Documentary or Stand-by Letters of Credit"). The fees for
issuance of all Inventory Acquisition Letters of Credit shall be in accordance
with the Bank's schedule of fees for issuance of letters of credit existing as
of the time of issuance. No fees shall be charged directly by Bank to Borrower
in connection with the issuance of the JDB Letter of Credit. Immediately upon
issuance, such Documentary and Stand-by Letters of Credit shall be considered in
computing the amount of funds available to the Borrower, as provided in Section
5 herein. The Bank shall not be obligated: (x) to issue Documentary or Stand-by
Letters of Credit if the issuance of same would cause the Outstanding Revolving
Credit to exceed the Total Commitment; (y) to issue such Letters of Credit with
an expiration date more than one hundred eighty (180) days after the maturity
date of the Revolving Note; and (z) to extend the expiration date of such
Letters of Credit to a date more than one hundred eighty (180) days after the
maturity date of the Revolving Note.
3. Foreign Currency Exchange Contracts. Subject to the conditions
contained herein, the Bank may, in its discretion, from time to time at the
request of the Borrower, issue foreign currency exchange contracts to Borrower
for use by Borrower in the ordinary course of its business. Immediately upon
issuance, such foreign currency exchange contracts shall be considered in
computing the amount of funds available to the Borrower, as provided in Section
5 hereof. The Bank shall not be obligated: (a) to issue any such foreign
currency exchange contract if the issuance of the same would cause the
Outstanding Revolving Credit to exceed the Total Commitment, (b) to issue any
foreign currency exchange contract with a settlement date after the maturity
date of the Revolving Note, or (c) to issue any such foreign currency exchange
contract if (i) the Bank's futures contract risk under such contract and all
other contracts then outstanding would exceed $20,000,000.00 or (ii) the Bank's
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delivery risk under such contract and all other contracts then outstanding would
exceed $5,000,000.00.
4. Use of Proceeds. The proceeds of the Revolving Note shall be used by
the Borrower to provide working capital for the short-term, seasonal working
capital needs of the Borrower and for general corporate purposes. No part of the
proceeds received hereunder will be used, directly or indirectly, for the
purpose of purchasing or carrying, or the payment in full or in part, of
indebtedness which was incurred for the purposes of purchasing or carrying
margin of stock, as such term is defined in Section 221.3 of Regulation U of the
Board of Governors of the Federal Reserve System 12 C.F.R., Chapter II, Part
221.
5. Availability.
------------
(a) Revolving Note. The aggregate principal amount at any time
outstanding under the Revolving Note, plus, one hundred twenty percent
(120%) of the face amount of the JDB Letter of Credit (calculated by
reference to the amount of United States of America dollars into which
Bank determines it could, in accordance with its practice from time to
time in the interbank foreign exchange market, convert such amount of
Yen at its spot rate of exchange in effect at approximately 8:00 a.m.
(Dallas, Texas time) on the date of determination), plus the face
amount of all outstanding Documentary and Stand-by Letters of Credit
(other than the JDB Letter of Credit) issued for the account of the
Borrower, plus twenty percent (20%) of the aggregate amount of all
foreign currency exchange contracts issued by the Bank for the account
of the Borrower (said sum being herein referred to as the "Outstanding
Revolving Credit") shall not at any time exceed the Total Commitment.
(b) Total Commitment Compliance. In the event the Outstanding
Revolving Credit at any time exceeds the Total Commitment then, upon
notice from the Bank, the Borrower shall immediately make such payments
to the Bank necessary to reduce the Outstanding Revolving Credit to an
amount such that the Outstanding Revolving Credit is less than or equal
to the Total Commitment.
6. Advances. Advances under the Line of Credit may be made by written
or telephone facsimile request signed by an authorized officer of the Borrower
or by telephone oral request by an authorized officer of the Borrower, provided
that any such advance shall be deposited in an account of the Borrower, unless
such authority for telephone oral request or telephone facsimile request is
revoked in writing by the President or an authorized officer of the Borrower,
and such revocation is actually received by the Bank (the "Revocation"). In
consideration of the Bank's permitting the Borrower to make telephone oral
requests and telephone facsimile requests for advances under the Revolving Note
until Revocation, the Borrower covenants and agrees to assume liability for and
to protect, indemnify and hold harmless the Bank, its predecessors, agents,
officers, directors, employees, successors and assigns (individually and
collectively, an "Indemnified Party") from any and all liabilities, obligations,
damages, penalties, claims, causes of action, costs, charges and expenses,
including attorneys' fees and expenses of employees, which may be imposed,
incurred by or asserted against any Indemnified Party by reason of any loss,
3
<PAGE>
damage or claim howsoever arising or incurred because of or out of or in
connection with (i) any action of any Indemnified Party pursuant to telephone
oral requests or telephone facsimile requests for advances under the Line of
Credit, (ii) the breach of any provisions of this Agreement by the Borrower,
(iii) the transfer of funds pursuant to such telephone oral requests or
telephone facsimile requests, or (iv) any Indemnified Party's honoring or
failing to honor any telephone oral request or telephone facsimile request for
any reason. The Bank is entitled to rely upon and act upon telephone oral
requests and telephone facsimile requests made or purportedly made by any of the
officers or employees specified in the resolutions delivered to the Bank of even
date herewith, as supplemented in writing from time to time and accepted by the
Bank, and the Borrower shall be unconditionally and absolutely estopped from
denying (i) the authenticity and validity of any such transaction so acted upon
by the Bank once the Bank has advanced funds under the Line of Credit and
deposited or transferred such funds as requested in any such telephone oral
request or telephone facsimile request, and (ii) the Borrower's liability and
responsibility therefore.
7. Prepayments. Any prepayment on the Revolving Note shall be paid at
the offices of the Bank. The Borrower shall be entitled to prepay the Revolving
Note from time to time and at any time, in whole or in part, without notice or
penalty except as set forth in the Revolving Note. The Borrower may re-borrow
the principal amount of the Line of Credit so prepaid subject to the terms of
Section 5(a) hereof. All prepayments on the Revolving Note shall be applied
first to accrued interest and then to principal in the order of maturity. No
prepayment shall relieve the Borrower of the obligation to pay the principal and
interest on the Revolving Note until such time as all obligations are paid in
full.
8. Collateral for the Loans. The Line of Credit shall be unsecured.
Upon execution of this Agreement and upon satisfaction of the condition
precedent set forth in Section 9 hereof, the Bank shall terminate its existing
security interests in the "Collateral", as such term is defined in the existing
Commercial Security Agreements to which Borrower and each Guarantor is a party
to or for the benefit of the Bank.
9. Execution of Loan Documents. The Borrower shall execute and deliver,
or cause to be executed and delivered, to Bank the following described
documents:
(a) In connection with advances under the Revolving Note, the
Borrower shall execute and deliver to the Bank the following documents
and instruments, provided the Bank shall have no obligation to make any
advance under the Revolving Note to the Borrower until each of said
documents and instruments are fully executed by the Borrower and
delivered to the Bank:
(i) This Agreement;
(ii) The Revolving Note; and
(iii) Ordinary and customary certificates and
documents satisfactory to the Bank and its counsel.
4
<PAGE>
(b) In connection with the Bank's issuance of each Documentary
or Stand-by Letter of Credit, the Borrower shall, in addition to the
documents required in Section 9(a) above, execute and deliver to the
Bank a Letter of Credit Application and Agreement (herein so called),
provided the Bank shall have no obligation to issue a Documentary or
Stand-by Letter of Credit for the account of the Borrower until a
Letter of Credit Application and Agreement has been executed by the
Borrower and delivered to the Bank.
(c) The Borrower shall cause to be executed and delivered to
the Bank the following documents and instruments, provided the Bank
shall have no obligation to make any advance under the Revolving Note
to the Borrower until each of said documents and instruments are fully
executed by the applicable third party and delivered to the Bank:
(i) Guaranty Agreements, in form and substance
satisfactory to the Bank, from each of the Guarantors,
guaranteeing the prompt payment and performance by the
Borrower of its obligations hereunder (collectively, the
"Guaranty Agreements") (the receipt of which are hereby
acknowledged by the Bank); and
(ii) A Stock Pledge Agreement from the Company, in
form and substance satisfactory to the Bank, pursuant to which
the Company shall pledge to the Bank as collateral security
for the Borrower's obligations to the Bank hereunder, a
security interest in sixty-five percent (65%) of any and all
issued and outstanding shares of stock of Fossil Europe B.V.
and Fossil (East) Ltd., whether now or hereafter issued by
such subsidiaries of the Company (the "Stock Pledge
Agreement") (the receipt of which is hereby acknowledged by
the Bank).
10. Conditions Precedent to each Loan and Issuance of each Documentary
or Stand-by Letter of Credit. Notwithstanding any other provision of this
Agreement or any other Loan Document to the contrary, it is understood and
agreed that the Bank's obligation to make any advance or extension of credit
hereunder on any date (including the issuance of any Documentary or Stand-by
Letter of Credit) is subject to the satisfaction of the following conditions
precedent:
(a) The Borrower shall have executed and delivered, or cause
to have been executed and delivered, to the Bank this Agreement and the
other loan documentation referred to in Section 9 hereof.
(b) There shall have been no material adverse change in the
financial condition of the Borrower or any Guarantor.
(c) There shall be no material adverse litigation, either
pending or threatened, against the Borrower or any Guarantor that could
reasonably be expected to have a material adverse effect on the
Borrower or such Guarantor.
5
<PAGE>
(d) The representations and warranties contained herein and in
the other Loan Documents (as hereinafter defined) shall be true and
correct as of such date.
(e) No default or event of default shall have occurred and be
continuing hereunder or under any of the other Loan Documents.
(f) The Bank shall have received from the Company or the
Borrower, as appropriate, all fees and expenses required to be paid to
the Bank pursuant to this Agreement.
11. Representations and Warranties. Until payment and performance in
full of the Revolving Note, unless the Borrower receives prior written approval
of a deviation therefrom from the Bank, the Borrower and each of the Guarantors
jointly and severally represent, warrant and covenant that:
(a) The Borrower and each of the Guarantors is a limited
partnership, corporation or business trust, as the case may be, duly
organized, validly existing and in good standing under the laws of the
state of its organization and is duly licensed, qualified to do
business and in good standing in each jurisdiction in which the
ownership of its property or the conduct of its business requires such
licensing and qualification and where the failure to be so licensed or
qualified would have a material adverse effect upon (i) its business,
operations, properties, assets or condition (financial or otherwise),
or (ii) its ability to perform or of the Bank to enforce its
obligations under the Loan Documents to which it is a party. Borrower
and each of the Guarantors has all powers and all permits consents and
authorizations necessary to own and operate properties and to carry on
its business as presently conducted. The execution, delivery and
performance of this Agreement and the Guaranty Agreements by the
Guarantors and the execution, delivery and performance of this
Agreement by the Borrower, the borrowings hereunder and the execution
and delivery of the Revolving Note, the Letter of Credit Applications,
the Guaranty Agreements, the Stock Pledge Agreement, and the several
agreements and instruments contemplated thereby, (i) have been duly
authorized by proper corporate, partnership or trust proceedings, as
appropriate, and (ii) will not contravene, or constitute a default
under, any provision of applicable law or regulation or of the
Agreement of Limited Partnership, Articles of Incorporation, By-Laws or
Trust Agreement, as applicable, of the Borrower or any Guarantor, or of
any mortgage, indenture, contract, agreement or other instrument, or
any judgment, order or decree, binding upon the Borrower or any
Guarantor. To the best of Borrower's and Guarantors' knowledge, no
consent or authorization of, filing with or other act by or in respect
of, any governmental authority or any other person (other than the
Bank) is required in connection with the borrowings hereunder or with
the execution, delivery, performance, validity or enforceability of any
of the Loan Documents, except for such consents, authorizations,
filings or acts as have been obtained, filed or taken by the Borrower
and the Guarantors prior to the date hereof. This Agreement, the
Revolving Note, the Letter of Credit Applications, the Guaranty
Agreements, the Stock Pledge Agreement, and any other agreements,
documents and instruments contemplated herein and thereby, or in any
6
<PAGE>
way related thereto whether executed simultaneously herewith or
hereafter (all of same being hereinafter sometimes called the "Loan
Documents"), when duly executed and delivered in accordance with this
Agreement, will each constitute a legal, valid and binding obligation
of each of the Borrower and the Guarantors, if a party thereto,
enforceable against each such party in accordance with its respective
terms.
(b) The audited balance sheet of the Company at January 2,
1999, the related statement of income and retained earnings for the
period then ended, copies of which have been delivered to the Bank,
accurately represent the financial position of the Company at January
2, 1999, and the results of its operations for the periods then ended
materially prepared in conformity with generally accepted accounting
principles applied on a basis consistent with the preceding year. No
material adverse change has occurred since January 2, 1999 position or
in the results of operations of the Company or in its business.
(c) No approvals or consents of any governmental department,
administrative agency or instrumentality having jurisdiction over the
Borrower or any Guarantor are necessary to permit the Borrower or any
Guarantor to enter into the Loan Documents to which it is a party,
except for such approvals and covenants as have been obtained.
(d) There is no action, suit or proceeding pending or, to the
knowledge of the Borrower or any Guarantor, threatened against the
Borrower or any Guarantor or the Collateral (hereinafter defined)
before any court, governmental department, administrative agency or
instrumentality which, if such action, suit or proceeding were
adversely determined, would materially affect the financial position or
the results of operations of the Borrower or any Guarantor or its
business or the ability of the Borrower or any Guarantor to perform its
obligations under the Loan Documents.
(e) To the best of the Company's management's knowledge, no
default or Event of Default (hereinafter defined) has occurred and is
continuing.
(f) To the best of the Company's management's knowledge, each
of the Borrower and the Guarantors has good and indefeasible title to
all of its assets and properties, free and clear of all security
interests, mortgages, liens or encumbrances, except as otherwise
permitted under this Agreement or reflected in the Company's financial
statements submitted to the Bank and dated as of January 2, 1999.
(g) Neither the Borrower nor any Guarantor is an investment
company within the meaning of the Investment Company Act of 1940.
(h) To the best of the Company's management's knowledge, each
of the Borrower and the Guarantors has filed all United States federal
returns and all material State and foreign tax returns required to be
filed by it and paid all sums required thereby to the extent the same
have become due and before they may have become delinquent in
accordance with such returns, or is contesting the payment of same
diligently and in good faith before the proper taxing authority. To the
best of the Company's management's knowledge, all other material tax
7
<PAGE>
returns required to be filed by the Borrower and the Guarantors with
any taxing jurisdiction have been filed and all tax liabilities shown
thereon to be due have been paid to the extent the same have become due
and before they may have become delinquent in accordance with such
returns, or the payment of such tax liabilities is being contested
diligently and in good faith before the proper taxing authority, and
such returns properly reflect the taxes of the Borrower and the
Guarantors, as applicable, for the periods covered thereby in all
material respects.
(i) Borrower and each Guarantor (a) is solvent and will
continue to be solvent after giving effect to the transactions
contemplated hereunder, and (b) is able to pay its debts as they mature
and has (and has reason to believe it will continue to have) sufficient
capital (and not unreasonably small capital) to carry on its business
and all businesses in which it is about to engage. The assets and
properties of Borrower and each Guarantor at a fair valuation and at
their present fair salable value are, and will be, greater than the
indebtedness of Borrower and each such Guarantor, respectively
(including subordinated and contingent liabilities computed at the
amount which, to the best of the Company's management's knowledge,
represents an amount which can reasonably be expected to become an
actual or matured liability).
12. Affirmative Covenants. The Borrower and the Company hereby agree
that, until payment and performance in full of the Revolving Note, unless the
Borrower receives prior written approval of a deviation therefrom from the Bank,
the Borrower and the Company shall, and except in the case of delivery of
financial information, reports and notices, shall cause each of the Guarantors
to:
(a) Annual Statements. Furnish the Bank, within one hundred
(100) days after the end of each fiscal year of the Company, (i) a copy
of the Company's audited consolidated financial statements, consisting
of at least a balance sheet and related statement of income, retained
earnings and changes in financial condition of the Company prepared in
conformity with generally accepted accounting principles, applied on a
basis consistent with that of the preceding year, and certified by an
independent certified public accountant selected by the Company and
reasonably satisfactory to the Bank, (ii) a copy of the consolidating
financial statements of the Company prepared by the Company, and (iii)
a copy of the Form 10-K of the Company for such fiscal year.
(b) Quarterly Statements. Furnish the Bank within fifty (50)
days after the end of each fiscal quarter of the Company during the
term hereof, (i) a copy of its unaudited consolidating financial
statements for such fiscal quarter, consisting of at least a balance
sheet and related statement of income, materially prepared in
conformity with generally accepted accounting principles and certified
by an authorized officer of the Company, and (ii) a copy of the Form
10-Q of the Company for such fiscal quarter.
(c) Compliance Certificate. Furnish the Bank concurrently with
the delivery of the financial statements required to be delivered
pursuant to clauses (a) and (b) above, a Compliance Certificate in a
8
<PAGE>
form similar to the Compliance Certificate attached hereto as Exhibit
B, but including all representations and warranties to the satisfaction
of the Bank, signed by an authorized officer of Borrower and the
Company.
(d) Accounts Receivable Summary. Furnish the Bank within fifty
(50) days after the end of each fiscal quarter of the Borrower during
the term hereof a summary of the Borrower's accounts receivable
(including, without limitation, a list of the ten account debtors who
owe the Borrower the greatest amount of accounts receivable), which
summary shall be in form satisfactory to the Bank.
(e) Accounts Receivable Listing and Aging. Furnish the Bank,
(i) within ten (10) days of any request by the Bank, a listing and
aging of Borrower's domestic accounts receivable for a period end not
more than 45 days prior to such request by the Bank, and (ii) within
forty-five (45) days of any request by the Bank, a listing and aging of
Borrower's international accounts receivable for the previous month
end, in each case with aging of accounts receivable on the basis of,
but not limited to, current, 30, 60, and over 90 days from date of
original invoice, all to the satisfaction of the Bank.
(f) Accounts Payable Listing and Aging. Furnish the Bank, (i)
within ten (10) days of any request by the Bank, a listing and aging of
Borrower's domestic accounts payable for a period end not more than 45
days prior to such request by the Bank, and (ii) within forty-five (45)
days of any request by the Bank, a listing and aging of Borrower's
international accounts payable for the previous month end, which
listing and aging shall be in form satisfactory to the Bank.
(g) Inventory Summaries. Furnish the Bank, (i) within ten (10)
days of any request by the Bank, a listing of Borrower's domestic
inventory, and (ii) within forty-five (45) days of any request by the
Bank, a listing of Borrower's international inventory, which listing
shall be in form and detail acceptable to the Bank.
(h) Insurance. Maintain insurance with reasonable companies in
the amounts and types and against the risks, liabilities and
contingencies as is usually carried by a similar business in the same
general area and of similar size to the Borrower and the Company with
the Bank named as loss payee as its interest may appear, such policies
to be non-cancelable without ten (10) days prior written notice to the
Bank.
(i) Taxes. Pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or
profits or on any of its property prior to the date on which such
taxes, assessments and governmental charges or levies become due and
payable; provided, however, that neither the Borrower nor any Guarantor
shall be required to pay and discharge or cause to be paid and
discharged any such taxes, assessments and governmental charges or
levies so long as the validity or amount thereof shall be contested in
good faith by appropriate proceedings diligently pursued and
appropriate reserves have been provided therefor; and in any event, pay
and discharge all taxes, assessments and governmental charges or levies
imposed on the Borrower or any Guarantor or on its income or profits or
9
<PAGE>
on any of its property prior to the date on which liens attach thereto
and become of public record for a period in excess of fifteen (15)
days.
(j) Litigation. Promptly give notice to the Bank of all
litigation and all proceedings before governmental or regulatory
agencies affecting the Borrower or any Guarantor except litigation or
proceedings that could not reasonably be expected to have material
adverse effect upon the financial condition of the Borrower or any such
Guarantor.
(k) Further Assurances. At any time and from time to time,
execute and deliver such further instruments and take such further
action as may reasonably be requested by the Bank, in order to cure any
defects in the execution and delivery of, or to comply with or
accomplish the covenants and agreements contained in the Loan
Documents.
(l) Books and Records. Make available to the Bank during
normal business hours at the Borrower's main office its books and
records, including, but not limited to, the subsidiary journals,
accounts receivable files, inventory records, general ledger, and
correspondence files. Bank shall have the right to examine its
collateral at any reasonable time without prior notice.
(m) Existence. Continue to be a limited partnership,
corporation or business trust, as the case may be, duly organized and
existing in good standing under the law of the jurisdiction under which
it is organized and continue to be duly licensed or qualified as a
foreign limited partnership, corporation or business trust, as the case
may be, in all jurisdictions wherein the character of the property
owned or leased by it or the nature of the business transacted by it
makes licensing or qualification necessary by a foreign limited
partnership, corporation or business trust, as the case may be, except
where the failure to qualify would not have a material adverse affect
on its business or operations as a whole.
(n) Expenses. Pay reasonable expenses, including reasonable
legal expenses and attorney's fees, of the Bank which have been or may
be incurred by the Bank in connection with the preparation of this
Agreement and the lending and incurring of obligations or liabilities
hereunder, the collection of any note authorized hereby, or for the
enforcement of Borrower's or any Guarantor's obligations hereunder and
under any document executed to secure the payment of any note
authorized hereunder and for the recording and filing and recording and
refiling of any such document.
(o) Default, Name Change, Casualty. Give notice to Bank in
writing of the occurrence of any default or Event of Default under this
Agreement, any change in name, identity or structure of Borrower or any
Guarantor, and any uninsured or partially uninsured loss in excess of
$1,000,000 through fire, theft, liability or property damage.
(p) Guarantees/Domestic Subsidiaries Stock Pledges. At the
discretion of the Company, either (i) cause each majority-owned
subsidiary of the Company or Borrower which is incorporated or formed
10
<PAGE>
in the United States of America and which owns or holds tangible assets
having an aggregate book value of $2,000,000.00 or more (each, a
"Significant Domestic Subsidiary") to execute a Guaranty Agreement in
the form of Exhibit A attached hereto, or (ii) pledge to the Bank, as
collateral security for the Borrower's obligations to the Bank
hereunder, a security interest in one hundred percent (100%) of the
stock of each such Significant Domestic Subsidiary which is owned by
Borrower or Company by executing a Stock Pledge Agreement in the form
of Exhibit B attached hereto.
13. Negative Covenants. The Borrower and the Guarantors hereby agree
that, so long as the Revolving Note is outstanding and unpaid, unless the
Borrower receives prior written approval of a deviation therefrom from Bank, the
Borrower and the Guarantors shall not directly or indirectly:
(a) Debt. Create, incur, assume or suffer to exist any debt
for borrowed money, whether by way of loan, or the issuance or sale of
bonds, debentures, notes or securities, including deferred debt for the
purchase price of assets, except (i) the loans described herein, (ii)
revolving credit loans in an aggregate principal amount of up to
(Y)600,000,000.00 from any Japanese domestic bank; provided, that the
only security for such revolving credit loans shall be the JDB Letter
of Credit, (iii) loans from one or more Guarantors to the Borrower or
another Guarantor, so long as the indebtedness in respect of such loans
is unsecured and fully subordinated to the indebtedness owing to the
Bank pursuant to a written subordination agreement in form and
substance satisfactory to the Bank, and (iv) current accounts payable
and other current obligations (other than for borrowed money) arising
out of transactions in the ordinary course of business.
(b) Liabilities. Assume, guarantee, endorse, suffer to exist
or otherwise become liable upon, or agree to purchase or otherwise
furnish funds for the payment of, the obligations of any person, firm
or corporation, except for
(i) the obligations hereunder;
(ii) endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary
course of business;
(iii) obligations under operating leases;
(iv) obligations for indebtedness secured by purchase money
liens, not to exceed $1,000,000 in the aggregate;
(v) obligations under foreign currency exchange contracts,
so long as such obligations are incurred in the
ordinary course of its business;
(vi) indebtedness to shareholders, officers or partners, so
long as such indebtedness is unsecured, fully
subordinated to the indebtedness owing to the Bank in
11
<PAGE>
form and substance satisfactory to the Bank, and
evidenced by debt instruments satisfactory in form and
substance to the Bank;
(vii)obligations under guaranties securing indebtedness of
SII Marketing International Inc. ("SMI") provided that
the aggregate principal amount of all such guaranteed
indebtedness does not exceed $10,000,000; and
(viii) any other unsecured indebtedness which is
subordinated to the indebtedness owing to the Bank
pursuant to a written subordination agreement in form
and substance satisfactory to the Bank.
(c) Encumbrances. Create, incur, assume or suffer to exist any
mortgage, deed of trust, pledge, encumbrance, lien or security interest
of any kind, upon any of its property now owned or hereafter acquired,
except (i) liens, mortgages, encumbrances or security interest to
secure payment of the borrowings authorized hereunder; (ii) pledges or
deposits to secure obligations under workmen's compensation laws or of
similar legislation; (iii) deposits to secure public or statutory
obligations; (iv) statutory mechanics', carriers', workmen's,
repairmen's liens or other like items in the ordinary course of
business in respect to obligations which are not overdue or are being
contested in good faith; (v) existing liens not contemplated under this
Agreement as reflected by the financial statements of the Company
submitted to the Bank and dated as of January 2, 1999 or disclosed to
Bank; (vi) liens for taxes, assessments or other governmental charges
or levies not yet due or liens which are being contested in good faith
by appropriate action but which are in an amount less than $10,000;
(vii) legal or equitable encumbrances not in excess of $250,000 in the
aggregate deemed to exist by reason of the existence of any litigation
or other legal proceeding or arising out of a judgment or award with
respect to which an appeal is being prosecuted; and (viii) additional
purchase of equipment and furniture and fixtures not to exceed
$6,000,000 per year.
(d) Subsidiaries. Form any new subsidiary or merge or invest
in or consolidate with any corporation or other entity, or sell, lease,
assign, transfer, or otherwise dispose of (whether in one transaction
or as a series of related transactions) all or substantially all of its
assets, whether now owned or hereafter acquired; or acquire by purchase
or otherwise, all or substantially all of the assets of any corporation
or other entity; provided, however, that (i) the Borrower and the
Company may form new subsidiaries, so long as the Bank has given its
prior, written approval, and (ii) the Company may merge or consolidate
one or more of its wholly-owned subsidiaries (other than Borrower) with
or into (A) the Company (provided that the Company shall be the
surviving corporation) or (B) any one or more of its wholly-owned
subsidiaries, (iii) the Company may merge or consolidate one or more of
its wholly-owned subsidiaries with or into Borrower (provided that
Borrower shall be the surviving corporation), (iv) Company may make a
capital investment in SMI not to exceed to $10,000,000, and (v) Company
or Borrower may invest in or acquire by purchase or otherwise, all or
substantially all of the assets of any corporation or other entity
(other than SMI) so long as (A) the consideration utilized by Company
or Borrower to effect any such investment or acquisition consists
12
<PAGE>
solely of cash and/or capital stock of the Company or any subsidiary of
the Company (to whose existence the Bank has previously consented), (B)
the cash portion of any such individual acquisition or investment does
not exceed $10,000,000 and (C) the cash portion of all such
acquisitions or investments does not exceed $40,000,000 in the
aggregate.
(e) Business. Change the nature of its business or engage in a
kind of business different from that which it presently conducts.
(f) Loans to Officers. Make any loans or advances to its
shareholders or officers in excess of $200,000 to any individual
officer or shareholder or $500,000 in the aggregate to all officers and
shareholders.
(g) Sale/Lease-back Transactions. Except for transactions
involving property or assets with a fair market value in the aggregate
less than $1,000,000, enter into (i) any lease as a lessor which calls
for the purchase or equivalence of a purchase or rental materially
below the fair market value of the property or an option to purchase at
a price below the fair market value of the property; (ii) any agreement
in which it sells and then leases back any property or assets.
(h) Pledges. Pledge any of its assets without prior consent of
the Bank, including, but not limited to, any purchase money liens in an
amount in excess of $1,000,000 (which $1,000,000 amount shall be in
addition to the amount allowed in Section 13(c)(viii) above), not
already disclosed to Bank.
14. Financial Covenants. The Company covenants and agrees that so long
as the Revolving Note is outstanding and unpaid, the Company will, on a
consolidated basis:
(a) Quick Ratio. Maintain a ratio of cash and account
receivables to current liabilities of not less than 0.75 to 1.0
throughout the term hereof. Cash, accounts receivable and current
liabilities are defined according to generally accepted accounting
principles, with the exception that current liabilities will include
all indebtedness of the Borrower under the Revolving Note.
(b) Net Worth. Maintain minimum net worth of not less than
(1) $117,000,000 during the period beginning the date
hereof and ending January 1, 2000 and
(2) beginning January 2, 2000, and during each
subsequent fiscal year of the Company, the amount of the
minimum net worth required under this Agreement during the
immediately preceding fiscal year of the Company plus
seventy percent (70%) of the Company's net income after
taxes, on a consolidated basis, during such preceding fiscal
year (with net income after taxes being determined in
accordance with generally accepted accounting principles and
no reductions being made to the minimum net worth for any
fiscal year during which the Company's net income after
taxes, on a consolidated basis, is a negative number).
13
<PAGE>
(c) Fixed Charge Coverage Ratio. Maintain a ratio of Cash Flow
to Fixed Charges of not less than 2.0 to 1.0 throughout the term
hereof. "Cash Flow" is defined as the Company's net income, plus
depreciation and amortization, plus interest expense, plus rental
expense, all on a consolidated basis, and each determined in accordance
with generally accepted accounting principles. "Fixed Charges" is
defined as the Company's current portion of long-term debt and
capitalized leases, plus interest expense, plus rental expense, plus
dividends, all on a consolidated basis, and each determined in
accordance with generally accepted accounting principles. Cash Flow and
Fixed Charges shall be determined as of the end of the immediately
preceding fiscal quarter for the twelve-month period ended as of the
end of such fiscal quarter for which the determination is being made
(i.e., on a rolling four-quarter basis).
(d) Minimum Net Income. Achieve net income of not less than
$1,000,000.00 for each fiscal quarter of the Company, commencing with
the fiscal quarter ending July 3, 1999 (with net income to be
determined in accordance with generally accepted accounting
principles).
15. Default. The Borrower shall be in default hereunder if any one of
the following events of default ("Events of Default") shall occur and be
continuing, namely:
(a) Default by the Borrower, any Guarantor or any other party to
the Loan Documents in the payment of any sums owing to the Bank; or
(b) Default by the Borrower, any Guarantor or any other party to
the Loan Documents in the payment of any sums owing to others for
borrowed money or the deferred payment of goods or services (excluding
trade payables) in excess of $100,000 (hereinafter referred to as the
"Other Indebtedness") or if the holder of any such Other Indebtedness
declares or may declare such Other Indebtedness due prior to the
stated maturity because of any default thereunder; or
(c) Any representation, statement, warranty, projection, or
certificate made by the Borrower or any Guarantor in the Loan
Documents, or in any agreement, document or instrument executed
pursuant hereto or concurrently herewith, or hereafter furnished to
the Bank in connection with any loan or loans hereunder, shall prove
to have been incorrect in any material respect at the time of making
or issuance thereof; or
(d) Borrower or any Guarantor, as applicable, shall fail or
neglect to perform, keep or observe any covenant contained in Section
12(l), 12(m), 12(o) or 13 hereof on the date that Borrower or any such
Guarantor, as applicable, is required to perform, keep or observe such
covenant.
14
<PAGE>
(e) Company shall fail or neglect to perform, keep or observe any
covenant contained in Section 3 of the Stock Pledge Agreement on the
date that Company is required to perform, keep or observe such
covenant.
(f) Borrower, any Guarantor or any other party to the Loan
Documents shall fail or neglect to perform, keep or observe any
covenant or agreements set forth in the Loan Documents or in any other
agreement, document or instrument executed pursuant hereto (other than
a covenant or agreement the performance of which is dealt with
specifically elsewhere in this Section 15), and such default is not
cured to the Bank's satisfaction within thirty (30) days of the
occurrence thereof; provided, however, that the provisions of this
Agreement shall control in the event that any of such provisions are
in conflict with the provisions of any other agreement, mortgage,
indenture or instrument executed pursuant hereto and all of such
provisions in such other instruments shall be deemed to be cumulative
of the provisions hereof to the extent such provisions are not
inconsistent herewith; or
(g) The Borrower, any Guarantor or any other party to the Loan
Documents shall apply for or consent to, or acquiesce in the
appointment of a receiver, trustee, or liquidator of itself or himself
or of its or his property, or admit in writing its or his inability to
pay its or his debts as they mature, or make a general assignment for
the benefit of creditors or an Order of Relief be entered with respect
to the Borrower, any guarantor or any other party to the Loan
Documents by any court having competent jurisdiction in the premises,
or file a voluntary petition in bankruptcy or a petition or answer
seeking reorganization, composition, readjustment or arrangement, or
similar relief with creditors, under any present or future statute,
law or regulation, or otherwise, or take advantage of any insolvency
law or file an answer admitting the material allegations of a petition
filed against it or him in bankruptcy, reorganization, or insolvency
proceedings, or corporate action shall be taken by it or him for the
purpose of effecting any of the foregoing, or it or he shall have a
receiver or trustee or assignee in bankruptcy or insolvency appointed
for it or him, or its or his property, without its or his application
or consent; or
(h) Except for liabilities permitted pursuant to Sections 13
(a),(b), (c) or (d) hereof and the contingent liabilities previously
disclosed to the Bank or other liabilities not contemplated by this
Agreement which are incurred in the ordinary course of business, the
Borrower or any Guarantor shall become or remains liable, directly or
indirectly, for or in connection with obligations in excess of
$250,000, stock or dividends of any other person or entity, whether by
guaranty, endorsement, agreement to purchase or repurchase, agreement
to lease, agreement to supply or advance funds (including, without
limitation, agreements to maintain working capital, solvency or other
balance sheet conditions or agreements to purchase stocks or make
capital contributions), or otherwise.
Thereupon, in any such case, the obligation of the Bank to make any
advance or extend credit hereunder (including the issuance of Documentary or
Stand-by Letters of Credit) to or for the account of the Borrower pursuant
15
<PAGE>
hereto shall immediately terminate and the Bank shall be entitled to each and
every remedy and to take each and every action permitted by the Loan Documents.
16. Notice. All notices and other communications given to any party
hereto, in accordance with the provisions of this Agreement, shall be deemed to
have been given to any party when sent by registered or certified mail, if by
mail, or when delivered to the telegraph company, charges prepaid, if by
telegram, in each case addressed to the party as provided as follows:
if to the Bank: Wells Fargo Bank (Texas),
National Association
1445 Ross Avenue
MAC 5303-031, 3rd Floor
Dallas, Texas 75202
Attention: Carol A. Polasky
if to the Borrower: Fossil Partners, L.P.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
if to Guarantors: Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
Fossil Intermediate, Inc.
1105 N. Market Street
Suite 1300
P. O. Box 8985
Wilmington, Delaware 19899
Attention: Corporate Trust
Administration
with a copy to: Fossil Intermediate, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
16
<PAGE>
Fossil Trust
1100 N. Market Street
Rodney Square North
Wilmington, Delaware 19890
Attention: Corporate Trust
Administration
with a copy to: Fossil Trust
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
Fossil Stores I, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
with a copy to: Fossil Stores I, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
Fossil Stores II, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
with a copy to: Fossil Stores II, Inc.
c/o Fossil, Inc.
2280 N. Greenville Avenue
Richardson, Texas 75082-4412
Attention: Don G. Hicks
17. Waiver. No failure to exercise and no delay in exercising on the
part of the Bank of any right, power or privilege hereunder, shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law or in any other agreement.
18. Survival of Agreements. All agreements, representations and
warranties herein made shall survive the execution and delivery of the Revolving
Note, and the making and renewal thereof.
17
<PAGE>
19. Amendment. This Agreement may not be amended except in writing
signed by the Borrower, the Guarantors and the Bank.
20. Successors. This Agreement shall be binding upon and inure to the
benefit of the Borrower, the Guarantors, the Bank and the successors and assigns
of each party hereto.
21. Severability. In the case any one or more of the provisions
contained in the Loan Documents should be invalid, illegal, or unenforceable, in
any respect, the validity, legality, and enforceability of the remaining
provisions contained therein shall not in any way be affected thereby.
22. Interest. It is the intention of the parties hereto to comply with
the laws of the State of Texas accordingly, it is agreed that notwithstanding
any provisions to the contrary in the Loan Documents, in no event shall said
Loan Documents require the payment or permit the collection of interest, as
defined under the laws of the State of Texas, in excess of the maximum amount
permitted by such laws. If any such excess of interest is contracted for,
charged or received, under the Loan Documents, or in the event the maturity of
the indebtedness evidenced by the Revolving Note or is accelerated in whole or
in part, or in the event that all or part of the principal or interest of the
Revolving Note shall be prepaid, so that under any of such circumstances the
amount of interest contracted for, charged, or received under the Loan Documents
on the amount of principal actually outstanding from time to time thereunder
shall exceed the maximum amount of interest permitted by the laws of the State
of Texas, then in any such event (a) the provisions of this section shall govern
and control, (b) neither the Borrower nor any other person or entity now or
hereafter liable for the payment of the Revolving Note shall be obligated to pay
the amount of such interest to the extent that it is in excess of the maximum
amount of interest permitted to be contracted for by, charged to or received
from the party obligated thereon under the laws of the State of Texas, (c) any
such excess which may have been collected shall be either applied as a credit
against the then unpaid principal amount on the Revolving Note or refunded to
the person paying the same, at the holder's option, and (d) the effective rate
of interest shall be automatically reduced to the maximum lawful rate of
interest permitted to be contracted for by, charged to or received from the
party obligated thereon under the laws of the State of Texas as now or hereafter
construed by the courts having jurisdiction thereof. It is further agreed that
without limitation of the foregoing, all calculations of the rate of interest
contracted for, charged or received under the Loan Documents, for the purpose of
determining whether such rate exceeds the maximum lawful rate of interest, shall
be made, to the extent permitted by the laws of the State of Texas, by
amortizing, prorating, allocating and spreading in equal parts during the period
of the full stated terms of the Revolving Note all interest at any time
contracted for, charged or received from the undersigned or otherwise by the
holder or holders thereof in connection with such Revolving Note.
23. Participations, Etc. The Borrower expressly recognizes and agrees
that, so long as the total indebtedness of the Borrower to the Bank is
$40,000,000 or less, upon the mutual consent of the Borrower and the Bank
(unless an Event of Default has occurred hereunder in which case no consent of
the Borrower shall be necessary), the Bank may sell to other lenders
18
<PAGE>
participations in the loans incurred by the Borrower pursuant hereto. The
Borrower expressly recognizes and agrees that, if the total indebtedness of the
Borrower to the Bank is more than $40,000,000, the Bank, without the consent of
the Borrower, may sell to other lenders participations in the loans incurred by
the Borrower pursuant hereto. Therefore, as security for the due payment and
performance of all indebtedness and other liabilities and obligations of the
Borrower to the Bank under the Loan Documents and any other obligation of the
Borrower to the Bank, whether now existing or hereafter arising, and to such
lenders arising now by reason of such participations or otherwise, the Borrower
hereby grants to the Bank and to such lenders, a lien on and security interest
in any and all deposits or other sums at any time credited by or due from the
Bank and such lenders or either or any of them to the Borrower, whether in
regular or special depository accounts or otherwise, and any and all monies,
securities and other property of the Borrower, and the proceeds thereof now or
hereafter held or received by or in transit to the Bank and such lenders or
either or any of them, from or for the Borrower whether for safekeeping,
custody, pledge, transmission, collection or otherwise and any such deposit,
sums, monies securities and other property may at any time after Default be
set-off, appropriated and applied by the Bank and by such lenders, or either or
any of them, against any indebtedness, liabilities or other obligations, whether
now existing or hereafter arising, of the Borrower or any of them, under this
Agreement, the Revolving Note, or otherwise whether or not such indebtedness,
liabilities or other obligation is then due or secured by any indebtedness,
liabilities or other obligation is then due or secured by any collateral or if
it is so secured whether or not such collateral held by the Bank or such lenders
is considered to be adequate.
24. Merger. This Agreement represents the final agreement between the
Borrower and the Bank pertaining the transactions contemplated by the Amended
Agreement. All prior agreements (including the Amended Agreement) between the
Borrower and the Bank pertaining to the Line of Credit, and the other matters
set forth in this Agreement are merged into and replaced by this Agreement.
25. Ratification of Guaranties. Each of the Guarantors hereby
acknowledges and consents to all of the terms and conditions of this Agreement
and hereby ratifies and confirms the Guaranty Agreement to which it is a party
to or for the benefit of the Bank. Each of the Guarantors hereby acknowledges
that it has no claims, counterclaims, offsets, credits or defenses to the Loan
Documents or the performance of its obligations thereunder. Furthermore, each
Guarantor agrees that nothing contained in this Agreement shall adversely affect
any right or remedy of the Bank under the Guaranty Agreement to which such
Guarantor is a party. Each Guarantor hereby agrees that with respect to the
Guaranty Agreement to which it is a party, all references in such Guaranty
Agreement to the "Guaranteed Obligations" shall include, without limitation, the
obligations of Borrower to Bank under this Agreement. Each Guarantor hereby also
agrees that with respect to the Guaranty Agreement to which it is a party, all
references in such Guaranty Agreement to "First Interstate Bank of Texas, N.A."
shall be deemed references "Wells Fargo Bank (Texas), National Association".
Finally, each of the Guarantors hereby acknowledges that the execution and
delivery of this Agreement and the other Loan Documents executed in connection
herewith shall in no way change or modify its obligations as a guarantor,
debtor, pledgor, assignor, obligor and/or grantor under its respective Guaranty
Agreement except as specifically provided in this Section 25 and shall not
19
<PAGE>
constitute a waiver by the Bank of any of the Bank's rights against such
Guarantor.
26. Ratification of Security Interests. The Company hereby agrees that
the Stock Pledge Agreement is hereby expressly amended such that the definition
of "Secured Obligations" contained therein includes, without limitation, all
indebtedness and other obligations of Borrower now or hereafter existing
hereunder this Agreement, the Revolving Note, and the other Loan Documents, as
amended hereby. Furthermore, the Company hereby ratifies and reaffirms its
obligations under the Stock Pledge Agreement, as the same is amended hereby, and
acknowledges that the Stock Pledge Agreement is not subject to any claims,
defenses or offsets. The Company hereby agrees that all references in the Stock
Pledge Agreement to "First Interstate Bank of Texas, N.A." shall be deemed
references "Wells Fargo Bank (Texas), National Association". Finally, the
Company hereby acknowledges that the execution and delivery of this Agreement
and the other Loan Documents executed in connection herewith shall in no way
change or modify its obligations as a debtor, pledgor, assignor, obligor and/or
grantor under the Stock Pledge Agreement except as specifically provided in this
Section 26 and shall not constitute a waiver by the Bank of any of the Bank's
rights against the Company.
27. AGREEMENT FOR BINDING ARBITRATION. The parties agree to be bound by
the terms and provisions of the Bank's current Arbitration Program which is
incorporated by reference herein and is acknowledged as received by the parties
pursuant to which any and all disputes shall be resolved by mandatory binding
arbitration upon the request of any party.
28. Judgment Currency.
-----------------
(a) If, for the purposes of obtaining judgment in any court,
it is necessary to convert a sum due hereunder or under the Revolving
Note from a currency (the `Original Currency') into another currency
(the `Other Currency'), the parties hereto agree, to the fullest extent
that they may effectively do so, that the rate of exchange used shall
be the rate of exchange prevailing on the business day immediately
preceding the day on which final judgment is given.
(b) The obligation of Borrower in respect of any sum due in
the Original Currency from it to Bank hereunder or under the Revolving
Note shall, notwithstanding any judgment in any Other Currency, be
discharged only if and to the extent that on the business day following
receipt by Bank of any sum adjudged to be so due in such Other Currency
Bank may in accordance with normal banking procedures purchase such
amount of the Original Currency with such Other Currency at the rate of
exchange prevailing on the business day preceding the day on which the
final judgment referred to in Section 28 (a) is given; if the amount of
the Original Currency so purchased is less than the amount of the
Original Currency which the Bank could have purchased at the rate of
exchange prevailing on the business day preceding the day on which such
final judgment is given, Borrower agrees, as a separate obligation of
Borrower to Bank and notwithstanding any such judgment, to indemnify
Bank against such difference, and if the amount of the Original
20
<PAGE>
Currency so purchased exceeds the amount of the Original Currency which
the Bank could have purchased at the rate of exchange prevailing on the
business day preceding the day on which such final judgment is given,
Bank agrees to remit to Borrower such excess.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
EXECUTED as of the day and year first above written.
"BANK"
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION,
By: /s/ Carol A. Polasky
----------------------------------------
Name: Carol A. Polasky
Title: Vice President
"BORROWER"
FOSSIL PARTNERS, L.P.
By: Fossil, Inc., its general partner
By: /s/ Randy S. Kercho
------------------------------
Randy S. Kercho
Executive Vice President and
Chief Financial Officer
"GUARANTORS"
FOSSIL, INC.
By: /s/ Randy S. Kercho
----------------------------------------
Randy S. Kercho
Executive Vice President and
Chief Financial Officer
<PAGE>
FOSSIL INTERMEDIATE, INC.
By: /s/ Kosta N. Kartsotis
----------------------------------------
Kosta N. Kartsotis, President
FOSSIL TRUST
By: /s/ Randy S. Kercho
----------------------------------------
Randy S. Kercho, Treasurer
FOSSIL STORES I, INC.
By: /s/ Randy S. Kercho
----------------------------------------
Randy S. Kercho, Treasurer
FOSSIL STORES II, INC.
By: /s/ Randy S. Kercho
----------------------------------------
Randy S. Kercho, Treasurer
Exhibits:
- --------
A - Guaranty Agreement
B - Stock Pledge Agreement
<PAGE>
EXHIBIT A
---------
GUARANTY AGREEMENT
(See Attached)
<PAGE>
EXHIBIT B
---------
STOCK PLEDGE AGREEMENT
(See Attached)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Part I Item Financial Statements of Fossil, Inc. and Subsidiaries as of and
for the twenty-six weeks ended July 3, 1999 filed on Form 10Q.
</LEGEND>
<CIK> 0000883569
<NAME> Fossil, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<EXCHANGE-RATE> 1
<CASH> 70,648
<SECURITIES> 0
<RECEIVABLES> 45,829
<ALLOWANCES> 7,415
<INVENTORY> 74,359
<CURRENT-ASSETS> 196,045
<PP&E> 42,242
<DEPRECIATION> 15,676
<TOTAL-ASSETS> 228,434
<CURRENT-LIABILITIES> 67,759
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 158,573
<TOTAL-LIABILITY-AND-EQUITY> 228,434
<SALES> 173,548
<TOTAL-REVENUES> 173,548
<CGS> 86,126
<TOTAL-COSTS> 138,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 501
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 34,403
<INCOME-TAX> 14,106
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,297
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.61
</TABLE>
