-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ise0u1Tx4dctNo2xZXxCtB7UOUMsLh0m3SPePZ8+fF7+4acN0k2C3ErT6uLMuq1Q HfXD6gXPrfg4Ug0NI4Z47g== 0000731947-00-000003.txt : 20000331 0000731947-00-000003.hdr.sgml : 20000331 ACCESSION NUMBER: 0000731947-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SWISS ARMY BRANDS INC CENTRAL INDEX KEY: 0000731947 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 132797726 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12823 FILM NUMBER: 585749 BUSINESS ADDRESS: STREET 1: ONE RESEARCH DRIVE STREET 2: PO BOX 874 CITY: SHELTON STATE: CT ZIP: 06484-0874 BUSINESS PHONE: 2039296391 MAIL ADDRESS: STREET 1: ONE RESEARCH DRIVE STREET 2: PO BOX 874 CITY: SHELTON STATE: CT ZIP: 06484-6226 FORMER COMPANY: FORMER CONFORMED NAME: FORSCHNER GROUP INC DATE OF NAME CHANGE: 19920703 10-K 1 ANNUAL REPORT FOR SWISS ARMY BRANDS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-1282-3 Swiss Army Brands, Inc. (Exact name of registrant as specified in its charter) Delaware 13-2797726 (State of incorporation) (I.R.S. Employer Identification No.) One Research Drive, Shelton, Connecticut 06484 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 929-6391 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None Not applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [x] The aggregate market value of voting stock held by nonaffiliates of the registrant on March 20, 2000, was approximately $21,898,000. On such date, the closing price of registrant's common stock was $7.97 per share. Solely for purposes of this calculation, shares beneficially owned by directors, executive officers and stockholders of the registrant that beneficially own more than 10% of the registrant's common stock have been excluded, except shares with respect to which such directors and officers disclaim beneficial ownership. Such exclusion should not be deemed a determination or admission by the registrant that such individuals are, in fact, affiliates of the registrant. The number of shares of registrant's common stock, $.10 par value, outstanding on March 20, 2000 was 7,850,860 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders of registrant to be held May 18, 2000 are incorporated by reference in Part III herein. PART I Item 1.Business. Swiss Army Brands, Inc. ("SABI" or the "Company") is the exclusive distributor in the United States, Canada (with one minor exception for cutlery) and the Caribbean of the Victorinox Original Swiss Army Knife, Victorinox SwissTool, Victorinox SwissCard and Victorinox Cutlery. SABI also markets its own line of Swiss Army Brand Watches, Swiss Army Brand Sunglasses and Swiss Army Brand Writing Instruments under its Swiss Army Brand worldwide. In addition, in 1999, the Company began manufacturing and distributing Bear MGC knives and multi-tools. The Company has been marketing Victorinox Original Swiss Army Knives and Victorinox Cutlery for over fifty years and has been the exclusive United States distributor of such products since 1972 under agreements with SABI's principal supplier of pocketknives and cutlery, Victorinox Cutlery Company ("Victorinox"), a Swiss corporation and Europe's largest cutlery producer. SABI added Canada and the Caribbean (including Bermuda) to its exclusive territory for Victorinox Original Swiss Army Knives in 1992 and 1993, respectively. In April 1999, the Company purchased substantially all of the assets and assumed certain liabilities of Bear MGC Cutlery, Inc., which manufactured and distributed Bear MGC knives and multi-tools. See Note 4 to the Company's Consolidated Financial Statements included herein for further information. The Company is engaged principally in one line of business - the importation, manufacturing and distribution of cutlery, pocketknives, multi-tools, watches and other consumer products. Total SABI sales for the calendar years 1999, 1998 and 1997 were $129,452,000, $127,851,000, and $118,744,000, respectively. Sales of Victorinox Original Swiss Army Knives, Victorinox SwissTools, Victorinox SwissCards and Bear MGC products, accounted for approximately 39% of SABI's 1999 sales while watches and other Swiss Army Brand products accounted for approximately 46%. Sales of professional and consumer cutlery accounted for approximately 15% of SABI's 1999 sales. No customer accounted for more than 10% of net sales during any year in the three-year period ended December 31, 1999. See Note 17 to the Company's Consolidated Financial Statements included herein for further information. The Company was incorporated in Delaware on December 12, 1974 as a successor to a New York corporation. SABI's principal executive offices are located at One Research Drive, Shelton, Connecticut 06484 and its telephone number is (203) 929-6391. As of December 31, 1999, SABI and its subsidiaries had 219 full-time employees, including 10 in Canada and five in Switzerland. 2 Products -------- Victorinox Original Swiss Army Knives are multiblade pocketknives containing implements capable of more functions than standard pocketknives. For example, SABI's most popular Victorinox Original Swiss Army Knife model, the Classic, with a suggested retail price of $16, features a blade, scissors, nail file with screwdriver tip, toothpick and tweezers. SABI markets more than 70 different models of Victorinox Original Swiss Army Knives containing up to 35 different implements (with up to 45 separate functions), ranging from a basic knife with a suggested retail price of $10 to the highest priced model at approximately $70 as well as a SwissChamp Deluxe SOS kit with a suggested retail price of approximately $160. SABI also sells multi-function lockblade knives designed for the hunting and outdoor market. The Company also offers the SwissCard , a credit card shaped, ten-function instrument, and the SwissTool , a multi-tool with 23 features, including full size pliers. In 1999, the Company added to its product line, a collection of Victorinox Lifestyle Tools; the CyberTool, GolfTool, AutoTool and SportRatchetTool. These tools are designed for use in specific activities. SABI's line of Swiss Army Brand products includes 25 models of Swiss Army Brand Watches with over 125 SKUs ranging from the Active Collection, starting out a suggested retail price of $85, to the Professional Collection, which tops out at a suggested retail price of $1,395. SABI's line of Swiss Army Brand Sunglasses includes four models with suggested retail prices ranging from $60 to $80. In addition, SABI's line of Swiss Army Brand writing instruments includes six SKUs at a suggested retail price of $95. SABI currently obtains a majority of its Swiss Army Brand Watches from a single Swiss supplier, which is responsible for the final assembly of watch components manufactured by several manufacturers. The Company believes that alternate suppliers would be available if necessary and that the loss of its current supplier of Swiss Army Brand Watches would not have a material adverse effect on the Company's business. The Company also sells professional cutlery products, made of stainless steel, primarily manufactured by Victorinox. Although the majority of SABI's professional cutlery products are marketed under the trademarks "Forschner" and "R.H. Forschner," the Company also has a private label business. Professional cutlery imported from Switzerland is generally more expensive than domestic United States products. SABI believes that it has the largest market share of imported professional cutlery products sold in the United States and that its share of all professional cutlery, foreign and domestic, sold in this country is second to the dominant seller of such products. SABI believes that it has achieved and maintained its market share due to the quality of its products and its merchandising efforts. The Company's line of Bear MGC knives and multi-tools include over 50 models with suggested retail prices primarily in the range of $20 to $60. The Company distributes its products throughout the United States, Canada and the Caribbean through independent sales representatives and its direct sales force to over 3,800 wholesalers and retailers, including department stores, specialty stores, high-end jewelers, sporting goods stores, cutlery shops, catalog showrooms, mass merchandisers and mail order houses, and through distributors to corporations and other organizations for promotional purposes, premium, employee gift award programs and corporate identity catalogs. SABI imprints its products primarily at its own facilities with the customer's corporate name or logo. SABI's customers for professional cutlery include distributors of hotel, restaurant, butcher, institutional, commercial fishing and slaughterhouse supplies and retail cutlery stores located throughout the United States and Canada. 3 Sales of Victorinox Original Swiss Army Knives and Swiss Army Brand products are seasonal with sales typically stronger during July through December. Although the Company is the largest United States seller of Swiss Army Knives, it faces competition from Precise Imports Corp. ("Precise"), the United States and Canadian distributor of Swiss Army Knives manufactured by Wenger S.A. ("Wenger"), the only company other than Victorinox supplying knives to the Swiss armed forces. Precise imports a substantially smaller number of knives into the United States than SABI. The Company also faces competition from the manufacturers and importers of other multiblade knives and multi-tools including importers that sell non Swiss-made pocketknives under the "Swiss Army Knife" name. SABI is unable to determine its competitive position with respect to the estimated seven major competitors in the general United States pocket knife market. SABI's direct competitors in the specialty advertising market are manufacturers of name brand products of similar price and quality. SABI has many competitors in the sale of watches and sunglasses at all price points. Many of these competitors have market shares and resources substantially greater than those of SABI. Victorinox Travel Gear ---------------------- In March 2000, the company signed a license agreement with TRG Accessories, LLC ("TRG"), an Untied States based company, reflecting a prior informal arrangement between the two companies. Under the agreement TRG is to develop, manufacture and market a line of Travel Gear under the Victorinox trademark and logo in the United States. The collection, including luggage, backpacks and small leather goods (wallets, PDA covers, etc.) was launched to select department store and specialty retailers in the late 1999. The marks are sublicensed to TRG by the Company on a royalty basis pursuant to a license agreement between the Company and Victorinox, granting the Company the right to utilize and sublicense the Victorinox trademarks, in conjunction with the development and international marketing of a collection of Travel Gear. Trademark Agreements -------------------- In 1992, in connection with the settlement of litigation with Precise, SABI granted Precise a perpetual worldwide royalty-free license to use the trademark Swiss Army in connection with Swiss-made non-knife goods, other than timepieces, sunglasses and compasses. Under this agreement, Precise acknowledged SABI's exclusive rights to the Swiss Army trademark for non-knife products including timepieces, compasses and sunglasses. See Item 3 for discussion of legal proceedings between SABI and Precise. The Company is the owner of United States and certain foreign trademark registrations for "Swiss Army", as applied to watches and sunglasses and actively defends its trademarks throughout the world. Although the Company's registrations have been challenged, on the basis of the advice of its trademark counsel, SABI expects to prevail in those proceedings. The Company is dedicated to a vigorous enforcement of these exclusive trademark rights. No U.S. trademark registrations have ever been issued for "Swiss Army" as applied to multi-bladed knives. In 1994, in a case originally brought by SABI against Arrow Trading Co., Inc. ("Arrow") in September 1992 in the District Court for the Southern District of New York, the U.S. Court of Appeals for the Second Circuit reversed a judgment originally issued in the Company's favor and held that the use of "Swiss Army" on Chinese-made knives could not be enjoined on grounds of geographic misdescriptiveness. On remand, the District Court ruled that Arrow had violated Section 43(a) of the Lanham Act and New York common law in connection with its sale of Chinese-made multi-bladed pocketknives which Arrow called "Swiss Army Knives." The court found that SABI had proved its contention that Arrow engaged in unfair competition and held that Arrow, although free to use the phrase "Swiss Army Knife" to designate its product, must amply distinguish it from the SABI product and prohibited Arrow from selling any multi-function pocketknives as "Swiss Army Knives" unless the phrase "Swiss Army Knife" is immediately preceded or followed by Arrow's name in such a way as to clearly designate its origin and that the size of the type designating origin be no smaller or less prominent than the type used in the phrase "Swiss Army Knife". The Company intends to utilize all reasonable means to safeguard the public from being misled by inferior imitation products. 4 On January 17, 1995, Victorinox and Wenger confirmed and memorialized in writing the grant of separate trademark licenses of Swiss Army as applied to multi-function pocketknives to SABI and Precise. The license to the Company is royalty-free and continues so long as SABI is a distributor for Victorinox. Victorinox and Wenger have filed with the U.S. Patent and Trademark Office a dual application for "Swiss Army" as applied to multi-bladed knives, which application has been opposed by various third parties. The Company is actively considering marketing other products under the "Swiss Army" trademark or under other trademarks. However, no assurances can be given that the Company will ever enter into these additional markets, or if entered into, that such activities will be profitable. If the Company's efforts to protect its trademarks prove to be unsuccessful, the Company may incur increased competition from non-Swiss made knives and other products sold under the "Swiss Army" name. No assurances can be given that such competition from non-Swiss made products would not have a material adverse effect on the business and prospects of the Company. Swiss Confederation Trademarks ------------------------------ On December 18, 1996, the Swiss Military Department representing the Swiss Confederation ("Swiss Confederation") and SABI entered into a trademark agreement (the "Trademark Agreement") pursuant to which SABI was granted certain worldwide use and sublicensing rights in connection with trademarks containing the words "Swiss Army" registered by the Swiss Confederation in Switzerland (the "Swiss Confederation Trademarks"). The Swiss Confederation acknowledged SABI's exclusive right to use SABI's trademarks in the countries of their registration or application and agreed to assist SABI in enforcing SABI's rights with respect to its trademarks. In addition, the Swiss Confederation stated its intention to assist Victorinox, Wenger, SABI and Precise in safeguarding their rights with respect to "Swiss Army" as applied to knives and in preventing the use of "Swiss Army" with respect to multi-blade pocketknives, multi-tools and other products which are not Swiss products. The Trademark Agreement grants SABI the right to an exclusive royalty-free license of the Swiss Confederation Trademarks as applied to watches and sunglasses in the United States, Canada and the Caribbean. SABI is also granted such rights with respect to certain designated products that either it or its licensees sell in commercial quantities in the United States, Canada and the Caribbean within designated time periods. In the event SABI or its licensees do not sell commercial quantities of product categories within the time periods set by the agreement, the Swiss Confederation shall have the right, subject to certain conditions, to license the Swiss Confederation Trademarks to a third party and, in such event, SABI shall be obligated to offer such third party a license of SABI's appropriate trademark. 5 Outside of the United States, Canada and the Caribbean, the Trademark Agreement provides for the grant to SABI of the right to an exclusive license, subject to the existing legal rights of others, for watches and sunglasses at a royalty equal to 3% of net sales. In addition, SABI has the right to a license for certain designated products outside of the United States, Canada and the Caribbean, also at a royalty equal to 3% of net sales, to use the Swiss Confederation Trademarks provided that SABI commences the sale of commercial quantities of such products within time periods prescribed by the Trademark Agreement. The Trademark Agreement also provides that all products sold under the license must be of a quality at least equal in workmanship and materials to the products currently sold by SABI, Victorinox or Wenger and that in the event SABI discontinues sales of goods in commercial quantities in any category of goods for three consecutive years, the Swiss Confederation shall have the right to terminate the license as to that category after giving SABI notice and an opportunity to resume sales. Except for the foregoing limitation, the rights of SABI with respect to the use of the Swiss Confederation Trademarks under the Trademark Agreement are perpetual. It is anticipated that the right to utilize the Swiss Confederation Trademarks on certain products other than timepieces and sunglasses will be made available to Precise by SABI on terms yet to be discussed. Victorinox Agreements --------------------- All of SABI's products, except for the Bear MGC products, are manufactured by independent suppliers. SABI's principal supplier of pocketknives and cutlery is Victorinox, which has manufactured the Original Swiss Army Knife for the Swiss Army for more than 100 years. The loss of this supplier would have a material adverse effect on SABI's business. SABI, Victorinox's largest single customer, has been distributing Victorinox's products since 1937. Distribution was on a non-exclusive basis for more than 45 years when, as a result of understandings reached on SABI's behalf by Mr. Louis Marx, Jr. and Mr. Stanley R. Rawn, Jr., both now SABI Directors, and Mr. Charles Elsener, Sr., Chief Executive Officer of Victorinox, SABI became Victorinox's exclusive United States distributor of Victorinox Original Swiss Army Knives under an agreement dated December 12, 1983 (as subsequently amended, the "U.S. Distribution Agreement"). In 1992 and 1993, Messrs. Marx and Rawn held extensive conversations principally in Switzerland, with Victorinox looking to expand the scope of SABI's exclusive territory. This resulted in SABI obtaining exclusive distributorship rights first in Canada, and then in Bermuda and the Caribbean areas, as well as SABI's receipt of exclusive U.S., Canadian and Caribbean distribution rights to the Victorinox Watch, which is supplied to the Company by Victorinox along with another Swiss manufacturer. The U.S. Distribution Agreement, together with the Company's agreements with respect to the rights obtained in 1992 and 1993 (together, the "Victorinox Agreements"), provides: o.SABI is the exclusive distributor in the United States, its territories and possessions, Canada (with one minor exception), Bermuda and the Caribbean (excluding Cuba so long as SABI is prohibited by United States law from operating therein) (together, the "Territories"), of Victorinox Original Swiss Army Knives and most other Victorinox cutlery products and Victorinox Swiss-made watches (collectively, "Products"). o.The U.S. Distribution Agreement was renewed in 1998 through December 12, 2003 and is subject to renewal at five year intervals at SABI's option unless, in any two consecutive years, purchases of Products by SABI fall below the average purchases for 1981 and 1982, which was 19,766,035 Swiss francs. SABI's distribution rights in Canada, which were renewed in 1999, and the Caribbean were for initial terms of seven years subject to renewal for successive five-year periods. In the event that Victorinox elects not to renew SABI's Canada distribution rights, Victorinox will be required to pay SABI the amount of $3,500,000. During each calendar year, SABI must purchase from Victorinox at least 85% of the maximum quantities of each of Swiss Army Knives and cutlery (expressed in Swiss francs) purchased in any prior year. The only remedy of Victorinox for SABI's failure to achieve these goals would be the termination of SABI's U.S. distribution rights. In the years 1996 through 1998, Victorinox agreed to reduce the minimum purchase requirements. The Company met the reduced minimum purchase requirements in years 1996 through 1998. In 1999, Victorinox met the minumum purchase requirement as set forth in the U.S. Distribution Agreement. 6 o.In each calendar year Victorinox must, if requested, furnish SABI with up to 105% of each type of product purchased during the immediately preceding year. Victorinox has historically been able to accommodate SABI's supply requirements even when they have exceeded such amount. However, Victorinox's plant has a finite capacity and no assurances can be given that Victorinox will continue to meet any increased supply requirements of SABI. o.Pricing provisions assure that the prices paid by SABI for products shipped to the United States will be as low or lower than those charged to any other Victorinox customer. In addition, SABI is granted a 4% discount on purchases of pocketknives and a 3% discount on purchases of cutlery. For products shipped directly to Canada and the Caribbean, the prices paid by SABI are Victorinox's regular export prices. SABI also pays a royalty to Victorinox of 1% of net sales of Victorinox Watches. o.SABI will not sell any new cutlery items without the agreement of Victorinox. o.SABI will have complete discretion as to advertising, packaging, pricing and other marketing matters. In consideration of the grant of the Canadian distribution rights in 1992, SABI issued to Victorinox 277,066 shares of common stock, par value $.10 per share, of SABI ("Common Stock"). In consideration for the grant of the Caribbean distribution rights in 1993, the Victorinox watch distribution rights and the acquisition by SABI of Victorinox's 20% interest in a subsidiary of SABI, SABI issued to Victorinox a five-year warrant to purchase 1,000,000 shares of Common Stock at a discount from the market price on the date of exercise. Victorinox exercised the warrant in full in April 1994 at a price per share of $9.75, a discount of $4.25 per share from the then current market price of SABI Common Stock. All of the shares issued upon exercise of the warrant were subsequently sold to Brae Group, Inc. ("Brae"), a corporate stockholder of SABI that is controlled by Louis Marx, Jr., a Director of SABI, in exchange for shares of the common stock of that corporation. Investments ----------- In 1994, SABI invested a total of $7,002,990, paid in cash and in shares of stock of a publicly traded corporation, to acquire 700,299 shares of Series A Preferred Stock of Forschner Enterprises, Inc., a privately held corporation which was merged into Victory Capital LLC. In 1996, Victory Capital LLC changed its name to Hudson River Capital LLC ("Hudson River"). In 1996, SABI invested $2,000,209, paid in cash, to acquire 190,477 Series B Preferred Units of Hudson River. SABI's interest in Hudson River currently represents, in the aggregate, approximately 9.6% of the equity of Hudson River. Hudson River is a private equity firm specializing in middle market acquisitions, recapitalizations and expansion capital investments. The preferred units of Hudson River held by SABI carry a preference on liquidation equal to their cost and, in certain instances, are entitled to an annual preferred return. 7 In 1996, Hudson River distributed pro-rata to its members all of its interest in Victory Ventures LLC, a private equity firm specializing in small market venture capital investments ("Victory Ventures"). SABI received in the distribution, and continues to hold, 890,776 Series A Preferred Units of Victory Ventures valued at the time of the distribution at $1.23 per unit, currently representing approximately 1.2% of the equity of Victory Ventures. The preferred units of Victory Ventures held by SABI carry a preference on liquidation equal to the value of the Series A Preferred Units on the date of the distribution and, in certain instances, are entitled to an annual preferred return. 490,000 of Hudson River's common units and 2,279,763 of Hudson River's Series B Preferred Units (currently representing, in the aggregate, approximately 29.9% of Hudson River's outstanding equity) are held by Brae Capital Corporation ("Brae Capital"), a wholly-owned subsidiary of Brae. Mr. Marx is the owner of 700,000 plan units (representing approximately 7.5% of Hudson River's outstanding equity) issued by Hudson River under its Equity Incentive Plan, which entitle Mr. Marx to voting rights and to receive a portion of the appreciation of Hudson River's assets after the date of grant of such units under certain circumstances. 490,000 of Victory Ventures' common units and 6,917,035 of Victory Ventures' Series A Preferred Units (currently representing in the aggregate, approximately 9.6% of Victory Ventures' outstanding equity) are held by Brae Capital. In addition, Brae Capital is the owner of 2,911,613 plan units (representing approximately 3.8% of Victory Ventures' outstanding equity) issued by Victory Ventures under its Equity Incentive Plan, which entitle Brae Capital to voting rights and to receive a portion of the appreciation of Victory Ventures' assets after the date of grant of such units, under certain circumstances. Pursuant to an agreement between Hudson River and Brae, if certain conditions are met, Brae is required to purchase from Hudson River at Hudson River's cost 10%, and may purchase up to 20%, of the "equity portion" (defined as the common and warrant portion, or the preferred and warrant portion if no common is purchased provided that the preferred portion is participating) of each investment made by Hudson River. Brae may allocate all or a portion of the securities to be acquired pursuant to such agreement among the officers, directors, employees, consultants and common equityholders of Hudson River and such other persons who may be in a position to benefit Hudson River in such proportions as Brae shall determine. Brae is party to a similar agreement with Victory Ventures. Also, Mr. Marx is a director and chairman of a private company that owns 6,841,784.4 series A preferred units of Victory Ventures (representing approximately 8.9% of the total outstanding units), and 193,652.6 series B preferred units of Hudson River (2.1% of the total outstanding units). Mr. Marx does not own any units of Victory Ventures directly. Mr. Marx, a Director of SABI, is a Co-Chairman of the Board, a director and an equity holder of each of Hudson River and Victory Ventures, and a consultant to Victory Ventures. Mr. Clarke H. Bailey, a Director of SABI, is a Co-Chairman of the Board, a Director and an equityholder of Hudson River. Mr. Stanley R. Rawn, Jr., Senior Managing Director and a Director of SABI, and Mr. Herbert M. Friedman, Vice President and General Counsel and Director of SABI, also serve as directors and are equityholders of each of Hudson River and Victory Ventures. Mr. Robert S. Prather, Jr., a director of SABI, also serves as a director of Victory Ventures, LLC. St. John Knits, Inc. License Agreement -------------------------------------- On May 15, 1997, SABI entered into an agreement with St. John Knits, Inc. ("St. John") providing for the grant of an exclusive license, subject to certain terms and conditions, to SABI to market watches bearing the St. John trademark. St. John is a leading designer, manufacturer and marketer of fine woman's apparel. SABI introduced the St. John Timepiece Collection in November 1998. SABI discontinued the sale of the St. John Timepiece Collection in the third quarter of 1999. 8 Item 2. Properties. - ------ ---------- The executive and administrative offices of SABI occupy approximately 42,500 square feet of leased space in an office building located in Shelton, Connecticut. SABI moved into these premises in September, 1993. The initial term of the lease on this space expires on September 1, 2001, subject to renewal options. In addition, SABI leases approximately 7.4 acres in Shelton, Connecticut upon which the landlord has constructed a 85,000 square foot building that SABI uses as a facility for warehousing, distribution, imprinting and assembly. The lease commenced in June 1991 and has a term of ten years, subject to renewal options. SABI also leases approximately 13,000 square feet in a building in Toronto, Canada that it uses for office space and warehousing of products. The lease commenced in December 1992 and expired in December 1997. The Company has extended the term on this lease until December 31, 2000. Also, in 1996, SABI entered into a four-year lease for 7,000 square feet of space in a 30,000 square foot building in Bienne, Switzerland for use as a distribution center. This lease has been extended until January 2001. SABI believes its properties are sufficient for the current and anticipated needs of its business. Item 3. Legal Proceedings. - ------ ----------------- Except as set forth or referenced below, the Company is not involved in any material pending legal proceedings. K-Swiss filed on December 30, 1996 petitions to cancel the Company's U.S. Trademark Reg. No. 1,734,665 for watches and Reg. No. 1,715,093 for sunglasses for "Swiss Army". The Company believes it has meritorious defenses to these petitions although their outcome cannot be predicted at this time. On July 14, 1997, the Company filed with the American Arbitration Association in New York, New York a demand for arbitration against Precise. In the demand for arbitration, the Company charged that Precise had violated the license agreement dated June 30, 1992 between Precise and the Company by utilizing the trademark Swiss Army in ways prohibited by the agreement. In response, Precise alleged certain counterclaims. These claims and counterclaims between the Company and Precise were dismissed with prejudice on December 31, 1999 pursuant to the terms of a November 7, 1998 stipulation since neither party exercised its right to continue the proceeding. The Company is also a plaintiff in several proceedings to enforce its intellectual property rights. In addition, see "Business - Trademark Agreements". Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- Not Applicable. 9 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ --------------------------------------------------------------------- A. Market Information. ------------------ Shares of SABI's Common Stock trades on The Nasdaq Stock Market under the symbol "SABI". The high and low closing sales prices for shares of Common Stock, which is the only class of capital stock of SABI outstanding, as reported by Nasdaq since the first quarter of 1998 were as follows:
1998 1999 2000* High Low High Low High Low First Quarter $12 1/16 $ 9 3/16 $10 1/8 $8 5/8 $8 1/2 $6 Second Quarter 12 1/2 10 1/4 10 7 5/8 Third Quarter 11 1/4 8 3/4 11 1/2 7 9/32 Fourth Quarter 10 3/8 8 7/8 9 1/2 6 5/8
*Through March 20, 2000. The public market for Common Stock is limited and the foregoing quotations should not be taken as necessarily reflective of prices that might be obtained in transactions involving substantial numbers of shares. B. Holders. ------- On March 20, 2000, shares of Common Stock were held of record by 299 persons, including several holders who are nominees for an undetermined number of beneficial owners. C. Dividends. --------- The Company has not paid a cash dividend since its inception, and its present policy is to retain earnings for use in its business. Payment of dividends is dependent upon the earnings and financial condition of SABI and other factors that its Board of Directors may deem appropriate. Under SABI's revolving credit agreement, which expires on June 30, 2001, SABI agreed not to declare or pay any dividends unless immediately following such payment SABI's is in compliance with the financial covenants set forth in the revolving credit agreement. 10 Item 6. Selected Financial Data - ------ ----------------------- The following selected financial data for the five years ended December 31, 1999 was derived from the consolidated financial statements of the Company. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements, related notes and other financial information included herein.
(In thousands, except per share amounts) Year Ended December 31, - ---------------------------------------- Operating Data: 1999 1998 1997(1) 1996(2) 1995 ---- ---- ------- ------- ---- Net sales $ 129,452 $127,851 $118,744 $130,030 $126,695 Gross profit 50,846 49,982 42,724 40,836 44,264 Selling, general and administrative expenses 46,305 49,005 49,639 46,241 40,265 Operating income (loss) 4,541 977 (6,915) (5,405) 3,999 Gain (loss) on sale (write-down) of investments (2,280) 1,651 398 (2,382) 1,771 Other income (expense), net (610) 55 116 179 (134) Income (loss) before income taxes 1,651 2,683 (6,401) (7,608) 5,636 Income tax provision (benefit) 1,531 1,220 (2,376) (2,343) 2,523 --------- -------- -------- -------- -------- Net income (loss) $ 120 $1,463 ($4,025) ($5,265) $3,113 ========= ======== ======== ======== ======== Earnings per share: Basic $ 0.02 $ 0.18 ($0.49) ($0.64) $0.38 Diluted $ 0.01 $ 0.18 ($0.49) ($0.64) $0.38 Balance Sheet Data: Current assets $ 70,540 $ 70,383 $64,144 $70,933 $74,355 Total assets 107,604 100,404 94,051 98,643 101,230 Current liabilities 19,169 25,210 18,343 18,787 16,291 Long-term debt 11,362 - - - - Stockholders' equity 76,380 74,598 75,708 79,856 84,939 Cash dividends per common share $ - $ - $ - $ - $ - Weighted average number of shares outstanding: Basic 7,862 8,138 8,209 8,202 8,185 Diluted 8,021 8,236 8,209 8,202 8,236
(1) The financial results for 1997 include a $1.3 million write-off of discontinued inventory (included in cost of sales) and $0.8 million of restructuring costs (included in selling, general and administrative expenses). See Note 16 to the Company's Consolidated Financial Statements. (2) The financial results for 1996 include special charges of approximately $9.9 million. The special charges consisted of a $4.9 million write-off of discontinued inventory (included in cost of sales), a $2.6 million write-off of obsolete displays, goodwill and other assets (included in selling, general and administrative expenses) and a $2.4 million write-down of non-strategic investments. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------ ----------------------------------------------------------------------- of Operations ------------- FORWARD LOOKING STATEMENTS The following discussion, as well as other portions of this Annual Report on Form 10-K, contains, in addition to historical information, forward looking statements. The forward looking statements were prepared on the basis of certain assumptions which relate, among other things, to the demand for and cost of purchasing and marketing the Company's products; the prices at which such products may be sold; new product development; seasonal selling trends; the Swiss franc-U.S. dollar exchange rates; the extent to which the Company is able to successfully hedge against foreign currency fluctuations; and the Company's anticipated credit needs and ability to obtain such credit. Even if the assumptions upon which the projections are based prove accurate and appropriate, the actual results of the Company's operations in the future may vary widely from financial projections due to increased competition, changes in consumer tastes and other factors not yet known or anticipated. Accordingly, the actual results of the Company's operations in the future may vary widely from the forward looking statements included herein. 11 Results of Operations The financial results for 1999 and 1997 were negatively impacted by investment write-downs, inventory write-offs and restructuring costs. The 1999 results included a $2.7 million ($2.4 million after-tax) write-down of the Company's investment in Hudson River Capital LLC. The 1997 financial results included a $1.3 million inventory write-off of discontinued inventory (included in cost of sales) and $0.8 million of restructuring costs (included in selling, general and administrative expenses). These restructuring costs primarily consisted of severance and related expenses. The following table shows, as a percentage of net sales, the Company's Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999:
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 60.7 60.9 64.0 ----- ----- ----- Gross profit 39.3 39.1 36.0 Selling, general and administrative expense 35.8 38.3 41.8 ----- ----- ----- Operating income (loss) 3.5 0.8 (5.8) Interest income (expense), net (0.5) - .1 Gain (loss) on sale (write-down) of investments (1.8) 1.3 .3 Other income, net - - - ----- ----- ----- Income (loss) before income taxes 1.2 2.1 (5.4) Income tax provision (benefit) 1.1 1.0 (2.0) ----- ----- ----- Net income (loss) 0.1% 1.1% (3.4%) ===== ===== =====
Comparison of the Years Ended December 31, 1999 and December 31, 1998 - --------------------------------------------------------------------- Net sales for the year ended December 31, 1999 were $129.5 million compared with $127.9 million for the same period in 1998, representing an increase of $1.6 million or 1.3%. The sales increase was due primarily to $5.3 million in sales related to Bear Cutlery, Inc., an increase in sales of new Victorinox products, primarily the Victorinox CyberTool, SwissCard and AutoTool, and an increase in North American sales of Swiss Army Brand Watches. The increases were partially offset by a decrease in sales of watches marketed under the St. John Timepiece Collection and a decrease in sales of Swiss Army Brand Sunglasses. 12 Gross profit for the year ended December 31, 1999 was $50.8 million, 1.7% higher than in 1998. The increase in gross profit was primarily due to the increase in the value of the U.S. dollar versus the Swiss franc and an increase in net sales, partially offset by unfavorable product mix. The Company's gross profit margin is a function of both product mix and Swiss franc exchange rates. Since the Company imports virtually all of its products from Switzerland, its costs are affected by both the spot rate of exchange and by its foreign currency hedging program. Increases in the value of the Swiss franc versus the dollar may effectively increase the cost of these products to the Company. The increase in the cost of products to the Company may result in either higher prices charged to customers or reductions in gross profit, both of which may have an adverse effect on the Company's results of operations. The Company enters into foreign currency contracts and options to hedge the exposure associated with foreign currency fluctuations. Based upon current estimated Swiss franc requirements, the Company believes it is hedged through the first quarter of 2001. However, such hedging activity cannot eliminate the long-term adverse impact on the Company's competitive position and results of operations that would result from a sustained decrease in the value of the dollar versus the Swiss franc. These hedging transactions, which are meant to reduce foreign currency risk, also reduce the beneficial effects to the Company of any increase in the dollar relative to the Swiss franc. The Company plans to continue to engage in hedging transactions; however, the extent to which such hedging transactions will reduce the effect of adverse currency fluctuations is uncertain. Selling, general and administrative expenses for the year ended December 31, 1999 were $46.3 million, $2.7 million or 5.5% lower than in 1998. The expense decrease resulted primarily from decreased advertising and merchandising expense related to Swiss Army Brand Sunglasses offset in part by expenses related to Bear. As a percentage of net sales, selling, general and administrative expenses decreased to 35.8% in 1999 from 38.3% in 1998. As a result of the above, the Company recorded operating income of $4.5 million for the year ended December 31, 1999 compared to $1.0 million in 1998. Interest expense of $748,000 for the year ended December 31, 1999 was $615,000 higher than interest expense in 1998 due to the debt incurred related to the acquisition of Bear, and the Company's repurchase of $3.6 million of its common stock since the fourth quarter of 1998. Interest income of $44,000 for the year ended December 31, 1999 was $144,000 lower than interest income in 1998, due to decreased cash balances during 1999 compared to 1998. Gain (loss) on sale of investments was a loss of $2,280,000 for the year ended December 31, 1999 compared to a gain of $1,651,000 in 1998. The loss in 1999 consisted of a $2.7 million non-cash write-down of the Company's investment in Hudson River Capital LLC due to the other than temporary impairment in the value of the investment, offset in part by a $420,000 gain related to the sale of the Company's investment in Iron Mountain, Inc. In 1998, the Company recorded a $1.5 million gain due to a cash and stock distribution from the Company's investment in Hudson River Capital LLC; received distributions from Victory Ventures LLC consisting of common stock in two publicly traded entities, both of which were sold by the Company resulting in a $57,000 gain; and sold its investment in SWWT, Inc. and realized a gain of $94,000. 13 As a result of the above, the income before income taxes was $1,651,000 for the year ended December 31, 1999 compared to $2,683,000 in 1998. Income tax expense (benefit) was provided at an effective rate of 92.7% for the year ended December 31, 1999 compared to 45.5% for the year ended December 31, 1998. The change in the effective rate was the result of the Company taking limited tax benefits on the capital loss write-down of the Hudson River Capital LLC investment. As a result of the above, the net income for the year ended December 31, 1999 was $120,000 ($0.01 per share-diluted, $0.02 per share-basic) compared to $1.5 million ($0.18 per share-basic and diluted) in 1998. Comparison of the Years Ended December 31, 1998 and December 31, 1997 - --------------------------------------------------------------------- Net sales for the year ended December 31, 1998 were $127.9 million compared with $118.7 million for the same period in 1997, representing an increase of $9.1 million or 7.7%. The sales increase was due primarily to a 14.2% increase in sales of Victorinox products, primarily the Victorinox SwissTool and SwissCard, and an increase in sales of Swiss Army Brand Sunglasses and the introduction of watches marketed under the St. John Timepiece Collection. Gross profit for the year ended December 31, 1998 was $50.0 million, 17.0% higher than in 1997. The increase in gross profit was primarily due to an increase in net sales, an increase in the value of the U.S. dollar versus the Swiss franc, and a $1.3 million inventory write-off in 1997. Selling, general and administrative expenses for the year ended December 31, 1998 were $49.0 million, $0.6 million or 1.3% lower than in 1997. The expense decrease resulted primarily from decreased advertising expense offset by increased expenditures in the areas of product development and merchandising and promotion. As a percentage of net sales, selling, general and administrative expenses decreased to 38.3% in 1998 from 41.8% in 1997. As a result of the above, the Company recorded operating income of $1.0 million for the year ended December 31, 1998 compared to an operating loss of $6.9 million in 1997. Interest expense of $133,000 for the year ended December 31, 1998 was $93,000 higher than interest expense in 1997, due to higher borrowings in 1998 related to the Company's repurchase of $3.1 million of its common stock. Interest income of $188,000 for the year ended December 31, 1998 was $33,000 higher than interest income in 1997, due to increased invested cash balances during the first half of 1998 compared to 1997. The gain on sale of investments for the year ended December 31, 1998 was $1.7 million compared to $398,000 in 1997. In 1998, the Company recorded a $1.5 million gain due to a cash and stock distribution from the Company's investment in Hudson River Capital LLC. In addition, the Company received distributions from Victory Ventures LLC consisting of common stock in two publicly traded entities, both of which were sold by the Company resulting in a $57,000 gain; and sold its investment in SWWT, Inc. and realized a gain of $94,000. The gain in 1997 was due to a distribution from the Company's investment in Victory Ventures LLC and a $112,000 recovery of a privately held entity that was written-off in 1996. 14 As a result of the above, the income before income taxes for the year ended December 31, 1998 was $2.7 million compared to $6.4 million loss in 1997. Income tax expense (benefit) was provided at an effective rate of 45.5% for the year ended December 31, 1998 compared to 37.1% for the year ended December 31, 1997. The change in the effective tax rate was due to foreign and state income taxes. As a result of the above, the net income for the year ended December 31, 1998 was $1.5 million ($0.18 per share) compared to $4.0 million loss ($0.49 per share) in 1997. Liquidity and Capital Resources - ------------------------------- As of December 31, 1999, the Company had working capital of $51.4 million compared with $45.2 million as of December 31, 1998, an increase of $6.2 million. Significant sources of working capital included proceeds from the sale of long-term investments of $1.9 million and the conversion of short-term debt to long-term debt. Also, working capital increased due to the acquisition of Bear. Significant uses of working capital consisted of additions to other assets of $3.8 million, capital expenditures of $1.7 million and repurchases of common stock of $0.5 million. The Company currently has no material commitments for capital expenditures. Cash provided from operating activities was approximately $4.9 million in the year ended December 31, 1999 compared to $0.2 million in the year ended December 31, 1998. The change primarily resulted from a decrease in inventory in 1999 compared to an increase in 1998, a smaller increase in accounts receivable in 1999 compared to 1998, a decrease in prepaid and other in 1999 compared to an increase in 1998 and an increase in accrued liabilities in 1999 compared to a decrease in 1998, offset in part by a decrease in accounts payable in 1999 compared to an increase in 1998. The Company meets its short-term liquidity needs with cash generated from operations, and, when necessary, bank borrowings under its bank agreement. As of December 31, 1999, the Company had $12,237,000 of outstanding borrowings under its bank agreement. The Company currently has a $23.0 million credit line, consisting of a $16.0 million revolving credit line and a $7.0 million term loan. The revolving credit line expires in June 2001. The Company's short-term liquidity is affected by seasonal changes in inventory levels, payment terms and seasonality of sales. The Company believes its current liquidity levels and financial resources continue to be sufficient to meet its operating needs. Year 2000 - --------- The Company conducted a review of its computer systems and operations to identify those areas that could have been affected by the "Year 2000" issue and developed an implementation plan to minimize disruption. Based upon that assessment, certain computer systems were vulnerable to the Year 2000 issues. The Company modified certain software and hardware, and made investment in new software and hardware, which successfully mitigated the effect of the Year 2000 problem as it related to its own computer systems. The Company's operations incurred no disruption of their ability to conduct business. The costs associated with the Year 2000 compliance were approximately $100,000. As of December 31, 1999, all the costs have been incurred. The Company also communicated with its significant suppliers and service providers to ensure that those parties had appropriate plans to manage the Year 2000 issue as it relates to the Company's operations. The Company experienced no significant problems with its key suppliers, service providers or customers as a result of the Year 2000 issue. 15 Recently Issued Accounting Standards - ------------------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting and reporting standards for derivatives and hedging activities and is effective for fiscal years beginning after June 15, 2000. The Company will adopt this statement effective January 1, 2001. The Company is currently evaluating the impact of SFAS No. 133 on the Company's financial position and results of operations. Item 7a. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- Foreign Exchange Risk - --------------------- The Company is exposed to significant market risk from changes in foreign exchange rates as the Company imports virtually all its products from Switzerland. To minimize the risks associated with fluctuations in the value of the Swiss franc versus the U.S. dollar, the Company enters into foreign currency contracts and options. Pursuant to guidelines approved by its Board of Directors, the Company is to engage in these activities only as a hedging mechanism against foreign exchange rate fluctuations associated with specific inventory purchase commitments to protect gross margin and is not to engage in speculative trading. Gains or losses on these contracts and options are deferred and recognized in cost of sales when the related inventory is sold. At December 31, 1999, the Company entered into foreign currency contracts and options to purchase approximately 107,000,000 Swiss francs in 2000 and 2001 at a weighted average rate $1.509 Swiss franc/dollar. The Company's ultimate unrealized gain or loss on these contracts and options will primarily depend on the currency exchange rates in effect at the time the contracts and options mature. At December 31, 1999, the Company has reviewed its foreign exchange risks and based upon its foreign currency hedging program and review of its outstanding foreign exchange contracts, it believes that a near-term increase in the value of the Swiss franc versus the U.S. dollar would not have a material effect on the Company's results of operations or financial condition. See Notes to Consolidated Financial Statements for further discussion of the Company's accounting policies and other information related to it foreign exchange instruments. Item 8. Financial Statements and Supplementary Data - ------ ------------------------------------------- The financial information required by Item 8 is included elsewhere in this report. See Part IV, Item 14. Item 9. Disagreements on Accounting and Financial Disclosure - ------ ---------------------------------------------------- None. PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- Incorporated herein by reference to the information under the heading "Election of Directors" in the Company's Proxy Statement with respect to the Company's Annual Meeting of Stockholders scheduled to be held on May 18, 2000. 16 Item 11. Executive Compensation - ------- ---------------------- Incorporated herein by reference to the information under the headings "Compensation of Directors", "Compensation Committee Interlocks and Insider Participation", "Compensation of Executive Officers", "Options" and "Report of the Compensation Committee on Executive Compensation" in the Company's Proxy Statement with respect to the Company's Annual Meeting of Stockholders scheduled to be held on May 18, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- Incorporated herein by reference to the information under the headings "Principal Shareholders" and "Security Ownership of Management" in the Company's Proxy Statement with respect to the Company's Annual Meeting of Stockholders scheduled to be held on May 18, 2000. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- Incorporated herein by reference to the information under the headings "Compensation Committee Interlocks and Insider Participation" in the Company's Proxy Statement with respect to the Company's Annual Meeting of Stockholder's scheduled to be held May 18, 2000. 17 PART IV -------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------- ---------------------------------------------------------------- (a) Documents filed as part of this report: Page(s) (1) Financial Statements: Report of Independent Public Accountants F-1 Consolidated Balance Sheets - December 31, 1999 and 1998 F-2 to F-3 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-6 Notes to Consolidated Financial Statements F-7 to F-23 (2) Schedule -- Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997 F-24
All other schedules called for under Regulation S-X are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Swiss Army Brands, Inc.: We have audited the accompanying consolidated balance sheets of Swiss Army Brands, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Swiss Army Brands, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Stamford, Connecticut February 18, 2000 F-1
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS December 31, 1999 1998 ---- ---- Current assets Cash and cash equivalents $1,302 $1,309 Accounts receivable, less allowance for doubtful accounts of $1,060 and $975, respectively 33,718 31,321 Inventories 30,227 28,890 Deferred income taxes 2,235 2,205 Prepaid and other 3,058 6,658 ------ ------- Total current assets 70,540 70,383 ------ ------- Deferred income taxes 1,474 1,069 Property, plant and equipment, net 4,856 3,735 Investments 4,476 9,467 Intangible assets, net 11,548 2,875 Other assets, net 14,710 12,875 ------ ------ Total assets $107,604 $100,404 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-2
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, Total Liabilities 1999 1998 Current liabilities Current portion of long-term debt $875 $5,140 Accounts payable 7,732 12,439 Accrued liabilities 10,562 7,631 ------ ------ Total current liabilities 19,169 25,210 ------ ------ Long-term liabilities Long-term debt 11,362 - Other 693 596 ------ ------ 31,224 25,806 Commitments and contingencies (Note 15) Stockholders' equity Preferred stock, par value $.10 per share: shares authorized - 2,000,000; no shares issued - - Common stock, par value $.10 per share: shares authorized - 18,000,000; shares issued - 8,866,218 and 8,858,218, respectively 886 885 Additional paid-in capital 49,137 46,472 Accumulated other comprehensive income (loss) (401) 177 Retained earnings 35,576 35,456 ------ ------ 85,198 82,990 Less: Treasury stock; 1,014,108 and 958,108 shares, respectively (8,711) (8,194) Deferred compensation (107) (198) ------ ------ Total stockholders' equity 76,380 74,598 ------ ------ Total liabilities and stockholders' equity $ 107,604 $100,404 ======= =======
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Net sales $129,452 $127,851 $118,744 Cost of sales 78,606 77,869 76,020 -------- -------- -------- Gross profit 50,846 49,982 42,724 Selling, general, administrative expenses 46,305 49,005 49,639 -------- -------- -------- Operating income (loss) 4,541 977 (6,915) -------- -------- -------- Interest expense (748) (133) (40) Interest income 44 188 155 Gain (loss) on sale (write-down) of investments (2,280) 1,651 398 Other income, net 94 - 1 -------- -------- -------- Total interest and other income (expense), net (2,890) 1,706 514 -------- -------- -------- Income (loss) before income taxes 1,651 2,683 (6,401) Income tax provision (benefit) 1,531 1,220 (2,376) -------- -------- -------- Net income (loss) $ 120 $1,463 ($4,025) ======== ======== ======== Earnings per share: Basic $0.02 $0.18 ($0.49) ======== ======== ======== Diluted $0.01 $0.18 ($0.49) ======== ======== ======== Weighted average number of shares outstanding: Basic 7,862 8,138 8,209 ======== ======== ======== Diluted 8,021 8,236 8,209 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (in thousands, except share data) Accumulated Common Stock Additional Other Par Value $.10 Paid-In Comprehensive Retained Treasury Comprehensive Shares Amount Capital Income (Loss) Earnings Stock Income (Loss) BALANCE December 31, 1996 8,822,968 $882 $46,182 ($113) $38,018 ($5,113) Comprehensive Loss: Net loss - - - - (4,025) - ($4,025) Foreign currency translation adjustment - - - (127) - - (127) ------- Comprehensive Loss ($4,152) ======= Stock options exercised 750 - 4 - - - ---------- ----- ------- ----- -------- ------- BALANCE December 31, 1997 8,823,718 882 46,186 (240) 33,993 (5,113) Comprehensive Income: Net income - - - - 1,463 - $1,463 Unrealized gain on marketable securities - - - 603 - - 603 Foreign currency translation adjustment - - - (186) - - (186) ------- Comprehensive Income $1,880 ======= Stock options exercised 9,500 - 70 - - - Stock grant 25,000 3 216 - - - Repurchase of common stock - - - - - (3,081) ---------- ------ ------- ----- -------- ------- BALANCE December 31, 1998 8,858,218 885 46,472 177 35,456 (8,194) Comprehensive Loss: Net income - - - - 120 - $120 Foreign currency translation adjustment - - - 233 - - 233 Unrealized gain in marketable securities - - - (811) - - (811) ------ Comprehensive Loss ($458) ====== Acquisition of Bear MGC Cutlery, Inc. - - 2,630 - - - Stock options exercised 10,000 1 53 - - - Cancellation of stock grant (2,000) - (18) - - - Repurchase of common stock - - - - - (517) ---------- ------ ------- ----- -------- ------- BALANCE December 31, 1999 8,866,218 $886 $49,137 ($401) $35,576 ($8,711) ========== ====== ======= ===== ======== =======
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 120 $1,463 ($4,025) Adjustments to reconcile net income (loss) to cash provided from operating activities: Depreciation and amortization 3,230 2,834 2,709 Stock compensation expense 73 21 - Deferred income taxes (435) 2,652 (1,034) (Gain) loss on (sale) write-down of investments 2,280 (1,651) (398) ------- ------- -------- 5,268 5,319 (2,748) Changes in other current assets and liabilities: Accounts receivable (1,206) (3,167) 4,745 Inventories 383 (1,433) 2,204 Prepaid and other 3,652 (2,814) (967) Accounts payable (5,030) 3,937 (2,462) Accrued liabilities 1,872 (1,661) 1,880 ------- ------- -------- Net cash provided from operating activities 4,939 181 2,652 ------- ------- -------- Cash flows from investing activities: Acquisition of Bear MGC Cutlery, Inc., net of cash acquired (7,982) - - Capital expenditures (1,698) (1,302) (1,056) Additions to other assets (3,776) (2,701) (3,070) Proceeds from sales of investments 1,972 1,949 550 ------- -------- -------- Net cash used for investing activities (11,484) (2,054) (3,576) Cash flows from financing activities: Borrowings under bank agreements 59,440 32,914 1,930 Repayments under bank agreements (52,343) (27,774) (1,930) Repurchase of common stock (517) (3,081) - Proceeds from exercise of stock options and warrants 54 70 4 -------- -------- -------- Net cash provided from financing activities 6,634 2,129 4 -------- -------- -------- Effect of exchange rate changes on cash (96) (25) (69) Net increase (decrease) in cash and cash equivalents (7) 231 (989) Cash and cash equivalents, beginning of period 1,309 1,078 2,067 -------- -------- -------- Cash and cash equivalents, end of period $ 1,302 $ 1,309 $ 1,078 ======== ======== ======== Cash paid during the period: Interest $ 766 $ 102 $ 34 ======== ======== ======== Income taxes $ 618 $ 1,752 $ 321 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 SWISS ARMY BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS Swiss Army Brands, Inc. ("Swiss Army" or the "Company") is the exclusive distributor in the United States, Canada (with one minor exception for cutlery) and the Caribbean of the Victorinox Original Swiss Army Knife, Victorinox SwissTool, Victorinox SwissCard, Victorinox Cutlery and Victorinox Watches. Swiss Army also markets its own line of Swiss Army Brand Watches, Swiss Army Brand Sunglasses and Swiss Army Brand Writing Instruments under its Swiss Army Brand worldwide. In addition, in 1999, the Company began manufacture and distributing Bear MGC knives and multi-tools. Swiss Army has only one business segment - the importation, manufacture and distribution of cutlery, knives, multi-tools, watches and other consumer products. No customer accounted for greater than 10% of net sales in any of the three years ended December 31, 1999. In April 1999, the Company purchased substantially all of the assets and assumed certain liabilities of Bear MGC Cutlery, Inc., which manufactured and distributed Bear MGC knives and multi-tools. See Note 4 for further information. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated. Revenue recognition The Company recognizes revenue upon shipment of product. Net sales are comprised of gross revenues less returns, trade discounts and customer allowances. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation and transactions Assets and liabilities of the Company's foreign operations are translated into U.S. dollars using the exchange rate in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in the foreign currency translation adjustment component of stockholders' equity, while gains and losses resulting from foreign currency transactions are included in net income (loss). F-7 The vast majority of the Company's products are imported from Switzerland and are paid for in Swiss francs. Increases in the value of the Swiss franc versus the dollar may effectively increase the cost of these products to the Company. The increase in the cost of products to the Company may result in either higher prices charged to customers or reductions in gross margin, both of which may have an adverse effect on the Company's results of operations. The Company enters into foreign currency contracts and options to hedge the exposure associated with foreign currency fluctuations. However, such hedging activity cannot eliminate the long-term adverse impact on the Company's competitive position and results of operations that would result from a sustained decrease in the value of the dollar versus the Swiss franc. Gains and losses on these contracts are deferred and recognized in cost of sales when the related inventory is sold. These hedging transactions, which are meant to reduce foreign currency risk, also reduce the beneficial effects to the Company of any increase in the dollar relative to the Swiss franc. The Company plans to continue to engage in hedging transactions; however, it is uncertain as to the extent to which such hedging transactions will reduce the effect of adverse currency fluctuations. Cash and cash equivalents Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less. Investments with maturities between three and twelve months are considered short-term investments. Inventories Domestic inventories are valued at the lower of cost determined by the last-in, first-out (LIFO) method or market. Had the first-in, first-out (FIFO) method been used to value domestic inventories as of December 31, 1999 and 1998, the amount at which inventories are stated would have been $3,372,000 and $3,076,000 higher, respectively. Foreign inventories are valued at the lower of cost or market determined by the FIFO method. Inventories primarily consist of finished goods and packaging materials. Property, plant and equipment Property, plant and equipment are stated at cost. Major improvements that add to productive capacity or extend the life of an asset are capitalized while repairs and maintenance are charged to expense as incurred. Property, plant and equipment are comprised of the following:
December 31, 1999 1998 (in thousands) ------------------ Leasehold improvements $1,133 $1,115 Equipment 8,485 5,966 Furniture and fixtures 1,458 1,290 ------ ------ 11,076 8,371 Accumulated depreciation (6,220) (4,636) ------ ------ $4,856 $3,735 ====== ======
Depreciation is computed principally by use of the straight-line method based on the following estimated useful lives:
Years ----- Equipment 3 to 10 Furniture and fixtures 3 to 10
The provision for amortization of leasehold improvements is provided on a straight-line basis over the estimated useful lives of the assets or terms of the leases, whichever is shorter. For the years ended December 31, 1999, 1998, and 1997, depreciation expense of property, plant and equipment was approximately $1,594,000, $1,300,000 and $1,260,000, respectively. F-8 Long-lived assets The Company follows Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company continually reviews the recoverability of the carrying value of these assets using the provisions of SFAS No. 121. Based upon the Company's review of its long-lived assets, no impairment exists at December 31, 1999. Investments Investments in preferred units are accounted for at cost, subject to review for impairment. Since these investments do not have a readily determinable fair value, the valuation of these investments is subject to uncertainty. Investments in common stock of companies in which the Company owns less than 20% are accounted for at fair value, subject to review for impairment. Changes between cost and fair value are reflected as a component of stockholders' equity. Any write-down of the cost due to impairment is reflected in income. Earnings per share Basic earnings per share is computed by dividing net income (loss) by the number of weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding during the period. No common share equivalents have been included in the year ended December 31, 1997, as they would have had an anti-dilutive effect. Common share equivalents are calculated using the treasury stock method. Stock-based compensation The Company accounts for stock options and warrants under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation", are included in Note 14. Income taxes The provision for income taxes, as determined using the liability method, includes deferred taxes resulting from temporary differences in income for financial and tax purposes. Such temporary differences primarily result from differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting and reporting standards for derivatives and hedging activities and is effective for fiscal years beginning after June 15, 2000. The Company will adopt this statement effective January 1, 2001. The Company is currently evaluating the impact of SFAS No. 133 on the Company's financial position and results of operations. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. F-9
(3) INTANGIBLE ASSETS Intangible assets are comprised of the following: December 31, 1999 1998 ---- ---- Goodwill (A) $ 8,153 $ - Foreign distributon rights (B) 2,207 2,875 Trademark rights (C) 1,188 - -------- -------- $11,548 $2,875 ======== ========
(A) Represents the goodwill related to the acquisition of Bear MGC Cutlery, Inc. The goodwill is being amortized on a straight-line basis over 20 years. See Note 4 for further discussion. (B) Represents foreign distribution rights with Victorinox Cutlery Company ("Victorinox"). The foreign distribution rights are being amortized on a straight-line basis over 10 years. See Note 5 for further discussion. (C) On August 17, 1999, the Company purchased all the rights in and trademarks containing Swiss Martial Terms, as defined, from S.A.W. Company S.A. These trademark rights are being amortized as a straight-line basis over 10 years. For the years ended December 31, 1999, 1998, and 1997, amortization expense was $916,000, $674 000 and $674,000, respectively. (4) ACQUISTION On April 16, 1999, Swiss Army and Bear Cutlery, Inc. ("Bear"), a Delaware corporation and a wholly- owned subsidiary of Swiss Army (collectively, the "Buyer"), entered into an Asset Purchase Agreement (the "Agreement") with Bear MGC Cutlery, Inc. ("Bear MGC") and the stockholders (the "Shareholders") of Bear MGC, pursuant to which the Buyer acquired substantially all of the assets and assumed certain of the liabilities of Bear MGC. In consideration for the acquisition of the assets, the Buyer paid Bear MGC $6,970,000 in cash and repaid debt of $298,000 upon execution of the Agreement. In further consideration of the acquired assets, on each of April 16, 2000, 2001 and 2002, the Company shall transfer to Bear MGC 52,868 shares of its common stock, valued at $500,000 (based on the average daily closing price of the common stock during the 30 trading days prior to April 16, 1999). The total value of these shares of common stock is included in additional paid-in capital as of December 31, 1999. Pursuant to the Agreement, Swiss Army will also pay an additional $2,130,000 ( $1.0 million in cash and $1.13 million in common stock of Swiss Army) because Bear attained certain earnings targets for the year ending December 31, 1999. The cash amount is to be paid in April 2000 and has been included in accrued liabilities and the common stock amount has been included in additional paid-in capital as of December 31,1999. F-10 The purchase method of accounting was used to account for the acquisition. The aggregate purchase price has been allocated to the assets and liabilities of Bear based on preliminary estimates of fair market value. Any adjustments resulting from the final purchase price allocation, which could result in changes to the carrying values of assets and liabilities, including goodwill, are not expected to be material to the consolidated financial statements. The purchase price has resulted in acquired goodwill of approximately $8.4 million, which is being amortized on a straight-line basis over 20 years. The following is a summary of the preliminary allocation (in thousands): Cash $ 16 Accounts receivable 1,175 Inventory 1,497 Other current assets 13 Plant and equipment 1,025 Goodwill 8,368 Accrued expenses and other liabilities 466 ------ Total $11,628 ======
The unaudited pro forma results of operations for the years ended December 31, 1999 and 1998, respectively, had the acquisition of Bear occurred at the beginning of each of the periods presented, are provided in the following table. These pro forma results include adjustments for depreciation and amortization of assets acquired based on their fair market values at the acquisition date, increased interest on debt, additional issuance of common stock, and the related income tax effect. For purposes of computing income taxes, an effective tax rate of 40% was used. The unaudited pro forma information does not necessarily represent what the results of operations would have been in such periods and is not intended to be indicative of future results.
Year Ended December 31, 1999 1998 (Unaudited, in thousands except per share data) Net sales $131,398 $134,743 Net income 261 1,802 Earnings per share - basic and diluted 0.03 0.21
(5) PRINCIPAL SUPPLIERS Swiss Army imports for resale all of its Swiss Army Knives, SwissTools, SwissCards and most of its other cutlery products from a principal supplier, Victorinox, a Swiss company. Effective December 12, 1998, Swiss Army renewed a five-year agreement with Victorinox, which appoints Swiss Army as exclusive distributor of Victorinox Original Swiss Army Knives, Victorinox SwissTools, Victorinox SwissCards and Victorinox Cutlery and which gives Swiss Army exclusive rights to use Victorinox trademarks and trade names in the United States with respect to those products. The agreement is subject to renewal at five year intervals at the Company's option and remains in effect as long as Swiss Army continues to purchase quantities of Swiss Army Knives and cutlery (based on the Swiss franc purchase price) at least equal to 85% of the maximum amount of purchases of each in any preceding year. In the years 1998 and 1997, Victorinox agreed to reduce the minimum purchase requirements. The Company met the reduced minimum purchase requirements in 1998 and 1997. In 1999, the Company met the minimum purchase requirement as set forth in the distribution agreement. Pursuant to this agreement, Swiss Army must obtain Victorinox's permission to sell new cutlery items. All of the Swiss Army Knives and certain of the cutlery items that Swiss Army sells in Canada and the Caribbean also are supplied by Victorinox. F-11 Foreign distribution rights with Victorinox are comprised of the following:
December 31, 1999 1998 ---- ---- (in thousands) Canadian distribution rights (A) $3,483 $3,483 Caribbean and Victorinox Watch distribution rights (B) 3,261 3,261 ------- -------- 6,744 6,744 Accumulated amortization (4,537) (3,869) ------- -------- $2,207 $2,875 ======= ========
(A) In April 1992, Swiss Army entered into an agreement with Victorinox under which it received the exclusive distribution rights for Victorinox Original Swiss Army Knives in Canada and was appointed the principal distributor of Victorinox professional cutlery in Canada. In exchange for the grant of these rights, Swiss Army issued to Victorinox 277,066 shares of its common stock from treasury. The rights received were awarded to Swiss Army for a fixed seven-year term, which were renewed in April 1999, with a continuous five-year renewal arrangement upon expiration of the fixed term. Victorinox has the right not to renew the agreement; however, should Victorinox choose not to renew the agreement, Victorinox is required to pay Swiss Army $3,500,000. (B) In December 1993, Swiss Army entered into an agreement with Victorinox under which it received the exclusive distribution rights for Victorinox Original Swiss Army Knives and professional cutlery in the Caribbean. Swiss Army also received the right to distribute Victorinox Swiss-made watches in the United States, Canada and the Caribbean and acquired the 20% share of the Company's subsidiary, Victorinox of Switzerland, Ltd., that Victorinox owned. As part of the agreement, Swiss Army pays Victorinox a royalty of 1% of net sales of Victorinox Watches. The Caribbean distribution rights are for a fixed seven-year term automatically renewable in successive five-year periods unless either party notifies the other at least six months prior to expiration of such period of its intent not to renew. The term of Victorinox Watch distribution rights in each territory coincides with the term for Victorinox cutlery products in that territory. The Company does not have any manufacturing facilities, except for the facility that manufacturers Bear MGC products, and imports virtually all of its products from independent suppliers. The Company's business is subject to certain risks related to its arrangements with its foreign suppliers, including possible restrictions on transfer of funds, the risk of imposition of quotas on the amount of products that may be imported into the United States (although no quota currently exists), maritime union strikes and political instability. Although the Company has exclusive distributorship agreements with Victorinox, its principal supplier, it does not have such contractual arrangements with its other suppliers. The agreements with Victorinox provides for certain minimum annual purchases of products by the Company, and failure to achieve these goals would result in Victorinox having the right to terminate the agreements. Although the Company has a contractual right to receive minimum quantities of Swiss Army Knives from Victorinox, were this source of supply to fail for any reason, the Company probably would be unable to find an alternative source. Any termination or substantial disruption of the Company's relationships with Victorinox would have a material adverse effect on its operation and results. Virtually all of the Company's imported products are subject to United States custom duties. F-12 Although approximately 72%, or $19,700,000, of total payments for watches and watch parts in 1999 were made to a single watch supplier, which is responsible for the final assembly of watch components manufactured by several manufacturers, the Company believes that alternate watch suppliers would be available, if necessary. Furthermore, the Company believes that the loss of this supplier of Swiss Army Brand Watches would not have a material adverse effect on the Company's business. (6) RELATED PARTY TRANSACTIONS Until 1998, one of Swiss Army's directors was a partner in a law firm that provided legal services to the Company. For the years ended December 31, 1998 and 1997, Swiss Army incurred fees of $174,000 and $629,000, respectively, relating to these services. Four of Swiss Army's directors serve as directors of Hudson River Capital LLC, including two who serve as Co-Chairman. Five of Swiss Army's directors serve as directors of Victory Ventures LLC, including one who serves as Co-Chairman. See Note 7 for further discussion. In July 1994, Swiss Army entered into a Services Agreement with Brae Group, Inc. ("Brae"), a company that is a stockholder of Swiss Army and in which a Swiss Army director and a principal supplier have a controlling and non-controlling stock interest, respectively. Under the Services Agreement, Brae agreed to provide various services to Swiss Army for a period of four years relating to maintaining, enhancing and expanding Swiss Army's relationship with the Company's principal supplier. In exchange for these services, Brae received an option to purchase 500,000 shares of Swiss Army's common stock at the then current market price of $10.75 per share. The option vested immediately and can be exercised for 10 years from the date of the Services Agreement. On May 1, 1998, the Company entered into an agreement with an affiliated company whereby this company would supply Swiss Army with legal services. The fees incurred for the years ended December 31, 1999 and 1998 were approximately $179,000 and $103,000, respectively. This agreement can be terminated by either party upon thirty days written notice. (7) INVESTMENTS Investments are comprised of the following:
December 31, 1999 1998 (in thousands) Preferred units of Hudson River Capital LLC (A) $3,613 $6,313 Preferred units of Victory Ventures LLC (B) 851 851 Common stock of Iron Mountain, Inc. (C) - 2,273 Common stock of Chaparral Resources, Inc. (D) 12 30 ------- ------- Total investments $4,476 $9,467 ======= =======
F-13 (A) Hudson River Capital LLC ("Hudson River"), is a private equity firm specializing in middle market acquisitions, re-capitalization and expansion capital investments. In January 1998, Hudson River distributed to the Company $1,613,000 in cash and authorized the distribution of 63,019 shares of common stock (as adjusted for a three to two stock split), valued at $1,481,000, of Iron Mountain Inc. ("Iron Mountain"). In 1998, the Company recognized a $1.5 million gain on this cash and common stock distribution which is included in gain on sale of investments in the accompanying financial statements. In 1999, the Company recorded a $2.7 million write-down of its investment in Hudson River due to the other than temporary impairment in the value of the investment. At December 31, 1999 and 1998, the Company owned 890,776 preferred units of Hudson River which represented approximately 9.6% of the outstanding equity of Hudson River. The preferred units in Hudson River owned by the Company carry a preference on liquidation equal to their per unit cost as well as, in certain instances, an annual preferred return. The Company accounts for this investment on the cost basis, subject to review for impairment. Since this investment does not have a readily determinable fair value, the valuation of this investment is subject to uncertainty. (B) Victory Ventures LLC ("Victory Ventures")is a private equity firm specializing in small market venture capital investments. In 1997, the Company received a cash distribution from Victory Ventures of $438,000, of which $286,000 was recorded as a gain and has been included in gain (loss) on sale (write-down) of investments. In 1997, Victory Ventures distributed to its members its investment in Chaparral Resources, Inc. ("Chaparral"). See (D) for further discussion. In 1998, Victory distributed 3,053 shares of common stock of Micromuse and 4,178 shares of common stock of FaxSav. The Company liquidated these investments in 1998 and realized a gain of approximately $57,000 on these investments. At December 31, 1999 and 1998, the Company owned 890,776 preferred units of Victory Ventures which represented approximately 1.2% and 1.3% of the outstanding equity of Victory Ventures, respectively. The preferred units in Victory Ventures owned by the Company carry a preference on liquidation equal to their per unit cost as well as, in certain instances, an annual preferred return. The Company accounts for this investment on the cost basis, subject to review for impairment. Since this investment does not have a readily determinable fair value, the valuation of this investment is subject to uncertainty. (C) Iron Mountain, a publicly traded company, is a full service provider of records management and related services. At December 31, 1998, the Company owned 63,019 shares of Iron Mountain stock valued at $36.06 per share. The Company accounted for this investment at fair value, with changes between cost and fair value reflected as a component of stockholders' equity. In January 1999, the Company sold its entire investment in Iron Mountain and recognized a gain of approximately $420,000. (D) Chaparral, a publicly traded company, is an independent oil and gas exploration and production company. At December 31, 1999, the Company owned 1,461 shares (adjusted for a reverse stock split of one share in exchange for sixty) of Chapparal common stock valued at $7.88 per share. The Company accounts for this investment at fair value, with changes between cost and fair value reflected as a component of stockholders' equity. F-14 (8) OTHER ASSETS Other assets are comprised of the following :
December 31, Amortization 1999 1998 Period ---- ---- ------------ (in thousands) Cash surrender value of life insurance (see Note 15) $14,111 $12,044 N/A Other 3,085 2,808 1-5 years -------- -------- Accumulated amortization (2,486) (1,977) -------- -------- $14,710 $12,875 ======== ========
For the years ended December 31, 1999, 1998 and 1997, amortization expense related to other assets was approximately $720,000, $860,000, and $775,000, respectively. (9) ACCRUED LIABILITIES Accrued liabilities are comprised of the following:
December 31, 1999 1998 ---- ---- (in thousands) Sales, marketing and promotional $3,951 $3,106 Payroll related 1,353 1,515 Acquisition payment - see Note 4 1,000 - Other 4,258 3,010 ------- -------- $10,562 $7,631 ======== ========
(10) DEBT AGREEMENTS On November 15, 1999, Swiss Army entered into a revolving credit agreement which, among other things, states that the Company can borrow up to $23.0 million, consisting of a $16.0 million line of credit for working capital purposes and a $7.0 million term loan related to the acquisition of Bear MGC, at one of three interest rate options: (i) LIBOR plus the applicable margin; (ii) Base Rate, as defined; or (iii) Cost of Funds rate, as defined. The interest rate also varies dependent on the Company's financial performance. The line of credit is secured by substantially all the assets of the Company and the agreement requires the Company to satisfy certain financial covenants including minimum tangible net worth, interest rate coverage and current ratio, and to continue the exclusive distributorship arrangement with Victorinox. At December 31, 1999, the Company is in compliance with the covenants contained in the Agreement. The fair value of the amount outstanding under the line of credit approximates book value as the interest rate is adjusted on a quarterly basis. The Company has entered into an interest rate cap agreement to provide interest rate protection on $5.0 million of debt to the maximum interest rate of 7.0% (before applicable margin) expiring in November 2004. F-15 Scheduled principal payments due on debt in the next five years are as follows: 2000 $ 875 2001 6,185 2002 875 2003 875 2004 3,427
(11) INCOME TAXES The income tax provision (benefit) for the years ended December 31, 1999, 1998 and 1997, consists of the following:
Year Ended December 31, 1999 1998 1997 ---- ---- ---- (in thousands) Current Federal $1,681 ($1,662) ($1,276) Foreign - - (280) State 285 230 214 ------ ------ ------- Total current 1,966 (1,432) (1,342) Deferred Federal (600) 2,294 (700) State 165 358 (334) ------ ------- ------- Total deferred (435) 2,652 (1,034) ------ ------- ------- Provision (benefit) for income taxes $1,531 $1,220 ($2,376) ====== ======= =======
The significant components of the deferred tax asset as of December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- (in thousands) Sales and marketing reserves $940 $888 Inventory related reserves 850 843 Depreciation and amortization 771 561 Loss carryforwards 1,329 411 Accrued employee benefits 234 363 Other, net 228 208 ------ ----- 4,352 3,274 Valuation allowance (643) - ------ ------ Total $3,709 $3,274 ======= =======
A valuation allowance of $643,000 has been recorded against a portion of the Company's deferred tax assets related to the capital loss write-down of the Company's investment in Hudson River. F-16 A reconciliation of the income tax provision (benefit) calculated at the federal income tax statutory rate and the Company's effective income tax rate for 1999, 1998 and 1997 is as follows:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate 34.0% 34.0% (34.0%) State income taxes, net of federal income tax benefit 11.4 5.7 (0.8) Foreign taxes 19.7 2.1 (4.0) Valuation allowance 38.9 - - Other (11.3) 3.7 1.7 ------ ----- ------ Effective income tax rate 92.7% 45.5% (37.1%) ====== ===== ======
(12) COMPREHENSIVE INCOME Accumulated other comprehensive income (loss) activity for the three years ended December 31, 1999 is as follows:
Foreign Currency Unrealized Gain (Loss) Accumulated Other Translation On Marketable Securities Comprehensive Income (Loss) ---------------- ------------------------ --------------------------- (In thousands) January 1, 1997 ($ 113) $ - ($113) 1997 activity ( 127) - (127) ------- ------- ------ December 31, 1997 ( 240) - (240) 1998 activity ( 186) 603 417 ------- ------- ------ December 31, 1998 ( 426) 603 177 1999 activity 233 (811) (578) ------- ------- ------ December 31, 1999 ($193) ($208) ($401) ======= ======= ======
(13) EMPLOYEE BENEFITS Substantially all employees of the Company are covered by a noncontributory defined benefit pension plan. Benefits are based on years of service and the employee's compensation during the five highest consecutive compensation years. Costs under the plan are accrued and funded on the basis of accepted actuarial methods. Total pension expense approximated $405,000, $285,000, and $336,000, for the years ended December 31, 1999, 1998 and 1997, respectively. The net periodic pension cost of Swiss Army's pension plan in 1999, 1998 and 1997 includes the following components:
1999 1998 1997 ---- ---- ---- (in thousands) Service cost - benefits earned during the period $367 $286 $339 Interest cost on projected benefit obligation 182 166 189 Expected return on assets (141) (143) (171) Amortization of net transition asset (14) (14) (14) Amortization of unrecognized prior service cost (13) (13) (13) Amortization of net loss 24 3 6 ----- ----- ------ Net periodic pension cost $405 $285 $336 ===== ===== ======
F-17 The changes in benefit obligations and plan assets and the funded status reconciliation as of December 31, 1999 and 1998 for Swiss Army's pension plan are shown below:
1999 1998 ---- ---- (in thousands) Change in Benefit Obligation Benefit obligation, January 1 $2,742 $3,211 Service cost 367 286 Interest cost 182 166 Actuarial (gain) loss (581) (750) Benefits paid - expected (91) (171) ------- ------- Benefit obligation, December 31 $2,619 $2,742 ======= ======= Change in Plan Assets Fair value of plan assets, January 1 $1,726 $1,792 Actual return on plan assets 96 132 Company contributions 260 140 Benefits paid - actual (653) (338) ------- ------- Fair value of plan assets December 31 $1,429 $1,726 ======= ======= Funded Status Reconciliation Funded status, December 31 ($1,188) ($1,016) Unrecognized (gains) losses, net 460 460 Unrecognized prior service costs (230) (243) Unrecognized transition amount (42) (56) ------- ------- Accrued pension cost, December 31 ($1,000) ($855) ======= =======
Rates used in determining the actuarial present value of the projected benefit obligation are as follows:
December 31, 1999 1998 ---- ---- Discount rate 7.00% 6.25% Rate of increase in future compensation levels 4.50% 4.50% Expected long-term rate of return on plan assets 8.00% 8.00%
Plan assets consist principally of investments in fixed income securities, short-term investments and common stock. The Company maintains a 401(k) employee benefit plan pursuant to which participants can defer a certain percentage of their annual compensation in order to receive certain benefits upon retirement, death, disability or termination of employment. The Company can elect to make a matching contribution of up to 6% of annual eligible compensation per employee. The determination to make a matching contribution is made at the beginning of each fiscal year. During 1999, 1998 and 1997, the Company incurred expenses of approximately $173,000, $161,000, and $175,000, respectively, related to this plan. The Company offers no other post retirement benefits. F-18 (14) STOCKHOLDERS' EQUITY The Swiss Army Brands, Inc. 1996 Stock Option Plan provides for the grant of options to employees, including officers of the Company, and members of the Board of Directors. Under this plan and previous stock option plans, 760,093 shares of common stock are reserved and available for issuance. Options expire no later than ten years after the date of grant. Option prices equal at least 100% of the fair market value of Swiss Army's common stock on the date of grant. The vesting of options is determined by the Stock Option and Compensation Committee of the Board of Directors, which administers the plan, and for options outstanding as of December 31, 1999, vesting ranges from immediately upon grant to three years. The following table summarizes stock option plan and warrant activity for the three years ended December 31, 1999:
Number of Shares Option Price Outstanding at December 31, 1996 2,312,000 $ 5.25 - $14.50 Exercised (750) $ 5.25 Canceled (70,219) $ 12.25 - $14.00 ---------- Outstanding at December 31, 1997 2,241,031 $ 5.25 - $14.50 Granted (A) 555,000 $ 8.75 - $10.125 Exercised (9,500) $ 5.25 - $ 8.62 Canceled (270,780) $ 8.75 - $14.00 ---------- Outstanding at December 31, 1998 2,515,751 $ 5.25 - $14.50 Granted 3,000 $ 8.75 Exercised (10,000) $ 5.38 Canceled (274,501) $ 8.75 - $14.00 ---------- Outstanding at December 31, 1999 2,234,250 $ 5.25 - $14.50 ==========
Of the options and warrants outstanding at December 31, 1999, 2,006,750 are exercisable at a weighted average option price of $11.78 per share. (A) In September 1998, the Company issued 505,000 options to purchase common stock at $8.75 per share to various employees and officers. These options are exercisable in four equal installments over three years starting with the grant date. In November 1998, the Company issued 50,000 options to purchase common stock at $10.125 per share to two directors. Of these options, 25,000 options are exercisable in four equal installments over three years starting with the grant date, and 25,000 options are exercisable immediately. The weighted-average fair value of the stock options granted in 1999 and 1998 was approximately $3.53 and $3.51, respectively. The weighted-average fair value of the options was estimated using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 30%; expected life of options of six years; dividend yield of 0%; and risk free interest rate of 5.26% in 1999 and 4.91% in 1998, respectively. F-19 The Company accounts for stock options and warrants under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation cost has been recognized. Had compensation cost for the three years ending December 31, 1999, been determined under the principles of SFAS No. 123, the Company's net income (loss) and earnings per share would have been the following:
1999 1998 1997 ---- ---- ---- (in thousands, except per share data) Net income (loss) As reported: $120 $1,463 ($4,025) Pro forma: ($346) $ 812 ($5,320) Earnings per share As reported: Basic $0.02 $0.18 ($0.49) Diluted $0.01 $0.18 ($0.49) Pro forma: Basic ($0.04) $0.10 ($0.65) Diluted ($0.04) $0.10 ($0.65)
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts as SFAS No. 123 does not apply to stock options and warrants granted prior to 1995, and additional options and warrants may be granted in future years. In September 1998, the Company issued 25,000 shares of its common stock to certain employees and officers. The common stock vests in four equal installments over three years beginning with the grant date. The Company recognized $73,000 and $21,000 for the years ended December 31, 1999 and 1998, respectively, in stock compensation expense related to this grant. On September 16, 1998, the Company's Board of Directors authorized a repurchase of up to 400,000 shares of its common stock. Through December 31, 1999, the Company had repurchased 400,000 shares for a total purchase price of approximately $3,598,000. (15) COMMITMENTS AND CONTINGENCIES The Company has minimum purchase requirements under an agreement with Victorinox (see Note 5). At December 31, 1999, minimum rental payment commitments for office and warehouse space leased by Swiss Army under operating leases were, as follows (in thousands): 2000 $1,296 2001 828
During the years ended December 31, 1999, 1998 and 1997, rent expense was approximately $1,487,000, $1,374,000 and $1,390,000, respectively. At December 31, 1999, the Company has open contracts to purchase approximately 107.0 million Swiss francs in 2000 and 2001 as a hedge against future purchase of inventories at a weighted average rate of $1.509 Swiss Franc/dollar. F-20 The Company maintains split dollar life insurance agreements covering two members of the Board of Directors. Primarily, these policies can only be canceled upon the mutual agreement of the Company and the insured. However, if these policies were canceled at December 31, 1999, the Company would receive in cash an amount equal to the lesser of the cash surrender value or cumulative premiums paid to date on these policies, which was approximately $6,300,000. Under the terms of these life insurance policies, the Company will make approximate future premium payments, if the policies remain in force, as follows (in thousands): 2000 $ 873 2001 512 2002 493 2003 460 2004 and thereafter 2,200
In 1993, Swiss Army's Board of Directors adopted a charitable insurance program that enables Swiss Army to make a commitment to the Victorinox-Swiss Army Knife Foundation (the "Foundation"), a foundation that engages in various charitable activities including the promotion of athletic events for underprivileged urban youth. Under the program, Swiss Army owns, is the beneficiary of and pays all the premiums for life insurance policies on the lives of certain Board members. Pursuant to the program, upon the death of each Director, the Company retains a share of the insurance proceeds equal to the cumulative premiums paid by the Company for the policy on that Director's life. One half of any additional insurance proceeds received upon the death of an insured Director will be used to fulfill charitable pledges made to the Foundation. The remaining half of the additional proceeds will be used to fulfill charitable pledges recommended by the individual Directors. Swiss Army is generally bound to continue to pay all premiums on the policies for the lives of the insured Directors or, in the case of the Chairman of the Management Committee, as long as he is an officer or a board member or agrees to serve as a consultant to the Company. Swiss Army will make approximate future premium payments related to these programs as follows (in thousands): 2000 $1,115 2001 1,102 2002 1,102 2003 1,086 2004 and thereafter 4,914
Under existing federal tax laws, the receipt by Swiss Army of the proceeds from an insurance policy upon the death of a director would not result in regular taxable income to the Company; however, Swiss Army may be subject to alternative minimum tax on a portion of the receipts. When Swiss Army makes cash contributions to a designated charity, it will be entitled to a tax deduction equivalent to the sum of those contributions. The extent of the utilization of this deduction in that year will depend upon Swiss Army's taxable income, since Swiss Army is entitled to claim as charitable deductions only 10% of its taxable income in any year. However, these deductions may be carried forward for tax purposes for a period of five years. Based upon estimates prepared by the Company's insurance agent, the anticipated earnings impact related to the policies for both the Foundation and the two members of the Board of Directors is expected to be insignificant. F-21 On July 14, 1997, the Company filed with the American Arbitration Association in New York, New York a demand for arbitration against Precise Imports Corporation, the United States and Canadian distributor of Swiss Army Knives manufactured by Wenger S.A., the only company other than Victorinox supplying pocketknives to the Swiss Armed Forces. In the demand for arbitration, the Company charged that Precise had violated the license agreement dated June 30, 1992 between Precise and the Company by utilizing the trademark Swiss Army in ways prohibited by the agreement. In response, Precise alleged certain counterclaims. These claims and counterclaims between the Company and Precise were dismissed with prejudice on December 31, 1999 pursuant to the terms of a November 7, 1998 stipulation since neither party exercised its right to continue the proceeding. In addition, the Company is involved in certain legal matters relating to trademark, patent, and other general business matters. Management believes that the outcome of these legal matters will not have a material adverse effect on the financial position and results of operations of the Company. (16) SPECIAL CHARGES In 1997, the Company recorded $0.8 million of restructuring costs (included in selling, general and administrative expenses) , which were paid in 1998, and a special charge of $1.3 million (included in cost of sales) related to discontinued inventory. The restructuring costs primarily consisted of severance and related expenses. (17) SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes standards for the reporting of information about operating segments. The Company is engaged in one line of business - the importation, manufacture and distribution of cutlery, knives, multi-tools, watches and other consumer products. There were no material amounts of sales or transactions between or among geographic areas. Summarized financial information concerning the Company's reportable segment and geographic areas is shown in the following table. The "Other" column includes corporate related items and results of insignificant operations.
United States Canada International Other Total 1999 ---- Sales $113,471 $8,573 $6,117 $ 1,291 $129,452 Operating income (loss) 26,124 1,168 187 (22,938) 4,541 Identifiable assets 58,045 3,557 3,376 42,626 107,604 1998 ---- Sales $111,107 $8,483 $7,811 $ 450 $127,851 Operating income (loss) 22,674 1,435 338 (23,470) 977 Identifiable assets 52,998 3,512 4,832 39,062 100,404
F-22 (18) QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended (in thousands, except per share data) March 31 June 30 September 30 December 31 1999 ---- Net sales $23,570 $30,396 $33,026 $42,460 Gross profit 8,949 11,990 12,798 17,109 Income (loss) before income taxes (614) (2,183) 1,353 3,095 Net income (loss) (353) (2,126) 766 1,853 Earnings per share - basic ($0.04) ($0.27) $0.10 $0.23 Earnings per share - diluted ($0.04) ($0.27) $0.10 $0.22 1998 ---- Net sales $24,610 $30,187 $31,370 $41,684 Gross profit 9,235 11,637 12,690 16,420 Income before income taxes 480 173 806 1,224 Net income 286 103 465 609 Earnings per share $0.03 $0.01 $0.06 $0.08
There was no difference between basic and fully diluted earnings per share for the 1998 periods presented above. F-23
SWISS ARMY BRANDS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (in thousands) Column A Column B Column C Column D Column E Additions Balance At Charged to Balance At Beginning Costs and End of Classification of Year Expenses Deductions Year -------------- ---------- ---------- ---------- ---------- Year Ended December 31, 1999: Allowance for Doubtful Accounts $ 975 $ 85 $ - $1,060 ======= ====== ======= ======= Inventory Reserve $ 1,163 $ 51 $ - $1,215 ======= ====== ======= ======= Year Ended December 31, 1998: Allowance for Doubtful Accounts $ 975 $ - $ - $ 975 ======= ====== ======= ======= Inventory Reserve $ 2,852 $ - ($1,689) $ 1,163 ======= ====== ======= ======= Year Ended December 31, 1997: Allowance for Doubtful Accounts $ 1,032 $(57) - $ 975 ======= ====== ======= ======= Inventory Reserve $ 1,950 $ 1,310 (408) $2,852 ======= ====== ======= =======
F-24 Exhibits. Exhibit Title Exhibit No. ------------- ----------- (3) (A) Articles of Incorporation, as amended, incorporated by reference to the Exhibits to Quarterly Report on Form 10-Q for the fiscal year ended June 30, 1997. (B) By-laws, as amended, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (10) Material Contracts (A) Letter Agreement dated December 12, 1983 between Victorinox Cutlery Company and The Forschner Group., Inc., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (B) Mutual Agreement dated as of October 20, 1986 between Victorinox Cutlery Company and The Forschner Group, Inc., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (C) Letter Agreement dated as of October 20, 1986 between Victorinox Cutlery Company and The Forschner Group, Inc., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (D) Life insurance agreement dated as of December 7, 1991 between The Forschner Group, Inc. and Stanley R. Rawn, Jr., as Trustee u/a dtd. December 9, 1986 between Louis Marx, Jr. and Stanley R. Rawn, Jr., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (E) License Agreement dated June 30, 1992 between The Forschner Group, Inc. and Precise Imports Corporation, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (F) Life insurance agreement dated December 24, 1992 between The Forschner Group, Inc. and Louis Marx, Jr., as Trustee u/a dtd. as of October 24, 1988 between Stanley R. Rawn, Jr. and Barbara Rawn and Louis Marx, Jr., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (G) Mutual Agreement dated April 6, 1992 between The Forschner Group, Inc. and Victorinox Cutlery Company, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (H) 1993 Stock Option Plan, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (I) Lease dated May 3, 1993 between One Research Drive Associates Limited Partnership and The Forschner Group, Inc., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 19 (J) Life insurance agreement dated as of December 24, 1992 between The Forschner Group, Inc. and Louis Marx, Jr., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (K) Life insurance agreement dated as of September 24, 1993 between The Forschner Group, Inc. and Louis Marx, Jr., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (L) Life insurance agreement dated as of September 24, 1993 between The Forschner Group, Inc. and James D. Rawn, as Trustee u/a dtd. as of June 4, 1992 between Louis Marx, Jr., Grantor and James D. Rawn, Trustee, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (M) Mutual Agreement dated December 21, 1993 between The Forschner Group, Inc. and Victorinox Cutlery Company, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (N) 1994 Stock Option Plan, incorporated by reference to the Exhibits to Registration Statement on Form S-8, No. 33-87078 filed by The Forschner Group, Inc. (O) Services Agreement dated as of July 29, 1994 between The Forschner Group, Inc. and Brae Group, Inc., incorporated by reference to the Exhibits to Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1994. (P) Non-Incentive Stock Option Agreement dated as of July 29, 1994 between The Forschner Group, Inc. and Brae Group, Inc., incorporated by reference to the Exhibits to Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1994. (Q) Consulting Agreement dated as of December 7, 1991 by and between The Forschner Group, Inc. and Louis Marx, Jr., incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (R) First Amendment to Lease dated June 16, 1994 between The Forschner Group, Inc. and Pefran Trap Falls Associates, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (S) Life insurance agreement dated as of April 15, 1994 between The Forschner Group, Inc. and Lawrence T. Warble, as Trustee u/a dtd. as of March 21, 1994 between Stanley R. Rawn, Jr., Grantor and Lawrence T. Warble, Trustee, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (T) Employment agreement dated as of January 2, 1996 between The Forschner Group, Inc. and James W. Kennedy, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (U) Warrant dated as of December 13, 1995 between The Forschner Group, Inc. and J. Merrick Taggart, incorporated by reference to the Exhibits to Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 20 (V) Watch design and Consulting Agreement dated as January 2, 1995 between The Forschner Group, Inc., Polenberg, Inc. and Myron Polenberg Incorporated by reference to the Exhibits to quarterly report on Form 10-Q for the fiscal quarter ended March 31, 1996. (W) 1996 Stock Option Plan incorporated by reference to the Exhibits on Form 10-K for the fiscal year ended December 31, 1996. (X) Trademark Agreement dated as of December 18, 1996 by and between the Swiss Confederation represented by the Federal Military Department represented by the Federal Defense Production Group and Swiss Army Brands, Inc. (confidential treatment has been granted for certain portions of this exhibit) incorporated by reference to the Exhibits on Form 10-K for the fiscal year ended December 31, 1996. (Y) Asset Purchase Agreement dated January 31, 1997 among Cuisine de France Limited, Sabatier USA, LLC, Robert P. Wolff and Robert Candler incorporated by reference on Form 10-K for the fiscal year ended December 31, 1996. (Z) License Agreement dated May 15, 1997 by and between Swiss Army Brands, Inc. and St. John Knits, Inc., incorporated by reference to the Exhibits on Form 10-Q for the fiscal quarter ended June 30, 1997. (AA) Letter Agreement dated September 27, 1996 between Swiss Army Brands, Inc. and Victorinox Cutlery Company. (BB) Asset Purchase Agreement dated April 16, 1999 by and among Swiss Army Brands, Inc., Bear Cutlery, Inc. Bear MGC Cutlery, Inc., and its shareholders incorporated by reference on form 8-K dated April 16, 1999. (CC) The 1999 Amended and Restated Commercial Loan Agreement dated November 15, 1999 between Fleet National Bank and Swiss Army Brands, Inc.. (A list of exhibits and schedules to the agreement is set forth therein. The Company agrees to furnish to the Commission supplementally, upon request, a copy of any such exhibit or schedule not otherwise filed herewith.) 10.1 (21) Subsidiaries of Registrant. 21 (23) Consent of Arthur Andersen LLP. 23 (27) Financial Data Schedule. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SWISS ARMY BRANDS, INC. (Registrant) By/s/ J. Merrick Taggart J. Merrick Taggart President and Chief Executive Officer By/s/ Thomas M. Lupinski Thomas M. Lupinski Senior Vice President, Chief Financial Officer, Secretary, and Treasurer By/s/ Marc A. Gold Marc A. Gold Vice President and Controller Date: March 27, 2000 22 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ J. Merrick Taggart March 27, 2000 J. Merrick Taggart President, Chief Executive Office and Director /s/ A. Clinton Allen March 27, 2000 A. Clinton Allen Director /s/ Clarke H. Bailey March 27, 2000 Clarke H. Bailey Director /s/ Thomas A. Barron March 27, 2000 Thomas A. Barron Director /s/ Vincent D. Farrell, Jr. March 27, 2000 Vincent D. Farrell, Jr. Director /s/ Herbert M. Friedman March 27, 2000 Herbert M. Friedman Director /s/ Peter W. Gilson March 27, 2000 Peter W. Gilson Director /s/ Keith R. Lively March 27, 2000 Keith R. Lively Director /s/ Louis Marx, Jr. March 27, 2000 Louis Marx, Jr. Director /s/ Robert S. Prather, Jr. March 27, 2000 Robert S. Prather, Jr. Director 23 /s/ Stanley R. Rawn, Jr. March 27, 2000 Stanley R. Rawn, Jr. Director /s/ Eric M. Reynolds March 27, 2000 Eric M. Reynolds Director /s/ John Spencer March 27, 2000 John Spencer Director /s/ John V. Tunney March 27, 2000 John V. Tunney Director 24 EX-10.1 2 COMMERCIAL LOAN AGREEMENT FLEET NATIONAL BANK 1999 Amended and Restated Commercial Loan Agreement THIS 1999 AMENDED AND RESTATED COMMERCIAL LOAN AGREEMENT ("Agreement"), dated as of November 15, 1999, between FLEET NATIONAL BANK (the "Bank"), having an office at 157 Church Street, New Haven, Connecticut 06510 and SWISS ARMY BRANDS, INC. (the "Borrower"), having its chief executive office at One Research Drive, Shelton, Connecticut 06484. This Agreement constitutes the amendment and restatement of that certain 1998 Amended and Restated Commercial Revolving Line of Credit Agreement between the Borrower and the Lender dated as of September 30, 1998, as modified by a First Modification to 1998 Commercial Revolving Line of Credit Agreement dated as of April 22, 1999, a letter agreement dated as of August 6, 1999, a Second Modification to 1998 Commercial Revolving Line of Credit Agreement dated as of September 17, 1999, and a letter agreement dated October 15, 1999 (collectively, the "1998 Loan Agreement, as modified"). W I T N E S S E T H: Section 1. Definitions Unless otherwise defined or specified herein, all accounting terms shall be construed and all accounting determinations shall be made in accordance with GAAP. Account means accounts, chattel paper and instruments as those terms are defined in the Code, whether now owned or hereafter acquired by the Borrower. Account Debtor means any Person who is or may become obligated to Borrower under or on account of an Account. Advance means an advance of funds to the Borrower by the Bank pursuant to this Agreement under the Line of Credit or a reborrowing by the Borrower of an outstanding amount under the Line of Credit, which shall bear interest at the Base Rate, the LIBOR Rate or the Cost of Funds Rate. Affiliate means any person or corporation which directly or indirectly controls, or is controlled by, or is under common control with the Borrower. Agreement means this 1999 Amended and Restated Commercial Loan Agreement. Applicable Interest Period means the Interest Period selected by the Borrower pursuant to this Agreement. Base Rate Advance means an Advance that bears interest at a rate per annum equal to the Base Rate. Base Rate means the variable per annum rate of interest so designated by the Bank from time to time as its Base Rate. The Base Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. Borrowing Base means seventy-five percent (75%) of the face value of the Eligible Accounts plus twenty five percent (25%) of the value of the Eligible Inventory (determined according to the lower of market value or cost on a last in first out basis) minus the then currently outstanding balance under the Term Loan. Borrowing Base Certificate means a form for reporting the Borrowing Base a specimen of which is attached hereto as Exhibit 1 or such other form as the Bank may require from time to time. Borrowing Date means the date on which the Bank shall make an Advance pursuant to the terms of this Agreement. Business Day means in respect of any date that is specified in this Agreement or the Notes to be subject to adjustment in accordance with the Modified Business Day Convention, a day on which commercial banks settle payments in (i) New York or London if the payment obligation is calculated by reference to LIBOR, or (ii) Connecticut, if the payment obligation is calculated by reference to any Base Rate. Capital Assets means assets that in accordance with GAAP are required or permitted to be depreciated or amortized on Borrower's balance sheet. Capital Leases means capital leases, conditional sales contracts and other title retention agreements relating to the purchase or acquisition of Capital Assets. Code means the Uniform Commercial Code in effect in Connecticut. Control shall be deemed to exist if any Person shall have possession, directly or indirectly, of the power to direct the management or policies of the Borrower or any Person deemed to be an Affiliate of the Borrower, and shall be deemed to include any holder of 10% or more of any stock or other interest in the Borrower or in any Person deemed to be an Affiliate of the Borrower, whether such holding is direct or indirect. Cost of Funds means the per annum rate of interest which Bank is required to pay, or is offering to pay, for wholesale liabilities, adjusted for reserve requirements and such other requirements as may be imposed by federal, state or local government and regulatory agencies, as determined by Fleet Treasury Group. Cost of Funds Advance means an Advance that bears interest at a rate per annum equal to the Cost of Funds Rate. Cost of Funds Rate Loan shall mean a Cost of Funds Advance or the Term Loan bearing interest at the Term Loan Cost of Funds Rate. Cost of Funds Rate means an interest rate per annum equal at all times during an Interest Period to the aggregate of (i) Cost of Funds and (ii) the Interest Rate Margin. Current Maturity of Long-Term Debt ("CMLTD") means the current maturity of long-term Indebtedness paid during the applicable period, including, but not limited to, amounts required to be paid during such period under Capital Leases. Current Ratio means the ratio of Total Current Assets to Total Current Liabilities. Dividends means, for the applicable period, the aggregate of all amounts paid or payable as dividends, with respect to Borrower's shares of stock, whether now or hereafter outstanding. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") means, for the applicable period, income from continuing operations, excluding the effect of any non-cash reductions in the value of investments on the Borrower's balance sheet, before the payment of interest and taxes plus depreciation and amortization, all as determined in accordance with GAAP. Eligible Accounts shall be determined by the Bank, upon delivery to Bank of a Borrowing Base Certificate, in the reasonable exercise of its discretion, as to which Accounts listed thereon shall be deemed to be "Eligible Accounts". In making this determination, Bank will consider, but shall not be limited to, the following criteria: (A) The goods or services giving rise to such Account have been shipped or delivered to or performed for an Account Debtor (i) on an absolute sale basis and not on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return agreement, (ii) on an open account basis, (iii) no material part of the subject goods or services has been returned, rejected, lost or damaged, (iv) the Account is not evidenced by chattel paper or an instrument of any kind, and (v) the Account Debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding of any kind; (B) If the Account Debtor is located outside the United States, (i) the subject goods shall have been shipped or the services rendered after receipt, by Borrower from the Account Debtor, of an irrevocable letter of credit, which letter of credit shall have been confirmed by a financial institution acceptable to Bank and shall be in form and substance acceptable to Bank and shall be transferred, assigned or otherwise made payable to Bank in form and substance satisfactory to Bank, and (ii) the Account shall be payable in the full amount of the face value of the Account in United States dollars; (C) The Account is a valid, legally enforceable obligation of the Account Debtor thereunder and is not subject to any offset or other defense on the part of such Account Debtor or to any claim on the part of such Account Debtor denying liability thereunder; provided, however, that, if it is subject to any such offset, defense or claim, it shall be ineligible only to the extent of such offset, defense or claim; (D) The Account is subject to a duly perfected first priority security interest in favor of the Bank; (E) The Account is subject to no lien or security interest whatsoever, except for the security interest of Bank hereunder and liens or security interests which have been expressly subordinated to the security interest of Bank in form and substance satisfactory to Bank; (F) The Account is evidenced by an invoice or other proof of delivery in form acceptable to Bank; (G) The Account has not remained unpaid for a period exceeding ninety (90) days after the due date; (H) The Account is not owing from an Account Debtor which is located in the State of New Jersey or the State of Minnesota unless Borrower has filed a Notice of Business Activities Report with the New Jersey Division of Taxation or the applicable Minnesota agency, as appropriate, for the then current year; (I) The Account does not arise out of transactions with an employee, officer, agent, director, stockholder, Affiliate, or Subsidiary of Borrower; (J) The Account does not arise out of a transaction with the United States or any department or agency thereof, unless assignment of which to Bank has been properly filed in accordance with the Federal Assignment of Claims Act; and (K) The Account is not an Account which is, or may become, a contra account. Eligible Inventory shall be determined by the Bank, upon delivery to Bank of a Borrowing Base Certificate, in the reasonable exercise of its discretion, as to what Inventory listed thereon shall be deemed to be "Eligible Inventory." In making this determination, Bank will consider, but shall not be limited to, the following criteria: (A) The Inventory consists of finished goods that are useable and saleable by the Borrower or Bear Cutlery, Inc. in the ordinary course of business; (B) The Inventory complies with all applicable laws, regulations and rules; (C) The Inventory is located in the United States or the province of Ontario, Canada; (D) The Inventory is subject to a duly perfected first priority security interest in favor of the Bank; and (E) The Inventory is subject to no lien or security interest whatsoever, except for the security interest of Bank hereunder and liens or security interests which have been expressly subordinated to the security interest of Bank in form and substance satisfactory to Bank. Events of Default shall have the meaning given such term in Section 8 of this Agreement. Eurocurrency Liabilities shall have the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. Fixed Rate Advance means a LIBOR Advance or a Cost of Funds Advance. Funded Debt means (i) Indebtedness on account of borrowed money; and (ii) obligations under Capital Leases. GAAP means generally accepted accounting principles in the United States of America, as from time to time in effect; provided, however, that for purposes of compliance of Section 7 of this Agreement and the related definitions, GAAP means such principles as in effect on the date of the preparation and delivery of the financial statements described in Section 3.3 and Schedule A hereto and consistently followed, without giving effect to any subsequent changes other than changes consented to in writing by the Bank. Guarantor means, individually and collectively, Excelsior Advertising, Inc., Swiss Army Brand, Ltd., Swiss Army Brands (Suisse) S.A., and Bear Cutlery, Inc. Indebtedness means all obligations that in accordance with GAAP should be classified as liabilities upon Borrower's balance sheet or to which reference should be made by footnotes thereto. Intangible Assets means assets that in accordance with GAAP are properly classifiable as intangible assets, including, but not limited to, goodwill, franchises, licenses, patents, trademarks, tradenames and copyrights. Interest means, for the applicable period, all interest paid or payable, including, but not limited to, interest paid or payable on Indebtedness and on Capital Leases, determined in accordance with GAAP. Interest Period means with respect to the Term Loan and each Fixed Rate Advance: (i) initially the period (A) commencing on the Borrowing Date of the Term Loan or such Advance, and (B) ending at the end of the Applicable Interest Period, for LIBOR Loans - 7, 30, 60 or 90 days thereafter, and for Cost of Funds Rate Loans, 7, 14, or 21 days thereafter, as the case may be, as selected by the Borrower, and (ii) thereafter, such subsequent Interest Period for the Term Loan or such Fixed Rate Advance shall begin on the last day of the preceding Interest Period for the Term Loan or such Fixed Rate Advance and shall end at the end of the Applicable Interest Period as the Borrower may select pursuant to this Agreement; provided that (A) any Interest Period for a LIBOR Loan which would otherwise end on a day which is not a Business Day shall end and the next Interest Period shall commence on the next preceding or the next succeeding day which is a Business Day as determined conclusively by the Bank in accordance with the then current bank practices in London, England, (B) any Interest Period for a Cost of Funds Rate Loan which would otherwise end on a day which is not a Business Day shall end and the next Interest Period shall commence on the next preceding or the next succeeding day which is a Business Day as determined conclusively by the Bank; and (C) no Interest Period for the Term Loan or a Fixed Rate Advance shall end after the Termination Date. Interest Rate Margin means, with regard to the Term Loan and the Line of Credit, the percentage rate by which LIBOR and Cost of Funds is increased as determined by referring to the Performance Pricing Grid attached hereto as Schedule B. Inventory means inventory, as the term is defined in the Code, whether now owned or hereafter acquired by the Borrower, and, including, without limitation, any and all goods, merchandise and other personal property, wheresoever located and whether or not in transit, now owned or hereafter acquired by the Borrower, which is or may at any time be held for sale or lease, or furnished or to be furnished under any contract of service or held as raw materials, work in process, supplies or materials used or consumed in the Borrower's businesses, and all such property the sale or other disposition of which has given rise to Accounts or Documents (as that term is defined in the Code) and which has been returned to or repossessed or stopped in transit by the Borrower. LIBOR Advance means an Advance that bears interest at a rate per annum equal to the LIBOR Interest Rate. LIBOR shall mean, as applicable to any Term Loan LIBOR Rate or LIBOR Advance (collectively, a "LIBOR Loan"), the rate per annum (rounded upward, if necessary, to the nearest 1/32 of one percent) as determined on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such LIBOR Loan which appears on the Telerate page 3750 as of 11:00 a.m. London time on the day that is two (2) London Banking Days preceding the first day of such LIBOR Loan; provided, however, if the rate described above does not appear on the Telerate system on any applicable interest determination date, the LIBOR rate shall be the rate (rounded upwards as described above, if necessary) for deposits in U.S. dollars for a period substantially equal to the interest period on the Reuters Page "LIBO" or such other page as may replace the LIBO Page on that service for the purpose of displaying such rates), as of 11:00 a.m. (London Time), on the day that is two (2) London Banking Days prior to the beginning of such interest period. "Banking Day" shall mean, in respect of any city, any date on which commercial banks are open for business in that city. If both the Telerate and Reuters system are unavailable, then the rate for that date will be determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such LIBOR Loan which are offered by four major banks in the London interbank market at approximately 11:00 a.m. London time, on the day that is two (2) London Banking Days preceding the first day of such LIBOR Loan as selected by the calculation agent. The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. dollar deposit offered rate. If at least two (2) such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two (2) quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such LIBOR Loan offered by major banks in New York City at approximately 11:00 a.m. New York City time, on the day that is two (2) London Banking Days preceding the first day of such LIBOR Loan. In the event that Bank is unable to obtain any such quotation as provided above, it will be deemed that LIBOR pursuant to LIBOR Loan cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Rate with respect to LIBOR deposits of Bank, then for any period during which such Reserve Rate shall apply, LIBOR shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Rate. LIBOR Interest Rate means an interest rate per annum equal at all times during an Interest Period to the aggregate of (i) LIBOR and (ii) the Interest Rate Margin. LIBOR Loan shall mean a LIBOR Advance or the Term Loan bearing interest at the Tem Loan LIBOR Rate. Line of Credit means the revolving line of credit set forth in Section 2.1 of this Agreement that the Bank may advance to the Borrower and the Borrower may borrow from the Bank. Line of Credit Note means the note executed and delivered by the Borrower in substantially the form of Exhibit 2 hereto and which evidences the Line of Credit. Modified Following Business Day Convention shall mean the convention for adjusting any relevant date if it would otherwise fall on a day that is not a Business Day. The following terms, when used in conjunction with the term, "Modified Following Business Day Convention", and a date, shall mean that an adjustment will be made if that date would otherwise fall on a day that is not a Business Day so that the date will be the first following day that is a Business Day. Net Income (Net Loss) means the net income (or net loss, expressed as a negative number) for any period, after all taxes actually paid or accrued and all expenses and other charges determined in accordance with GAAP. Notes means the Line of Credit Note and the Term Note. Performance Pricing Grid means that chart outlining the applicable adjustment to the interest rate payable under the Line of Credit Note and the Term Note, respectively, which chart is attached hereto as Schedule B. Person means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party, or government (whether national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). Related Agreements means the various agreements and documents described under the heading "Related Agreements" in Schedule A to this Agreement and such other documents, delivered or caused to be delivered, by the Borrower to the Bank. Reserve Rate means the rate (expressed as a decimal) at which the Bank would be required to maintain reserves under Regulation D of the Board of Governors of the Federal Reserve System against Eurocurrency Liabilities if such liabilities were outstanding. The LIBOR Interest Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Rate, and the rate of interest thereby effected shall simultaneously change. Subsidiary means any corporation, a majority of whose outstanding stock having ordinary voting powers for the election of directors, shall at any time be owned or controlled by the Borrower or one or more of its subsidiaries. Stockholder Equity means total stockholders' equity determined in accordance with GAAP. Tangible Net Worth means Stockholder Equity minus Intangible Assets. Termination Date shall have the meaning given such term in Section 2.1 of this Agreement. Term Loan means the Term Loan as defined in Section 2.A. hereof. Term Loan Base Rate means the variable per annum rate of interest equal at all times to the Base Rate. Term Loan Cost of Funds Rate means an interest rate per annum equal at all times during an Interest Period to the aggregate of (i) Cost of Funds and (ii) the Interest Rate Margin. Term Loan Fixed Rate means the Term Loan LIBOR Rate or the Term Loan Cost of Funds Rate. Term Loan LIBOR Rate means an interest rate per annum equal at all times during an Interest Period to the aggregate of (i) LIBOR and (ii) the Interest Rate Margin. Term Note means the 1999 Commercial Promissory Term Note substantially in the form of Exhibit 3 hereto. Total Current Assets means total current assets determined in accordance with GAAP. Total Current Liabilities means total current Indebtedness determined in accordance with GAAP. Total Liabilities means total Indebtedness determined in accordance with GAAP. Working Capital means Total Current Assets less Total Current Liabilities. Year 2000 Compliant means, with regard to the Borrower and/or its suppliers, vendors and customers, that all software, embedded microchips, and other processing capabilities utilized by, and material to the business operations or financial condition of, such entity are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates on and after January 1, 2000. Year 2000 Risk means the risk that computer applications used by Borrower and/or its suppliers, vendors and customers may be unable to recognize and perform without error date-sensitive functions involving certain dates prior to and any date after December 31, 1999. Section 2. The Line of Credit 2.1 The Line of Credit. Pursuant to the terms of this Agreement and upon the satisfaction of the conditions precedent referred to in Section 4 hereof, the Bank will lend to the Borrower, and the Borrower may, in its sole discretion, borrow from the Bank, Advances not to exceed the aggregate principal amount to be outstanding at any time of the lesser of: (a) Sixteen Million and No/100 DOLLARS ($16,000,000.00); or (b) the amount of the Borrowing Base (the "Line of Credit") as evidenced by the Line of Credit Note. Unless an Event of Default occurs and is continuing, the Borrower may borrow, repay and reborrow Advances under this Agreement during the period from the date hereof until June 30, 2001(as such date may be extended in writing from time to time in the Bank's sole and absolute discretion, the "Termination Date"); provided, however, that all outstanding principal plus accrued and unpaid interest shall be paid in full on the Termination Date as adjusted by the Modified Following Business Day Convention. 2.2 Advances. (a) The Borrower may, in writing, request that the Bank make an Advance under the Line of Credit. Each such written request shall be accompanied by a certificate by the president or chief financial officer of the Borrower stating that: (i) the Borrower is current with its obligation to submit Borrowing Base Certificates to the Bank pursuant to Section 5.1(f) of this Agreement; and (ii) the aggregate outstanding Advances are not in excess of the lesser of the Borrowing Base and the Line of Credit; and (iii) the making of the requested Advance will not increase the aggregate outstanding Advances to an amount greater than the lesser of the Borrowing Base and the Line of Credit. If any Advance is made, the Advance shall be made by a deposit to any of Borrower's accounts with the Bank. Advances will be payable as provided in the Line of Credit Note. In the event the Borrower fails to provide notice of the type of Advance to be effected by a new borrowing, Borrower shall be deemed to have elected a Base Rate Advance. If any Advance is made, the Bank may, at its option, record on the books and records of the Bank or endorse on a schedule attached to the Line of Credit Note, an appropriate notation evidencing any Advance, each repayment on account of the principal thereof and the amount of interest paid; and the Borrower authorizes the Bank to maintain such records or make such notations and agrees that the amount shown on the books and records or on said schedule, as applicable, as outstanding from time to time shall constitute the amount owing to the Bank pursuant to this Agreement, absent manifest error. In the event the amount shown on the schedule conflicts with the amount noted as due pursuant to the books and records of the Bank, the books and records of the Bank shall control the disposition of the conflict. (b) Whenever Borrower desires that the Bank make an Advance which is to be a Base Rate Advance, it shall give the Bank notice of such request. The Borrowing Date relating to such Advance shall be a Business Day. (c) When Borrower desires that Bank make an Advance which is to be a LIBOR Advance or a Cost of Funds Advance, it shall give Bank not less than two (2) Business Days notice of such request. The Borrowing Date relating to such Advance shall be a Business Day. No LIBOR Advance will be made in an amount less than $100,000 and no more than eight (8) Fixed Rate Advances may be outstanding under the Line of Credit at any time. (d) Each request for an Advance shall specify whether such Advance is to be a Base Rate Advance, or a LIBOR Advance or a Cost of Funds Advance and, once so specified, such specification may not be changed except with prior approval of the Bank. Each such request shall further specify the Interest Period to be applicable to such Advance as follows: (i) for Base Rate Advances no Interest Period need be specified; and (ii) for LIBOR Advances, the Interest Period may be of a duration of 7, 30, 60 or 90 days; and (iii) for Cost of Funds Advances, the Interest Period may be of a duration of from 7, 14 or 21 days. 2.2.A Letters of Credit; Reduction in Availability. (a) Within the limits set forth in 2.1 of this Agreement and subject to the provisions of this Section 2.2.A, the Borrower may, from time to time, request the Lender to issue commercial letters of credit and standby letters of credit ("Letters of Credit"). The aggregate outstanding available undrawn amount of all outstanding Letters of Credit shall not exceed $10,000,000. (b) The amount of Advances which would otherwise be available to the Borrower under the Line of Credit shall be reduced by the aggregate outstanding available undrawn amount of outstanding Letters of Credit. (c) A draw under a Letter of Credit shall be deemed to be a request for an Advance under the Line of Credit. (d) No Letters of Credit shall be issued with an expiration date later than 180 days after the Termination Date. (e) Borrower shall execute any additional documentation as the Bank may request in connection with the issuance of Letters of Credit including, without limitation, reimbursement agreements. (f) The Bank's obligation to issue Letters of Credit is contingent upon the payment by the Borrower of the applicable fees from the Bank's then current fee schedule for commercial letters of credit, and a fee of 1.5% of the face amount for standby letters of credit. 2.3 Interest; Principal. LIBOR Advances, Base Rate Advances and Cost of Funds Advances will bear interest at a per annum rate as provided in the Line of Credit Note. Such interest shall be payable as specified in the Line of Credit Note. Principal shall also be repaid in accordance with the terms of the Line of Credit Note. Upon the occurrence of and during the continuance of an Event of Default or after maturity or after judgment has been rendered on the Line of Credit Note, Borrower's right to select pricing options shall, at the option of the Bank, cease and the unpaid principal of all advances shall, at the option of the Bank, bear interest at a rate which is two (2) percentage points per annum greater than that which would otherwise be applicable. All agreements between Borrower and Bank are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Bank for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof provided, however that in the event there is a change in the law which results in a higher permissible rate of interest, then the Line of Credit Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of Borrower and Lender in the execution, delivery and acceptance of the Line of Credit to contract in strict compliance with the laws of the State of Connecticut from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof, the Line of Credit Note or of any of the Related Agreements at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from any circumstances whatsoever Bank should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between Borrower and Bank. 2.4 Computation of Interest. All computations of interest on the Line of Credit Note shall be made on the basis of a three hundred sixty (360) day year and the actual days elapsed. 2.5 Payment of Principal and Interest. All payments shall be made in lawful money of the United States in immediately available funds. The Bank is authorized (but not required) to charge principal and interest and all other amounts due hereunder and under the Line of Credit Note to any account of the Borrower when and as it becomes due. 2.6 Prepayments. (a) The Borrower may prepay Base Rate Advances LIBOR Advances or Cost of Funds Advances in accordance with the terms of the Line of Credit Note. If at any time, the aggregate principal amount of all Advances under the Line of Credit Note shall exceed the lesser of the Borrowing Base and the Line of Credit, the Borrower shall immediately prepay so much of the outstanding principal balance, together with accrued interest on the portion of principal so prepaid as shall be necessary in order that the unpaid principal balance, after giving effect to such prepayments, shall not exceed the lesser of the Borrowing Base and the Line of Credit. Any such prepayment will, at the option of the Bank, be applied first to the payment of all costs and expenses incurred by the Bank and arising out of this Agreement, the Notes or any Related Agreement and which has not been paid or reimbursed to the Bank, then to accrued interest to the date of the prepayment and the remainder to the outstanding principal. (b) Notwithstanding any other provision of this Agreement, (i) if, after the date of this Agreement, the introduction of or any change in any law or regulation (or change in the interpretation thereof by regulatory authorities) applicable to the Bank, shall make it, or (ii) if any central bank or other governmental authority having jurisdiction over the Bank shall assert that it is, unlawful for the Bank to perform its obligations hereunder to make LIBOR Advances to the Borrower or to continue to fund or maintain LIBOR Advances to the Borrower hereunder, then, on notice thereof by the Bank to the Borrower, (A) the obligation of the Bank to the Borrower to make LIBOR Advances shall terminate, and (B) within five (5) Business Days after the Bank gives notice, the Borrower shall prepay in full all such LIBOR Advances then outstanding, which the Bank is prohibited from maintaining or continuing, together with interest accrued thereon, provided, however, the Borrower may elect to convert all outstanding LIBOR Advances to Base Rate Advances. (c) The Borrower may, at its option, prepay any Base Rate Advances, in whole or in part, at any time, without fee or premium. (d) If at any time (i) the interest rate on the Line of Credit is a fixed rate, and (ii) Bank in its sole discretion should determine that current market conditions can accommodate a prepayment request, Borrower shall have the right at any time and from time to time to prepay the Line of Credit in whole or in part, in minimum increments of $100,000, and Borrower shall pay to Bank a make whole premium in an amount computed as follows: The current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the maturity date of the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made, shall be subtracted from the "cost of funds" component of the fixed rate in effect at the time of prepayment. If the result is zero or a negative number, there shall be no make whole premium. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. Said amount shall be reduced to present value calculated by using the above-referenced United States Treasury security rate and the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. The resulting amount shall be the make whole premium due to Bank upon prepayment of the fixed rate loan. Each reference in this paragraph to "Fixed Rate Election" shall mean the effective election by Borrower pursuant to paragraph 2.2 of this Loan Agreement and the Line of Credit Note of a Fixed Rate Advance. If by reason of the occurrence and continuance of an Event of Default Bank elects to declare the Line of Credit to be immediately due and payable, then any make whole premium with respect to the Line of Credit shall become due and payable in the same manner as though Borrower had exercised such right of prepayment 2.7 Intentionally Omitted. 2.8 Late Charge. If the entire amount of any required installment of principal and/or interest is not paid in full within ten (10) days after the same is due, Borrower shall, at the discretion of the Bank, pay to the Bank a late fee equal to five percent (5%) of the required payment. The minimum late charge shall be $25.00. The assessment and collection of a late fee by the Bank shall not waive any Event of Default or preclude the exercise of the other rights and remedies available to the Bank hereunder. 2.9 Additional Payments. (a) If the Bank shall deem applicable to this Agreement or the Line of Credit Note (including, in each case, any borrowed and any unused portion thereof), any requirement of any law of the United States of America, any regulation, order, interpretation, ruling, official directive or guideline (whether or not having the force of law) of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation or any other board or governmental or administrative agency of the United States of America which shall impose, increase, modify or make applicable to this Agreement or the Line of Credit Note or cause this Agreement or the Line of Credit Note to be included in any reserve, special deposit, calculation used in the computation of regulatory capital standards, assessment or other requirement which imposes on the Bank any cost that is attributable to the maintenance thereof, then, and in each such event, the Borrower shall promptly pay the Bank, upon its demand, such amount as will compensate the Bank for any such cost, which determination may be based upon the Bank's reasonable allocation of the aggregate of such costs resulting from such events. In the event any such cost is a continuing cost, a fee payable to the Bank may be imposed upon the Borrower periodically for so long as any such cost is deemed applicable by the Bank, in an amount determined by the Bank to be necessary to compensate the Bank for any such cost, which determination may be based upon the Bank's reasonable allocation of the aggregate of such costs resulting from such events. The determination by the Bank of the existence and amount of any such costs shall, in the absence of manifest error, be conclusive. (b) In the event the Bank shall determine that, by reason of circumstances affecting the London inter-bank Eurodollar market, adequate and reasonable methods do not exist for ascertaining the LIBOR Interest Rate which would otherwise be applicable during any Interest Period, the Bank shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower) to the Borrower at least one Business Day before the first day of such Interest Period. In such event: (i) any pending notice of borrowing which specified a LIBOR Advance shall be of no effect; and (ii) the obligation of the Bank to make the LIBOR Advance shall be suspended until the Bank determines that the circumstances giving rise to such suspension no longer exist, whereupon the Bank shall notify the Borrower. (c) If, after the date of this Agreement, there shall be any increase in the cost to the Bank due to either (i) the introduction of or any change in any law or regulation (or the interpretation thereof by regulatory authorities) or (ii) compliance with any written guideline or written request from any central bank or other governmental authority having jurisdiction over Bank (whether or not such guideline or request has the force of law), of agreeing to make or making, funding or maintaining LIBOR Advances to the Borrower, then the Borrower shall, from time to time, upon such notice by the Bank, pay to the Bank additional amounts sufficient to reimburse the Bank for such increased cost. Section 2A. The Term Loan 2A.1 The Term Loan. Pursuant to the terms of this Agreement and upon the satisfaction of the conditions precedent referred to in Section 4 hereof, the Bank will lend to the Borrower the aggregate principal amount of Seven Million and No/100 DOLLARS ($7,000,000.00) (the "Term Loan") as evidenced by the Term Note. All outstanding principal plus accrued and unpaid interest shall be paid in full on the Termination Date (as the Termination Date may be extended from time to time) or November 1, 2004 (the "Maturity Date") should the Termination Date be extended beyond the Maturity Date. 2A.2 Interest Rate. (a) The outstanding principal balance of the Term Loan shall bear interest equal to a Term Loan Base Rate, the Term Loan LIBOR Rate, or the Term Loan Cost of Funds Rate. (b) Whenever Borrower desires that the Term Loan bear interest at the Term Loan Base Rate, it shall give the Bank notice of such request. The effective date of a Term Loan Base Rate request shall be a Business Day. (c) Whenever Borrower desires that the Term Loan bear interest at the Term Loan LIBOR Rate or the Term Loan Cost of Funds Rate: it shall give Bank not less than two (2) Business Days notice of such request; and the effective date of a Term Loan LIBOR Rate request or Term Loan Cost of Funds Rate shall be a Business Day. (d) Each request regarding the interest rate applicable to the Term Loan shall specify whether the interest rate is to be the Term Loan Base Rate, the Term Loan LIBOR Rate, or the Term Loan Cost of Funds Rate and, once so specified, such specification may not be changed except with prior approval of the Bank. Each such request shall further specify the Interest Period to be applicable to such request as follows: (i) for Term Loan Base Rate no Interest Period need be specified; (ii) for Term Loan LIBOR Rate, the Interest Period may be of a duration of 7, 30, 60 or 90 days; and (iii) for Term Loan Cost of Funds Rate, the Interest Period may be of a duration of from 7, 14 or 21 days. 2A.3 Interest; Principal. The Term Loan will bear interest at a per annum rate as provided in the Term Note. Such interest shall be payable as specified in the Term Note. Principal shall also be repaid in accordance with the terms of the Term Note. Upon the occurrence of and during the continuance of an Event of Default or after maturity or after judgment has been rendered on the Term Note, Borrower's right to select pricing options shall, at the option of the Bank, cease and the unpaid principal of the Term Loan shall, at the option of the Bank, bear interest at a rate which is two (2) percentage points per annum greater than that which would otherwise be applicable. All agreements between Borrower and Bank are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Bank for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof provided, however that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of Borrower and Lender in the execution, delivery and acceptance of the Term Note to contract in strict compliance with the laws of the State of Connecticut from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof, the Term Note or of any of the Related Agreements at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from any circumstances whatsoever Bank should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between Borrower and Bank. 2A.4 Computation of Interest. All computations of interest on the Term Note shall be made on the basis of a three hundred sixty (360) day year and the actual days elapsed. 2A.5 Payment of Principal and Interest. All payments shall be made in lawful money of the United States in immediately available funds. The Bank is authorized (but not required) to charge principal and interest and all other amounts due hereunder and under the Term Note to any account of the Borrower when and as it becomes due. 2A.6 Prepayments. (a) The Borrower may prepay the Term Loan in accordance with the terms of the Term Note. Any such prepayment will, at the option of the Bank, be applied first to the payment of all costs and expenses incurred by the Bank and arising out of this Agreement, the Term Note or any Related Agreement and which has not been paid or reimbursed to the Bank, then to accrued interest to the date of the prepayment and the remainder to the outstanding principal. (b) Notwithstanding any other provision of this Agreement, (i) if, after the date of this Agreement, the introduction of or any change in any law or regulation (or change in the interpretation thereof by regulatory authorities) applicable to the Bank, shall make it, or (ii) if any central bank or other governmental authority having jurisdiction over the Bank shall assert that it is, unlawful for the Bank to perform its obligations hereunder to continue to offer or maintain the Term Loan LIBOR Rate for the Borrower hereunder, then, on notice thereof by the Bank to the Borrower, (A) the obligation of the Bank to the Borrower to offer or maintain the Term Loan LIBOR Rate shall terminate, and (B) within five (5) Business Days after the Bank gives notice, the Borrower shall convert the outstanding principal balance of the Term Loan to the Term Loan Base Rate. (c) The Borrower may, at its option, prepay any Base Rate Advances, in whole or in part, at any time, subject only to the prepayment premium, if applicable, as set forth in the Term Note. (d) If at any time (i) the interest rate on the Term Loan is a fixed rate, and (ii) Bank in its sole discretion should determine that current market conditions can accommodate a prepayment request, Borrower shall have the right at any time and from time to time to prepay the Term Loan in whole or in part, in minimum increments of $100,000, and Borrower shall pay to Bank a make whole premium in an amount computed as follows: The current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the maturity date of the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made, shall be subtracted from the "cost of funds" component of the fixed rate in effect at the time of prepayment. If the result is zero or a negative number, there shall be no make whole premium. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. Said amount shall be reduced to present value calculated by using the above-referenced United States Treasury security rate and the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. The resulting amount shall be the make whole premium due to Bank upon prepayment of the fixed rate loan. Each reference in this paragraph to "Fixed Rate Election" shall mean the effective election by Borrower pursuant to paragraph 2A.2 of this Loan Agreement and the Term Note of a Term Loan LIBOR Rate or the Term Loan Cost of Funds Rate. If by reason of the occurrence and continuance of an Event of Default Bank elects to declare the loan to be immediately due and payable, then any make whole premium with respect to the Term Loan shall become due and payable in the same manner as though Borrower had exercised such right of prepayment 2A.8 Late Charge. If the entire amount of any required installment of principal and/or interest is not paid in full within ten (10) days after the same is due, Borrower shall, at the discretion of the Bank, pay to the Bank a late fee equal to five percent (5%) of the required payment. The minimum late charge shall be $25.00. The assessment and collection of a late fee by the Bank shall not waive any Event of Default or preclude the exercise of the other rights and remedies available to the Bank hereunder. 2A.9 Additional Payments. (a) If the Bank shall deem applicable to this Agreement or the Term Note (including, in each case, any borrowed and any unused portion thereof), any requirement of any law of the United States of America, any regulation, order, interpretation, ruling, official directive or guideline (whether or not having the force of law) of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation or any other board or governmental or administrative agency of the United States of America which shall impose, increase, modify or make applicable to this Agreement or the Term Note or cause this Agreement or the Term Note to be included in any reserve, special deposit, calculation used in the computation of regulatory capital standards, assessment or other requirement which imposes on the Bank any cost that is attributable to the maintenance thereof, then, and in each such event, the Borrower shall promptly pay the Bank, upon its demand, such amount as will compensate the Bank for any such cost, which determination may be based upon the Bank's reasonable allocation of the aggregate of such costs resulting from such events. In the event any such cost is a continuing cost, a fee payable to the Bank may be imposed upon the Borrower periodically for so long as any such cost is deemed applicable by the Bank, in an amount determined by the Bank to be necessary to compensate the Bank for any such cost, which determination may be based upon the Bank's reasonable allocation of the aggregate of such costs resulting from such events. The determination by the Bank of the existence and amount of any such costs shall, in the absence of manifest error, be conclusive. (b) In the event the Bank shall determine that, by reason of circumstances affecting the London inter-bank Eurodollar market, adequate and reasonable methods do not exist for ascertaining the LIBOR Interest Rate which would otherwise be applicable during any Interest Period, the Bank shall forthwith give notice of such determination (which shall be conclusive and binding on the Borrower) to the Borrower at least one Business Day before the first day of such Interest Period. In such event: (i) any pending request for the Term Loan LIBOR Rate shall be of no effect; and (ii) the obligation of the Bank to maintain or offer the Term Loan LIBOR Rate shall be suspended until the Bank determines that the circumstances giving rise to such suspension no longer exist, whereupon the Bank shall notify the Borrower. (c) If, after the date of this Agreement, there shall be any increase in the cost to the Bank due to either (i) the introduction of or any change in any law or regulation (or the interpretation thereof by regulatory authorities) or (ii) compliance with any written guideline or written request from any central bank or other governmental authority having jurisdiction over Bank (whether or not such guideline or request has the force of law), of agreeing to make or making, funding or maintaining the Term Loan LIBOR Rate to the Borrower, then the Borrower shall, from time to time, upon such notice by the Bank, pay to the Bank additional amounts sufficient to reimburse the Bank for such increased cost. Section 3. Representations and Warranties The Borrower hereby represents and warrants to the Bank (which representations and warranties will survive the delivery of the Notes and this Agreement and the making of any Advances and shall be deemed to be continuing until the Notes are fully paid and this Agreement is terminated) that: 3.1 Existence and Power. (a) The Borrower is a corporation which is and will continue to be, duly organized and validly existing; the Borrower is in good standing under the laws of its state of organization; (b) the Borrower is qualified and in good standing to do business in all other jurisdictions in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary; (c) the Borrower has the power to execute and deliver this Agreement, the Notes, the Related Agreements and to borrow hereunder, and (d) the Borrower has all permits, authorizations and licenses, without unusual restrictions or limitations, to own, operate and lease its properties and to conduct the business in which it is presently engaged, all of which are in full force and effect. 3.2 Authority. The making and performance by the Borrower of this Agreement and the Related Agreements have been authorized by all necessary action. The execution and delivery of this Agreement, the Notes and the Related Agreements, the consummation of the transactions herein and therein contemplated, the fulfillment of or compliance with the terms and provisions hereof and thereof, (a) are within its powers, (b) will not violate any provision of law or, of its certificate of incorporation or by-laws or (c) will not result in the breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any property or assets of the Borrower pursuant to any indenture or bank loan or credit agreement (other than pursuant to this Agreement) or other material agreement or instrument to which the Borrower is a party. No approval, authorization, consent or other order of or registration or filing with any governmental body is required in connection with the making and performance of this Agreement, the Notes or the Related Agreements. 3.3 Financial Condition. The financial statements described in Schedule A hereto under the heading "Description of Financial Statements," heretofore delivered to the Bank, were prepared in conformity with GAAP and are correct and complete and fairly present the financial condition and the results of operations of the Borrower for the period(s) and as of the date(s) thereof with the exception of all interim statements. The Borrower has no direct or contingent liabilities not disclosed in such statements or in Schedule A hereto under the heading "Liabilities Not Disclosed in Financial Statements." Since the date of the latest financial statement delivered to the Bank, except as disclosed to the Bank in writing, there has been no adverse change in the assets, liabilities, financial condition or business of the Borrower and, no Dividends have been declared or made to stockholders. 3.4 Information Complete. Subject to any limitations stated therein or in connection therewith, all information furnished or to be furnished by the Borrower pursuant to the terms hereof is, or will be at the time the same is furnished, accurate and complete in all respects necessary in order to make the information furnished, in the light of the circumstances under which such information is furnished, not misleading. 3.5 Statutory Compliance. The Borrower is in compliance with all federal, state, county and municipal laws, ordinances, rules or regulations applicable to it, its property or the conduct of its business, including, without limitation, those pertaining to or concerning the employment of labor, employee benefits, public health, safety and the environment. 3.6 Litigation. No proceedings by or before any private, public or governmental body, agency or authority and no litigation is pending, or, so far as is known to the Borrower or, a any of its officers, threatened against it except such as are disclosed in Schedule A hereto under the heading "Litigation Pending or Threatened." 3.7 Subsidiaries, Affiliates. The Borrower has no Subsidiaries or Affiliates other than those shown on Schedule A attached hereto under the heading "Subsidiaries, Affiliates and Trade Names" and the Borrower has not invested in the stock, common or preferred, of any other corporation and there are no fixed, contingent or other obligations on the part of the Borrower to issue any additional shares of its capital stock 3.8 Events of Default. No Event of Default has occurred and no event has occurred or is continuing which, pursuant to the provisions of Section 8, with the lapse of time and/or the giving of a notice specified therein, would constitute such an Event of Default. 3.9 Validity. This Agreement, the Notes and all Related Agreements, upon the execution and delivery thereof, will be legal, valid, binding and enforceable obligations of the Borrower or the person executing the same, as the case may be, in accordance with the terms of each. 3.10 Title to Property. The Borrower has good and marketable title to its properties and assets subject to no mortgage, pledge, lien, security interest, encumbrance or other material charge not set forth in (a) Schedule A hereto under the heading "Encumbrances Not Otherwise Disclosed" or (b) Section 6.1 hereinafter stated. 3.11 Taxes. The Borrower has filed all tax returns and reports required to be filed by it with all federal, state or local authorities and has paid in full or made adequate provision for the payment of all taxes, interest, penalties, assessments or deficiencies shown to be due or claimed to be due on or in respect of such tax returns and reports. 3.12 Business Name and Locations. The Borrower conducts its business solely in its own name without the use of a trade name or the intervention of or through any other entity of any kind, other than as disclosed on Schedule A under the heading "Subsidiaries, Affiliates and Trade Names." All books and records relating to Borrower's assets are located at the Borrower's chief executive office as set forth above and its other places and locations, where its assets are located, are as set forth on Schedule A hereto under the heading "Places of Business." 3.13 Notices of Environmental Problems. The Borrower and any tenants have not given nor have they received, any notice that: (a) there has been a release, or there is a threat of release, of toxic substances or hazardous wastes from any real property owned or operated by the Borrower, (b) the Borrower or any tenants may be or is liable for the costs of cleaning up or responding to a release of any toxic substances or hazardous wastes; or (c) any of such real property is subject to a lien for any liability arising from costs incurred in response to a release of toxic substances or hazardous wastes. 3.14 ERISA Compliance. The Borrower has received no notice to the effect that it is not in full compliance with any of the requirements of the Employee Retirement Income Security Act of 1974, as amended, ("ERISA") and the regulations promulgated thereunder and, to the best of its knowledge there exists no event described in Section 4043 of ERISA, excluding subsections 4043(b)(2) and 4043(b)(3) thereof. 3.15 Year 2000. The Borrower will be Year 2000 Compliant by January 1, 2000. 3.16 Year 2000 Risk. Borrower has reviewed the Year 2000 Risk and represents that it is taking such action as may be necessary to ensure that the Year 2000 Risk will not materially adversely affect its business operations and/or financial condition. Section 4. Conditions Precedent 4.1 The initial Advance under the Line of Credit and the funding of the Term Loan shall be subject to the following conditions precedent: (a) Approval of Bank Counsel. All legal matters incident to the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Bank. (b) Proof of Action. The Bank shall have received such documents evidencing the Borrower's power to execute and deliver this Agreement, the Notes and the Related Agreements as the Bank or its counsel shall reasonably request. (c) The Notes, Related Agreements and Documents. The Borrower shall have delivered to the Bank the Notes, this Agreement and the Related Agreements and such other documents as the Bank may reasonably request. 4.2 Every Advance under the Line of Credit shall be subject to the following conditions precedent that: (a) No Event of Default. No Event of Default has occurred and is continuing and no event has occurred or is continuing which, pursuant to the provisions of Section 8, with the lapse of time and/or the giving of a notice as specified therein, would constitute an Event of Default. (b) No Material Adverse Change. There has been no material adverse change in the assets, liabilities, financial condition or business of the Borrower or any Guarantor since the date of any financial statements delivered to the Bank before or after the date of this Agreement. (c) Representations and Warranties. That the representations and warranties contained in Sections 3.1 through 3.16 are true and correct, and that the Borrower shall have so certified to the Bank. Any request for a borrowing shall be deemed a certification by the Borrower as to the truth and accuracy of the representations and warranties contained in Sections 3.1 through 3.16 as of the date of such request. Section 5. Affirmative Covenants The Borrower covenants and agrees that from the date hereof until payment in full of the Notes, the performance of all Borrower's obligations hereunder and under any Related Agreement is complete and the termination of this Agreement, unless the Bank otherwise consents in writing, the Borrower shall: 5.1 Financial Statements; Notice of Default. Deliver to the Bank (a)within forty-five (45) days after close of each of the quarters of each fiscal year of the Borrower, consolidated and consolidating financial statements that are internally prepared, consisting of a balance sheet and statement of income and retained earnings and cash flows for that portion of the fiscal year to date then ended, which statements shall be prepared in accordance with GAAP consistently applied; (b) within ninety (90) days after the close of each fiscal year of the Borrower, consolidated and consolidating financial statements including a balance sheet as of the close of such year and statements of income and retained earnings and cash flows for the year then ended, prepared in conformity with GAAP and audited by a firm of independent certified public accountants selected by the Borrower and acceptable to the Bank, such financial statements shall be accompanied by an opinion of the auditor which (i) shall not disclaim the auditor's obligation to address the Year 2000 Risk as it relates to the Borrower's liabilities or contingent liabilities and (ii) shall not be qualified due to the Borrower's possible failure to take all appropriate steps to successfully address the Year 2000 Risk; (c) within ninety (90) days after the close of each fiscal year, a copy of the Borrower's annual report on Form 10-k as filed with the Securities and Exchange Commission together with all schedules, exhibits and attachments thereto; (d) promptly upon the Bank's written request, such other information about the financial condition, business and operations of the Borrower or any Guarantor, as the Bank may, from time to time, reasonably request; (e) promptly upon becoming aware of any occurrence that but for the giving of notice or the passage of time, would constitute an Event of Default, notice thereof in writing; and (f) as of the date of this Agreement and thereafter as of the first Business Day of each calendar month, a Borrowing Base Certificate. Together with any and all financial statements to be delivered to the Bank pursuant to Section 5.1, the Borrower shall submit a certificate of compliance by the president or chief financial officer of the Borrower, certifying that the Borrower is in compliance with all affirmative and negative covenants of this Agreement. The Borrower shall also deliver to the Bank, promptly upon receipt thereof, any management audit letter issued to the Borrower by its firm of certified public accountants. 5.2 Insurance. (a) Keep its properties insured against fire and other hazards (so called "All Risk" coverage) in amounts and with companies reasonably satisfactory to the Bank to the same extent and covering such risks as is customary in the same or a similar business, (b) maintain public liability coverage against claims for personal injuries or death, and (c) maintain all worker's compensation, employment or similar insurance as may be required by applicable law. Such policies of insurance shall contain an endorsement, in form and substance satisfactory to Bank, showing loss payable to Bank. Such endorsement or an independent instrument furnished to Bank, shall provide that the insurance companies will give Bank at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act, default or misrepresentation of Borrower or any other person shall affect the right of Bank to recover under such policy or policies of insurance in case of loss or damage. Borrower hereby directs all insurers under such policies of insurance to pay all proceeds payable thereunder directly to Bank. Borrower agrees to deliver certificates and evidence of insurance to the Bank upon request. 5.3 Compliance with Laws; Payment of Taxes and Other Liens. Comply in all respects with all federal, state, county and municipal laws, rules, ordinances and regulations applicable to Borrower, Borrower's business or property, including without limitation, those pertaining to or concerning the employment of labor, employee benefits, public health, safety and the environment. The Borrower shall pay all taxes, assessments, governmental charges or levies, or claims for labor, supplies, rent and other obligations made against Borrower or Borrower's property which, if unpaid, might become a lien or charge against the Borrower or Borrower's property, except liabilities being contested in good faith and against which, if requested by the Bank, the Borrower shall maintain reasonable reserves. 5.4 Chief Executive Office and Places of Business. Keep its chief executive office, principal places of business and locations of assets at the locations set forth in this Agreement and maintain its principal places of business, its chief executive office and locations of assets at said locations or, in the event that the Borrower changes any of such locations or adds any new locations, Borrower shall promptly give Bank written notice of any change in any of such addresses or such new locations. All business records of the Borrower, including those pertaining to all accounts and contract rights, shall be kept at the said chief executive office of the Borrower unless prior written notice is given to the Bank with respect to a change of location. 5.5 Inspection. Allow the Bank by or through any of its officers, agents, attorneys, or accountants designated by it, for the purpose of ascertaining whether or not the provisions hereof and of any Related Agreement, instrument or document is being performed and for the purpose of examining the assets of the Borrower and the records relating thereto, to enter the offices, and plants of the Borrower to examine or inspect any of the properties, books and records or extracts therefrom and to discuss the affairs, finances and accounts thereof with the Borrower with prior notification and consent; such consent not to be unreasonably withheld, all at reasonable times and as often as the Bank may reasonably request. 5.6 Litigation. Promptly advise the Bank of the commencement of litigation, including arbitration proceedings and any proceedings before any governmental agency, which might have a material adverse effect upon the assets, liabilities, financial condition or business of the Borrower, or where the amount involved is $100,000.00 or more. 5.7 Notices of Environmental and Labor Actions and Claims. Promptly notify the Bank in writing of (a) any enforcement, clean-up, removal or other action instituted by any federal, state, county or municipal authority or agency pursuant to any public health, safety or environmental laws, rules, ordinances and regulations, (b) any and all claims made by any third party against Borrower or any real property owned or operated by either relating to the existence of, or damage, loss or injury from any toxic substances or hazardous wastes or any other conditions constituting actual or potential violations of such laws, rules, ordinances or regulations and (c) any enforcement or compliance action, instituted or claim made by any federal or state authority relating to the employment of labor or employee benefits. 5.8 Maintenance of Existence. Continue to conduct its business as presently conducted, maintain its existence and maintain its properties in good repair, working order and operating condition. The Borrower shall promptly notify the Bank of any event causing material loss or unusual depreciation in the value of its business assets and the amount of same. 5.9 Performance. Comply with all terms and conditions of this Agreement, the Related Agreements and the Notes and pay all debts of the Borrower before the same shall become delinquent. 5.10 Covenant to Secure Equally and Ratably. Secure the Notes or cause the Notes to be secured equally and ratably with any and all Indebtedness secured by any lien or encumbrance created after the date hereof by the Borrower or any Subsidiary upon any of its property or assets, whether owned or hereafter acquired, other than liens or encumbrances permitted pursuant to Section 6.1 hereof. 5.11 Deposits. Maintain the Bank as its principal bank of deposit and account. 5.12 Use of Proceeds. (a) Advances Under the Line of Credit. The Borrower shall use the proceeds of each Advance under the Line of Credit for general commercial purposes, provided that no part of such proceeds will be used, in whole or in part, for the purpose of (i) purchasing or carrying any "margin stock" as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System, or (ii) acquiring all or substantially all of the assets or stock of, or otherwise investing in, any person, firm or corporation; (b) Advances under the Term Loan. The Borrower shall use the proceeds of the Term Loan to pay down existing indebtedness owing to the Bank. 5.13 Victorinox Contract. The Borrower shall maintain in full force and effect the exclusive distribution agreement with Victorinox Cutlery Company, dated December 12, 1983, as amended and modified from time to time (the "Victorinox Cutlery Contract"). The Borrower will not modify or amend the Victorinox Cutlery Contract so as to disturb its status as the exclusive distributor thereunder without the prior express written consent of the Bank. Section 6. Negative Covenants The Borrower covenants and agrees that until payment is made in full of the Notes, the performance of all Borrower's obligations hereunder and under any Related Agreement is complete and the termination of this Agreement, unless the Bank otherwise consents in writing which consent shall not be unreasonably withheld, the Borrower shall not: 6.1 Encumbrances. Incur or permit to exist any lien, mortgage, security interest, pledge, charge or other encumbrance against any of its property or assets (including, without limitation, the Victorinox Cutlery Contract), whether now owned or hereafter acquired (including, without limitation, any lien or encumbrance relating to any response, removal or clean-up of any toxic substances or hazardous wastes), except: (a) pledges or deposits in connection with or to secure workers' compensation and unemployment insurance; (b) tax liens which are being contested in good faith and in compliance with Section 5.3 hereof; (c)liens, mortgages, security interests, pledges, charges or other encumbrances in favor of the Bank or specifically permitted, in writing, by the Bank; and (d) purchase money security interests provided such purchase money security interest does not attach to any property other than the property being acquired with the proceeds of purchase money security interest indebtedness permitted under Section 6.2 hereof. 6.2 Limitation on Indebtedness. Create or incur any Indebtedness for borrowed money, become liable, either actually or contingently, in respect of letters of credit or banker's acceptances or issue or sell any obligations of the Borrower, excluding, however, from the operation of this covenant: (a) the Line of Credit and the Term Loan hereunder and all other Indebtedness of the Borrower to the Bank; (b) Indebtedness subordinated in payment and priority to all Indebtedness of the Borrower to the Bank in writing and in form and substance reasonably satisfactory to the Bank; (c) trade debt incurred in the ordinary course of business; (d) Indebtedness secured by a purchase money security interest, provided such Indebtedness does not exceed the lesser of (i) the purchase price or (ii) the value of the property acquired with the proceeds thereof; (e) obligations in connection with performance bonds which the Borrower is required to provide in the ordinary course of its business; and (f) Indebtedness to financial institutions under or pursuant to foreign currency exchange facilities. 6.3 Disposition of Assets. Sell, lease, pledge, transfer or otherwise dispose of all or any of its assets whether now owned or hereafter acquired except for liens or encumbrances required or permitted hereby or by any Related Agreement, except (a) sales of inventory in the ordinary course of business; (b) sales of machinery, equipment and inventory which has become obsolete and is no longer used or useful; (c) sales of machinery or equipment in the ordinary course of business if such machinery and equipment is replaced with other similar equipment or machinery; (d) sales of any assets not described in (a), (b), or (c) above, having an aggregate value not in the excess of $100,000 in any year calculated on a consolidated basis; and (e) a lien on the currency or contracts which are the subject of any foreign exchange transaction. 6.4 Contingent Liabilities. Without prior notice to the Bank (Bank consent not required) assume, guarantee, endorse or otherwise become liable upon the obligations of any Person except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. 6.5 Consolidation or Merger. Merge or consolidate with, or acquire all or substantially all of the assets of, or make any investment in the securities of, any other Person or other entity, except that (a) the Borrower may merge or consolidate with one or more of its Subsidiaries, provided that the Borrower is the surviving corporation, or, if it is not the surviving corporation, the surviving corporation assumes all of the Borrower's liabilities hereunder and under the Notes and the Security Agreement; (b) the Borrower's Subsidiaries may merge or consolidate with one another so long as the surviving corporation is a Guarantor hereunder; and (c) Borrower may issue shares of its stock, without dollar limitation. 6.6 Loans, Advances, Investments. Purchase or otherwise acquire any shares of stock or obligations of, or make loans or advances to, or investments in, any Person; provided, however: (1) the Borrower or any Subsidiary may extend credit to any customer of the Borrower or such Subsidiary who is also a stockholder of the Borrower or such Subsidiary, provided such extension of credit meets the standards set forth in Section 6.8 below; and (2) the Borrower and any Subsidiary may make loans or advances to any other Person, provided that the aggregate amount of all such loans or advances outstanding at any time does not exceed $150,000. 6.7 Dividends. Declare or pay dividends or make any distributions of its property or assets upon any of its stock or make any loans, advances, or extension of credit to any of its stockholders unless no Event of Default, or any event or condition which with the passage of time, the giving of notice or both would constitute an Event of Default, is existing hereunder at the time of or immediately following such transaction; provided, however, that, notwithstanding this Section, any Subsidiaries of the Borrower may declare or pay dividends or make distributions of its property or assets upon any of its stock to the Borrower or make loans, advances or extensions of credit to the Borrower. 6.8 Transactions with Subsidiaries and Affiliates. Enter into, or be a party to, any transaction with any Subsidiary or Affiliate (including, without limitation, transactions involving the purchase, sale or exchange of property, the rendering of services or the sale of stock) except in the ordinary course of business pursuant to the reasonable requirements of the Borrower and upon fair and reasonable terms no less favorable to the Borrower than Borrower would obtain in a comparable arm's-length transaction with a person other than a Subsidiary or an Affiliate. 6.9 Change of Name or Location. Without at least 30 days prior notice to the Bank, change its name or conduct its business under any trade name or style other than as herein above set forth or change its chief executive office, places of business or the present locations of its assets or records relating thereto from those addresses set forth on page 1 of this Agreement. 6.10 Subsidiaries, Affiliates. Acquire, form or dispose of any Subsidiary or Affiliate or acquire all or substantially all or any portion of the stock or assets of any other person, firm or corporation. 6.11 Management, Capital Structure, Accounting Methods. Make or consent to a change in the ownership or capital structure of the Borrower, or make a change in the executive management of the Borrower or in the manner in which the business of the Borrower is conducted or in its method of accounting. 6.12 Use of Property. Allow any business or activity to be conducted on real property owned or occupied by the Borrower that uses, manufacturers, treats, stores or disposes of any toxic substances or hazardous wastes which are prohibited or regulated under any public health, safety or environmental law, rule, ordinance or regulation or contrary to the provisions of any insurance policy. 6.13 Grant of Negative Pledge. Enter into any agreement with any Person (other than the Bank) in which the Borrower agrees not to create or suffer to exist any liens or encumbrances of any kind on any property of the Borrower, except that the Borrower may enter into such an agreement with respect to assets which are subject to liens permitted under Section 6.1. 6.14 Acquisition of Stock of Borrower. Purchase, acquire, redeem or retire, or make any commitment to purchase, acquire, redeem or retire any of the capital stock of the Borrower, whether now or hereafter outstanding. 6.15 Transactions with Victorinox Cutlery Company. Make any distributions of its assets or any loans, advances or extensions of credit to Victorinox Cutlery Company, except in the ordinary course of business as reasonable payment for goods or services actually received. Section 7. Financial Covenants The Borrower covenants and agrees that until payment is made in full of the Notes, the performance of Borrower's obligations hereunder and under any Related Agreement is complete and the termination of this Agreement, unless the Bank otherwise consents in writing: 7.1 Calculation of Financial Covenants. The calculation of the financial covenants set forth in this Section 7 shall be measured against the Borrower's financial statements required to be delivered to the Bank pursuant to Section 3.1 of this Agreement on a consolidated basis unless otherwise noted. All financial covenants set forth below are to be tested quarterly. 7.2 Funded Debt to EBITDA Ratio. On a rolling four quarter basis, Borrower shall not permit its ratio of Funded Debt to EBITDA to be greater than: 3.7 to 1.0 through December 30, 1999; 2.25 to 1.0 as of December 31, 1999 and thereafter. 7.3 Current Ratio. Borrower shall not permit its Current Ratio to be less than: 2.0 to 1.0 through March 30, 2001; 2.5 to 1.0 as of March 31, 2001 and thereafter. 7.4 EBITDA to Interest Expenses plus CMLTD Ratio. On a rolling four quarter basis, Borrower shall not permit its ratio of EBITDA to Interest Expense plus CMLTD to be less than 3.0 to 1.0. 7.5 Tangible Net Worth: Borrower shall not permit Tangible Net Worth to be less than: $64,000,000 through December 30, 1999 $66,000,000 as of December 31, 1999 through September 29, 2000; $66,500,000 as of September 30, 2000 through December 30, 2000; and $68,000,000 as of December 31, 2000 and thereafter. Section 8. Events of Default If any one or more of the following "Events of Default" shall occur and be continuing: 8.1 Failure to make due payment of the principal of the Notes, or in the payment of interest on the Notes or in the payment of any other liability owing by the Borrower to the Bank within 10 days of the due date, now existing or hereinafter incurred, whether direct or contingent; or 8.2 Failure by the Borrower to observe or perform any covenant contained in Sections 5, 6 or 7 hereof; or 8.3 Failure by the Borrower to perform any act, duty, obligation or other agreement contained herein and not otherwise constituting an Event of Default hereunder, or failure by the Borrower to perform any of its obligations under any Related Agreement, which shall occur and continue without correction for thirty (30) days following the Bank giving the Borrower notice thereof; or 8.4 Any representation or warranty made by the Borrower herein or in any Related Agreement, or any statement, certificate or other data furnished by the Borrower in connection herewith or with any Related Agreement, proves to have been incorrect when made in any material respect; or 8.5 A judgment or judgments for the payment of money shall be rendered against the Borrower, and any such judgment shall remain unsatisfied and in effect for any period of thirty (30) consecutive days without a stay of execution; or 8.6 Any levy, seizure, attachment, execution or similar process shall be issued or levied on any of the Borrower's property in excess of $100,000 and Borrower shall not in good faith be contesting such situation; or 8.7 The Borrower shall (a) apply for or consent to the appointment of a receiver, conservator, trustee or liquidator of all or a substantial part of any of its assets; (b) be unable, or admit in writing its inability, to pay its debts as they mature; (c) file or permit the filing of any petition, case, arrangement, reorganization, or the like under any insolvency or bankruptcy law, or the adjudication of it as a bankrupt, or the making of an assignment for the benefit of creditors or the consenting to any form of arrangement for the satisfaction settlement or delay of debt or the appointment of a receiver for all or any part of its properties; or (d) take any action for the purpose of effecting any of the foregoing; or 8.8 An order, judgment or decree shall be entered, or a case shall be commenced, against the Borrower, without the application, approval or consent of the Borrower by or in any court of competent jurisdiction, approving a petition or permitting the commencement of a case seeking reorganization or liquidation of the Borrower or appointing a receiver, trustee, conservator or liquidator of the Borrower or of all or a substantial part of its assets and Borrower, by any act, indicates its approval thereof, consent thereto, or acquiescence therein, or such order, judgment, decree or case shall continue unstayed and in effect for any period of one hundred twenty (120) consecutive days; or 8.9 The Borrower shall dissolve or liquidate, or be dissolved or liquidated, or cease to legally exist; or 8.10 Intentionally Omitted; 8.11 Failure by the Borrower to pay any other Indebtedness in an amount in excess of $250,000, whether contingent or otherwise upon maturity or the acceleration thereof; unless such other Indebtedness is subject to a bona fide dispute and the Borrower maintains on its books an adequate reserve with respect to such Indebtedness; or 8.12 Any material adverse change in the assets, liabilities, financial condition or business of the Borrower has occurred since the date of any financial statements delivered to the Bank before or after the date of this Agreement which condition shall remain in effect for thirty (30) days after notice and an opportunity to cure; then, and in such event, the Bank may declare the then outstanding principal balance and all interest accrued on the Notes and all applicable late charges and surcharges and all other liabilities and obligations of the Borrower to the Bank to be forthwith due and payable, whereupon the same shall become forthwith due and payable, the availability of the Line of Credit shall be deemed to be automatically terminated, Borrower's right to select pricing options for Advances shall terminate, and the Bank may exercise its rights and remedies under this Agreement and the Related Agreements; all of the foregoing without presentment or demand for payment, notice of non-payment, protest or any other notice or demand of any kind, all of which are expressly waived by the Borrower and each Guarantor. Section 9. Intentionally Omitted Section 10. Miscellaneous 10.1 Waivers. (a) Borrower hereby waives presentment, demand, notice, protest, notice of acceptance of this Agreement, notices of advances made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to this Agreement, the Related Agreements, the Notes and any collateral now or hereafter securing the Notes, Borrower assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payments thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Bank may deem advisable. The Bank shall not be deemed to have waived any of its rights upon or under any document or agreement relating to the liabilities of the Borrower, unless such waiver be in writing and signed by the Bank. No delay or omission on the part of the Bank in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. The Bank may revoke any permission or waiver previously granted to Borrower such revocation shall be effective whether given orally or in writing. All rights and remedies of the Bank with respect to this Agreement, the Related Agreements or the Notes whether evidenced hereby or by any other instrument or document, shall be cumulative and may be exercised singularly or concurrently. (b) BORROWER AND BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE NOTES OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR BANK TO ACCEPT THE NOTES AND MAKE THE LOANS DESCRIBED HEREIN. (c) BORROWER (i) ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION AND (ii) TO THE EXTENT PERMITTED BY ANY STATE OR FEDERAL LAW, WAIVES ANY RIGHT IT MAY HAVE TO PRIOR NOTICE OF AND A HEARING AND THE POSTING OF A BOND ON THE RIGHT OF ANY HOLDER OF THE NOTES TO ANY REMEDY OR COMBINATION OF REMEDIES THAT ENABLES SAID HOLDER BY WAY OF ATTACHMENT, FOREIGN ATTACHMENT, GARNISHMENT OR REPLEVIN, TO DEPRIVE BORROWER OR ANY GUARANTOR OF ANY OF THEIR PROPERTY, AT ANY TIME, PRIOR TO FINAL JUDGMENT IN ANY LITIGATION INSTITUTED IN CONNECTION WITH THIS AGREEMENT. [The Remainder of this Page is Intentionally Left Blank] 10.2 Notices. All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid), (b) sent by facsimile with confirmation of transmission by the transmitting equipment; or (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, in each case to the following addresses, or facsimile numbers and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, or person as a party may designated by notice to the other parties: If to the Bank: FLEET NATIONAL BANK 157 Church Street New Haven, Connecticut 06510 Facsimile No. (203) 821.7311 Attention: Kevin Burke, Vice President with a copy to: TYLER COOPER & ALCORN, LLP 205 Church Street P.O. Box 1936 New Haven, Connecticut 06510 Facsimile No. (203) 789.2133 Attention: Joseph C. Lee, Esq. If to the Borrower: SWISS ARMY BRANDS, INC. One Research Drive Shelton, Connecticut 06484 Facsimile No. (203) 925.2933 Attention: Thomas M. Lupinski, Chief Financial Officer with a copy to: MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104-0050 Facsimile No. (212) 468.7900 Attention: Charles B. Friedman, Esq. 10.3 Expenses; Additional Documents. The Borrower will pay all taxes levied or assessed upon the principal sum of the Advances made against the Bank and all reasonable expenses arising out of the preparation, administration, amendment, waiver, modification, protection, collection and/or other enforcement of this Agreement, the Related Agreements, and the Notes. The Borrower will, from time to time, at its expense, execute and deliver to the Bank all such other and further instruments and documents as the Bank shall reasonably request. 10.4 Lien, Security Interest and Set Off. Borrower hereby grants to Bank, a lien, security interest and right of setoff as security for all liabilities and obligations to Bank, whether now existing or hereafter arising, upon and against all deposits and credits, now or hereafter in the possession, custody, safekeeping or control of Bank or in transit to the Bank. At any time, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured. 10.5 Indemnification. The Borrower agrees to defend, indemnify and hold harmless the Bank and any participants, successors or assigns of the Bank and the officers, directors, employees and agents of each of them from and against any and all losses, claims, liabilities, asserted liabilities, reasonable costs and expenses, including, without limitation, reasonable costs of litigation and reasonable attorneys' fees (both the allocated costs of internal counsel and outside counsel) incurred in connection with any and all claims or proceedings for bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage (including all foreseeable damage) or any diminution in value of any real property resulting from or relating, directly or indirectly, to (a) a release into the environment of any toxic substances or hazardous wastes (a "Release") a threatened Release, the existence or removal of any toxic substances or hazardous wastes on, into, from, through or under any real property owned or operated by the Borrower or any Guarantor (whether or not such Release caused by Borrower, or Borrower Affiliate, tenant, subtenant, prior owner or prior tenant or any other Person and whether or not the alleged liability is attributable to the handling, storage, generation, transportation or disposal of toxic substances or hazardous wastes or the mere presence of such toxic substances or hazardous wastes) or (b) the breach or alleged breach by Borrower of any federal, state or local law or regulation concerning public health, safety or the environment with respect to any real property owned or operated by the Borrower and/or any business conducted thereon. 10.6 Stamp Tax. The Borrower will pay any stamp or other tax which becomes payable in respect of the Notes, this Agreement or the Related Agreements. 10.7 Schedules. Schedule A and Schedule B, which are attached hereto, are and shall constitute a part of this Agreement. 10.8 Connecticut Law; Jurisdiction of Connecticut Courts. This Agreement, the Related Agreements and the rights and obligations of the parties hereunder and thereunder shall be construed and interpreted in accordance with the laws of Connecticut. The Borrower and each Guarantor agree that the execution of this Agreement and Related Agreements and the performance of the Borrower's obligations hereunder and thereunder shall be deemed to have a Connecticut situs and the Borrower shall be subject to the personal jurisdiction of the courts of the State of Connecticut with respect to any action the Bank or its successors or assigns may commence hereunder or thereunder. Accordingly, the Borrower hereby specifically and irrevocably consents to the jurisdiction of the courts of the State of Connecticut with respect to all matters concerning this Agreement, the Related Agreements, the Notes, or the enforcement of any of the foregoing. 10.9 Survival of Representations. All representations, warranties, covenants and agreements herein contained or made in writing in connection with this Agreement shall survive the execution and delivery of the Notes, shall continue in full force and effect until all amounts payable on account of the Notes, the Related Agreements and this Agreement shall have been paid in full and this Agreement has been terminated. 10.10 Severability. If any provision of this Agreement shall to any extent be held invalid or unenforceable, then only such provision shall be deemed ineffective and the remainder of this Agreement shall not be affected. 10.11 Integration; Modifications. This Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement. No modification or amendment hereof shall be effective unless the same shall be in writing and signed by the parties hereto. 10.12 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Borrower, the Bank and their respective successors and assigns. 10.13 Pledge by Bank to Federal Reserve. Bank may at any time pledge all or any portion of its rights under this Agreement or the Notes including any portion of the Notes to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or enforcement thereof shall release Bank from its obligations under this Agreement or any of the Related Agreements. 10.14 Lost, Stolen, Destroyed or Mutilated Documents. Upon receipt of an affidavit of an officer of Bank as to the loss, theft, destruction or mutilation of the Notes or any other security document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Notes or other security document, Borrower will issue, in lieu thereof, a replacement Notes or other security document in the same principal amount thereof and otherwise of like tenor. 10.15 Assignment of Bank's Interest. Bank shall have the unrestricted right at any time or from time to time, and without Borrower's or any Guarantor's consent, to assign all or any portion of its rights and obligations hereunder to one or more banks or other financial institutions (each, an "Assignee"), and Borrower and each Guarantor agrees that it shall execute, or cause to be executed, such documents, including without limitation, amendments to this Agreement and to any other documents, instruments and agreements executed in connection herewith as Bank shall deem necessary to effect the foregoing. In addition, at the request of Bank and any such Assignee, Borrower shall issue one or more new promissory notes, as applicable, to any such Assignee, and, if Bank has retained any of its rights and obligations hereunder following such assignment, to Bank, which new promissory notes shall be issued in replacement of, but not in discharge of, the liability evidenced by the promissory note held by Bank prior to such assignment and shall reflect the amount of the respective commitments and loans held by such Assignee and Bank after giving effect to such assignment. Upon the execution and delivery of appropriate assignment documentation, amendments and any other documentation required by Bank in connection with such assignment, and the payment by Assignee of the purchase price agreed to by Bank, and such Assignees, such Assignee shall be a party to this Agreement and shall have all of the rights and obligations of Bank hereunder (and under any and all other guaranties, documents, instruments and agreements executed in connection herewith) to the extent that such rights and obligations have been assigned by Bank pursuant to the assignment documentation between Bank and such Assignee, and Bank shall be released from its obligations hereunder and thereunder to a corresponding extent. 10.16 Participations. Bank shall have the unrestricted right at any time and from time to time, and without the consent of or notice to Borrower or any Guarantor to grant to one or more banks or other financial institutions (each a "Participant") participating interest in Bank's obligation to lend hereunder and/or any or all of the loans held by Bank hereunder. In the event of any such grant by Bank of a participating interest to a Participant, whether or not upon notice to Borrower, Bank shall remain responsible for the performance of its obligations hereunder and Borrower shall continue to deal solely and directly with Bank in connection with Bank's rights and obligations hereunder. Bank may furnish any information concerning Borrower in its possession from time to time to prospective Assignees and Participants, provided that Bank shall require any such prospective Assignee or Participant to agree in writing to maintain the confidentiality of such information. IN WITNESS WHEREOF, the parties hereto have caused this Commercial Loan Agreement to be duly executed as a sealed instrument as of the day and year first above written. SWISS ARMY BRANDS, INC. Witness: By /S/ Thomas M. Lupinski Its Senior Vice President, CFO FLEET NATIONAL BANK Witness: By K.E.Burke Its SCHEDULE A Annexed to and made a part of the 1999 Amended and Restated Commercial Loan Agreement (the "Loan Agreement") dated as of November ___, 1999 between FLEET NATIONAL BANK (defined in the Loan Agreement as the "Bank") and SWISS ARMY BRANDS, INC. (defined in the Loan Agreement as the "Borrower"). Description of Financial Statements (See Section 3.3 of Agreement): Liabilities Not Disclosed in Financial Statements (Section 3.3 of Agreement): Litigation, Pending or Threatened (See Section 3.6 of Agreement): See addendum to Schedule A. Subsidiaries, Affiliates and Trade Names-list name and state of organization of each Subsidiary and Affiliate (See Section 3.7 of Agreement) and percentage ownership if less than 100% and list each Trade Name used by Borrower (See Section 3.13 of Agreement): Encumbrances Not Otherwise Disclosed (See Section 3.11 of Agreement): Places of Business (See Section 3.13 of Agreement): Chief Executive Office and location of material assets. Related Agreements (See Section 1 of Agreement, Definitions): 1999 Substituted Revolving Commercial Promissory Note 1999 Commercial Promissory Term Note 1999 Substituted Security Agreement Negative Pledge Agreement 1999 Substituted Agreement of Guaranty and Suretyship Agreement of Guaranty and Suretyship Commercial Transaction Waiver Borrowing Resolution ISDA Master Agreement and Schedules Schedule B - Pricing Grid Exhibit 1 - Borrowing Base Certificate Exhibit 2 - Revolving Note Exhibit 3 - Term Note EX-21 3 LIST OF SUBSIDIARIES OF SWISS ARMY BRANDS, INC. Exhibit 21 List of Subsidiaries of Swiss Army Brands, Inc. Excelsior Advertising Forcan, Inc. Swiss Army Brands (Suisse) AG Swiss Army Brands, Ltd. Swiss Army, Inc. Victorinox Watch Importing Corporation Forschner Watch Repair, Inc. Bear Cutlery, Inc. EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we herby consent to the incorpation of our report dated February 18, 2000, included in Swiss Army Brands, Inc.'s Form 10-K for the year ended December 31, 1999, into the previously filed registration statments. ARTHUR ANDERSEN LLP Stamford, Connecticut, March 29, 2000 EX-27 5 FDS --
5 0000731947 Swiss Army Brands, Inc. 1,000 US Dollars 12-MOS Dec-31-1999 Jan-01-1999 Dec-31-1999 1 1,302 0 34,778 1,060 30,227 70,540 11,076 (6,220) 107,604 19,169 0 0 0 886 75,494 107,604 129,452 129,452 78,606 46,305 (2,142) 0 (748) 1,651 1,531 120 0 0 0 120 .02 .01
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