-----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, PYPT1KcFQiRjcjr7mUa25/kSe4ndM6CfjA+y7b4zIgp+6t/NlI/giQCg+m673Lch hM1dBaBfGCD1kpw0RZoU/g== 0000899078-99-000284.txt : 19990818 0000899078-99-000284.hdr.sgml : 19990818 ACCESSION NUMBER: 0000899078-99-000284 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSSIL INC CENTRAL INDEX KEY: 0000883569 STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873] IRS NUMBER: 752018505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19848 FILM NUMBER: 99694794 BUSINESS ADDRESS: STREET 1: 2280 NORTH GREENVILLE AVE CITY: RICHARDSON STATE: TX ZIP: 75082 BUSINESS PHONE: 9722342525 MAIL ADDRESS: STREET 1: 2280 N GREENVILLE CITY: RICHARDSON STATE: TX ZIP: 75082 10-Q 1 FORM 10-Q FOR FOSSIL, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-19848 FOSSIL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2018505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2280 N. GREENVILLE, RICHARDSON, TEXAS 75082 (Address of principal executive offices) (Zip Code) (972) 234-2525 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Registrant's common stock, outstanding as of August 13, 1999: 31,926,226 (after giving effect to the 3-for-2 stock split payable in the form of a 50% stock dividend on August 17, 1999). PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) JULY 3, JANUARY 2, 1999 1999 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 70,648 $ 57,263 Accounts receivable - net 38,414 42,582 Inventories 74,359 57,295 Deferred income tax benefits 6,495 5,655 Prepaid expenses and other current assets 6,129 3,538 ----- ----- Total current assets 196,045 166,333 Property, plant and equipment - net 26,567 23,117 Intangible and other assets - net 5,822 4,628 ----- ----- $ 228,434 $ 194,078 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 4,255 $ 4,537 Accounts payable 15,850 14,512 Accrued expenses: Co-op advertising 13,605 13,311 Compensation 3,384 3,246 Other 12,570 11,201 Income taxes payable 18,095 10,487 ------ ------ Total current liabilities 67,759 57,294 Minority interest in subsidiaries 2,102 1,864 Stockholders' equity: Common stock, shares issued and outstanding, 31,916,700 and 31,398,136, respectively 213 209 Additional paid-in capital 38,741 34,345 Retained earnings 122,679 102,859 Accumulated other comprehensive income (3,060) (1,037) Treasury stock at cost, none and 155,518 shares, respectively - (1,456) --------- --------- Total stockholders' equity 158,573 134,920 ------- ------- $ 228,434 $ 194,078 ========= =========
See notes to condensed consolidated financial statements. 1
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 90,271 $ 64,363 $ 173,548 $ 121,248 Cost of sales 45,521 32,458 86,126 61,442 ------ ------ ------ ------ Gross profit 44,750 31,905 87,422 59,806 Operating expenses: Selling and distribution 21,277 16,258 39,176 31,075 General and administrative 6,714 5,761 13,610 10,994 ----- ----- ------ ------ Total operating expenses 27,991 22,019 52,786 42,069 ------ ------ ------ ------ Operating income 16,759 9,886 34,636 17,737 Interest expense (24) (59) (49) (117) Other income (expense) - net (43) (130) (184) (41) ---- ----- ----- ---- Income before income taxes 16,692 9,697 34,403 17,579 Provision for income taxes 6,826 3,993 14,106 7,209 ----- ----- ------ ----- Net income $9,866 $5,704 $20,297 $10,370 Other comprehensive income: Currency translation adjustment (1,623) (63) (1,830) (256) Unrealized loss on short term investments (175) - (193) - ----- ----- ------ ------ Comprehensive income $8,068 $5,641 $18,274 $10,114 ====== ====== ======= ======= Net income per share: Basic $ 0.31 $ 0.18 $ 0.64 $ 0.34 ======= ======= ======= ======= Diluted $ 0.29 $ 0.17 $ 0.61 $ 0.32 ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding: Basic 31,809 31,072 31,611 30,826 ====== ====== ====== ====== Diluted 33,449 32,694 33,267 32,425 ====== ====== ====== ======
See notes to condensed consolidated financial statements. 2
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS) FOR THE 26 WEEKS FOR THE 26 WEEKS ENDED ENDED JULY 3, JULY 4, 1999 1998 ---- ---- Operating activities: Net income $ 20,297 $ 10,370 Noncash items affecting net income: Minority interest in subsidiaries 1,027 148 Depreciation and amortization 2,593 1,701 Increase in allowance for doubtful accounts 501 697 Increase in allowance for returns - net of related inventory in transit 636 212 Deferred income tax benefits (921) (537) Changes in assets and liabilities: Accounts receivable 3,203 3,542 Inventories (17,236) (9,453) Prepaid expenses and other current assets (2,783) (534) Accounts payable (56) 4,253 Accrued expenses 1,800 (2,795) Income taxes payable 9,308 2,370 ----- ----- Net cash from operations 18,369 9,974 Investing activities: Additions to property, plant and equipment (5,786) (1,774) Increase in intangible and other assets (1,371) (56) ------- ---- Net cash used in investing activities (7,157) (1,830) Financing activities: Issuance of common stock 2,700 6,135 Treasury stock issued for options exercised 981 - Distribution of minority interest earnings (790) (327) Repayments of notes payable-banks (282) (4,208) ----- ------- Net cash from financing activities 2,609 1,600 Effect of exchange rate changes on cash and cash equivalents (436) (60) ----- ---- Net increase in cash and cash equivalents 13,385 9,684 Cash and cash equivalents: Beginning of period 57,263 21,104 ------ ------ End of period $ 70,648 $ 30,788 ======== ========
See notes to condensed consolidated financial statements. 3 FOSSIL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. FINANCIAL STATEMENT POLICIES BASIS OF PRESENTATION. The condensed consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its majority-owned subsidiaries (the "Company"). The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the Company's financial position as of July 3, 1999, and the results of operations for the thirteen-week periods ended July 3, 1999, and July 4, 1998. All adjustments are of a normal, recurring nature. These interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included in Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934 for the year ended January 2, 1999. Operating results for the thirteen-week period ended July 3, 1999, are not necessarily indicative of the results to be achieved for the full year. On July 21, 1999, the Board of Directors of the Company declared a three-for-two stock split of the Company's $0.01 par value common stock ("Common Stock") which was effected in the form of a stock dividend to be paid on August 17, 1999 to stockholders of record on August 3, 1999. Retroactive effect has been given to the stock split in stockholders' equity accounts beginning as of the fiscal year ended January 2, 1999, and in all share and per share data in the accompanying condensed consolidated financial statements. BUSINESS. The Company designs, develops, markets and distributes fashion watches and other accessories, principally under the "FOSSIL" and "RELIC" brands names. The Company's products are sold primarily through department stores and other major retailers, both domestically and internationally. RECLASSIFICATIONS. Reclassifications of certain 1998 amounts have been made to conform to the 1999 presentation. 2. INVENTORIES
Inventories consist of the following: July 3, January 2, (IN THOUSANDS) 1999 1999 ---- ---- Components and parts $ 3,945 $ 3,402 Work-in-process 1,577 1,445 Finished merchandise on hand 54,095 40,344 Merchandise at Company stores 7,784 5,340 Merchandise in-transit from estimated customer returns 6,958 6,764 ----- ----- $74,359 $57,295 ======= =======
4 The Company periodically enters into forward contracts principally to hedge the payment of intercompany inventory transactions with its non-U.S. subsidiaries. Currency exchange gains or losses resulting from the translation of the related accounts, along with the offsetting gains or losses from the hedge, are deferred until the inventory is sold or the forward contract is completed. At July 3, 1999, the Company had hedge contracts to sell 12.0 million German Marks for approximately $7.0 million, expiring through December 1999.
3. GEOGRAPHIC INFORMATION (IN THOUSANDS) FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED ENDED JULY 3, 1999 JULY 4, 1998 ------------------ ------------ OPERATING OPERATING NET SALES INCOME NET SALES INCOME --------- --------- --------- --------- U.S.- exclusive of Company Stores $ 56,117 $ 4,048 $ 44,494 $ 2,748 Stores 7,358 308 5,476 89 Europe 17,773 3,205 13,770 1,886 Far East 57,777 9,342 31,725 5,470 Japan 1,570 (144) 1,987 (307) Intergeographic items (50,324) - (33,089) - -------- -------- -------- ------- Consolidated $ 90,271 $ 16,759 $ 64,363 $ 9,886 ======== ======== ======== ======= FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED ENDED JULY 3, 1999 JULY 4, 1998 ------------------ ------------ OPERATING OPERATING NET SALES INCOME NET SALES INCOME --------- --------- --------- --------- U.S.- exclusive of Company Stores $115,005 $ 12,838 $ 85,130 $ 6,958 Stores 12,147 (289) 9,084 (401) Europe 36,988 7,485 25,960 3,251 Far East 91,248 15,176 53,246 8,573 Japan 3,512 (574) 3,810 (644) Intergeographic items (85,352) - (55,982) - -------- -------- -------- ------- Consolidated $173,548 $ 34,636 $121,248 $17,737 ======== ======== ======== =======
5 4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS: FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26 (IN THOUSANDS, EXCEPT PER SHARE DATA) WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JULY 3, 1999 JULY 4, 1998 JULY 3, 1999 JULY 4, 1998 ------------ ------------ ------------ ------------ BASIC EPS COMPUTATION: Numerator: Net income $ 9,866 $ 5,704 $20,297 $ 10,370 ------- ------- ------- -------- Denominator: Weighted average common shares outstanding 21,206 20,715 21,074 20,551 Treasury stock - - (30) - Effect of stock dividend 10,603 10,357 10,567 10,275 ------- ------- ------- -------- 31,809 31,072 31,611 30,826 ------- ------- ------- -------- BASIC EPS $ 0.31 $ 0.18 $ 0.64 $ 0.34 ======= ======= ======= ======== DILUTED EPS COMPUTATION: Numerator: Net income $ 9,866 $ 5,704 $20,297 $ 10,370 ------- ------- ------- -------- Denominator: Weighted average common shares outstanding 21,206 20,715 21,074 20,551 Stock option conversion 1,093 1,081 1,104 1,066 Treasury stock - - (30) - Effect of stock dividend 11,150 10,898 11,119 10,808 ------- ------- ------- -------- 33,449 32,694 33,267 32,425 ------- ------- ------- -------- DILUTED EPS $ 0.29 $ 0.17 $ 0.61 $ 0.32 ====== ====== ====== ======
5. DEBT In June 1999, the Company renewed the U.S. short-term revolver for one year and amended the interest rate the Company pays on LIBOR based borrowings. All borrowings under the U.S. short-term revolver accrue interest at the bank's prime rate less 0.50% or LIBOR plus 0.75% (LIBOR plus 1.00% prior to June 29, 1999). The U.S. short-term revolver is unsecured and requires the maintenance of net worth, quarterly income, working capital and financial ratios. 6 FOSSIL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of Fossil, Inc. and it's majority owned subsidiaries ("the Company") for the thirteen and twenty-six week periods ended July 3, 1999 (the "Second Quarter" and "Year to Date", respectively), as compared to the thirteen and twenty-six week periods ended July 4, 1998 (the "Prior Year Quarter" and "Prior Year YTD Period", respectively). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes attached hereto. GENERAL The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion watches and accessories. The Company developed the FOSSIL brand name to convey a distinctive fashion, quality and value message and a brand image reminiscent of "America in the 1950s" that suggests a time of fun, fashion and humor. Since its inception in 1984, the Company has grown from its original flagship FOSSIL watch product into a diversified company offering an extensive line of fashion watches that includes its RELIC brand as well as complementary lines of small leather goods, belts, handbags and sunglasses under certain of the Company's brands. In addition to developing its own brands, the Company leverages its development and production expertise by designing and manufacturing private label products for some of the most prestigious companies in the world, including national retailers, entertainment companies and theme restaurants. The Company has further capitalized on the increasing awareness of the FOSSIL brand by entering into various license agreements for other categories of fashion accessories and apparel, such as optical frames and underwear under the FOSSIL brand. In addition, the Company licenses the brands of other companies, including the EMPORIO ARMANI brand, to further leverage its infrastructure. The Company's products are sold to department stores and specialty retail stores in over 80 countries worldwide through Company-owned foreign sales subsidiaries and through a network of approximately 50 independent distributors. The Company's foreign operations include a presence in Asia, Australia, Canada, the Caribbean, Europe, Central and South America and the Middle East. In addition, the Company's products are offered at Company-owned retail locations throughout the United States and in independently-owned, authorized FOSSIL retail stores and kiosks located in several major airports, on cruise ships and in certain international markets. The Company's successful expansion of its product lines worldwide and leveraging of its infrastructure have contributed to its increasing net sales and operating profits. COMPANY HIGHLIGHTS o Sales of FOSSIL brand watches worldwide continued to represent over half of the Company's net sales. o A line of stainless steel watches, FOSSIL Steel, chronograph look watches, BLUE TEQ, and women's dress bracelet watches, F2, combined with FOSSIL Blue continue to represent the Company's core watch assortment. 7 COMPANY HIGHLIGHTS - CONTINUED o FOSSIL Big Tic, a part analog, part digital watch that highlights the seconds on a backlite digital display was introduced on a test basis in late 1998. The style was represents one of the Company's best selling watch lines in volume during the Second Quarter and Year to Date. o FOSSIL brand handbag sales continued to record double-digit sales growth during the Second Quarter and Year to Date in comparison to the comparable periods in 1998. o FOSSIL brand sunglasses gained market share as a result of the consumer preference for quality brand name items at more moderate price levels, both of which align with the Company's sunglass program initiatives. During the Second Quarter, FOSSIL brand sunglass sales were down in comparison to the Prior Year Quarter but, based on strong sales during the 1999 first quarter, showed double-digit growth on the Year to Date comparison. o RELIC, the Company-owned brand sold in leading national and regional chain department stores and specialty stores, recorded sales volume growth of approximately 50% during the Second Quarter and Year to Date. As a result of increasing RELIC brand recognition, the Company, at the request of retailers, began the extension of the RELIC brand into leather products during late 1998. o Sales momentum continued in Europe, which recorded net sales increases of FOSSIL brand product of approximately 30% in the Second Quarter and Year to Date in comparison to the same periods in 1998. o The Company operated 30 outlet and 14 full price stores at the end of the Second Quarter compared to 28 outlet and 7 full price stores at the end of the Prior Year Quarter. o The Company holds a worldwide license agreement with Giorgio Armani for the rights to design, produce and market a line of EMPORIO ARMANI watches. Net sales volume for this line of watches during the Second Quarter and Year to Date periods amounted to $7.0 million and $13.7 million, respectively, in comparison to $6.6 million and $9.7 million during the Prior Year Quarter and Prior Year YTD Period, respectively. o The Company entered into a license agreement with Safilo USA, Inc. and Safilo B.V. to design, manufacture and market FOSSIL brand optical frames in the United States, Canada and Italy as well as sunglasses in Italy. The initial launch of the products is anticipated during fall 1999. o The Company entered into an agreement with Seiko Instruments America, Inc. to form a joint venture company in which the Company will hold a 20% equity interest. The joint venture company will be responsible for manufacturing, marketing and distributing watches principally to the mass market distribution channel produced under various proposed licensing agreements and private label brands. The Company will perform certain design, marketing and sourcing services for the joint venture. o The Company's stock was added to the Standard & Poor's SmallCap 600 Index in June 1999. o The Company declared a 3-for-2 stock split ("the 3-for-2 Stock Dividend") in the form of a 50% stock dividend payable on August 17, 1999. 8 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, (i) the percentages of the Company's net sales represented by certain line items from the Company's condensed consolidated statements of income and (ii) the percentage changes in these line items between the current period and the comparable period of the prior year.
PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE NET SALES CHANGE NET SALES CHANGE ---------- ---------- FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED ----------- ----------- ----------- ----------- JULY 3, JULY 4, JULY 3, JULY 3, JULY 4, JULY 3, 1999 1998 1999 1999 1998 1999 ---- ---- ---- ---- ---- ---- Net sales 100.0% 100.0% 40.3% 100.0% 100.0% 43.1% Cost of sales 50.4 50.4 40.2 49.6 50.7 40.2 ----- ----- ----- ----- Gross profit margin 49.6 49.6 40.3 50.4 49.3 46.2 Selling and distribution expenses 23.6 25.2 30.9 22.6 25.6 26.1 General and administrative expenses 7.4 9.0 16.5 7.9 9.1 23.8 --- --- --- --- Operating income 18.6 15.4 69.5 19.9 14.6 95.3 Interest expense (0.0) (0.1) (60.1) (0.0) (0.1) (57.8) Other income (expense)- net (0.0) (0.2) (67.2) (0.1) 0.0 349.5 ----- ----- ----- --- Income before income taxes 18.6 15.1 77.7 19.8 14.5 95.9 Income taxes 7.5 6.2 70.9 8.1 5.9 95.7 --- --- --- --- Net income 10.9% 8.9% 73.0% 11.7% 8.6% 95.7% ===== ===== ===== =====
9
NET SALES. The following table sets forth certain components of the Company's consolidated net sales and the percentage relationship of the components to consolidated net sales for the periods indicated (in millions, except percentage data): AMOUNTS % OF TOTAL ------- ---------- FOR THE 13 WEEKS ENDED FOR THE 13 WEEKS ENDED ---------------------- ---------------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- International: Europe $ 17.1 $ 13.8 19% 21% Other 16.9 6.2 19 10 ---- --- -- -- Total International 34.0 20.0 38 31 ---- ---- -- -- Domestic: Watch products 35.8 28.2 40 44 Other products 13.1 10.6 14 16 ---- ---- -- -- Total 49.9 38.8 54 60 Stores 7.3 5.5 8 9 --- --- - - Total Domestic 56.2 44.3 62 69 ---- ---- -- -- Total Net Sales $ 90.2 $ 64.3 100% 100% ====== ====== === === AMOUNTS % OF TOTAL ------- ---------- FOR THE 26 WEEKS ENDED FOR THE 26 WEEKS ENDED ---------------------- ---------------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- International: Europe $ 36.4 $ 26.0 21% 21% Other 24.9 11.8 14 10 ---- ---- -- -- Total International 61.3 37.8 35 31 ---- ---- -- -- Domestic: Watch products 72.1 51.5 42 42 Other products 28.0 22.8 16 19 ---- ---- -- -- Total 100.1 74.3 58 61 Stores 12.1 9.1 7 8 ---- --- - - Total Domestic 112.2 83.4 65 69 ----- ---- -- -- Total Net Sales $173.5 $121.2 100% 100% ====== ====== === ===
10 Worldwide sales volume of FOSSIL branded watches has continued to represent the single largest factor in the Company's sales growth. Strong sales volume increases in FOSSIL brand watches were principally a result of (a) increased sales from the Company's core FOSSIL brand watch assortments and (b) sales from the newly introduced Big Tic line of watches. Net sales during the first half of 1999 were abnormally impacted by (a) refilling of certain retailer's watch inventories after a very successful 1998 holiday season and (b) a $7.2 million sale of non-branded premium incentive watches in the Second Quarter. Fueling top line sales growth during the Year to Date period was double-digit sales growth in the Company's other accessory product lines and sales increases in certain private label and licensing watch lines. In addition, sales of the Company's RELIC brand grew at a rate of approximately 50% during the Second Quarter and Year to Date periods. Management believes the sales increases will average at or above 20% during the last half of 1999. GROSS PROFIT. In comparison to the comparable 1998 periods, gross profit margins increased slightly to 50% during the Year to Date period while remaining even during the Second Quarter. The gross profit margins during the Second Quarter would have been approximately 52% without the gross margin impact of the non-branded premium incentive sale, which sold at a low margin. The increases in gross profit margins are partially due to the positive gross margin influence stemming from an increase in the Company's sales mix of FOSSIL brand watches, European-based sales and Fossil-owned retail store sales. These sales categories generally result in higher gross profit margins than the Company's consolidated average. In addition, gross profit margins increased based on higher production levels in the Company's foreign-based assembly facilities. Management believes that the Company's gross profit margins for the remainder of 1999 will be comparable to the Year to Date period. OPERATING EXPENSES. The aggregate increases in operating expenses were due primarily to costs necessary to support increased sales volumes. Total operating expenses as a percentage of net sales ("operating expense ratios") decreased to 31%, in the Second Quarter and Year to Date periods, respectively, compared to the prior year comparable periods. Leveraging expenses against higher sales volumes was the principal reason for this decrease. In addition, during the Second Quarter, operating expense ratios were positively impacted by the non-branded premium incentive sale that had relatively little associated operating expenses. Exclusive of that sale, the operating expense ratio for the Second Quarter would have reflected only a minor improvement over the Prior Year Quarter. Management believes the operating expense ratio for the remainder of 1999 will be the comparable to 1998 levels as a result of planned increases in advertising expenditures to heighten the awareness of the FOSSIL brand. OTHER INCOME (EXPENSE). Other expense - net increased during the Year to Date period compared to the Prior Year YTD Period. The increase in expense was primarily due to (a) the minority interests share of increased profits generated in the Company's assembly facilities and (b) foreign currency losses stemming from a weaker U.S. dollar in relation to the local currencies of several of the Company's foreign operations during the Year to Date period. Higher interest income generated on increased cash holdings offset these increases during the Second Quarter, and partially offset the additional expenses in the Year to Date period. YEAR 2000 COMPLIANCE Computer programs that were written using two digits rather than four digits to define the applicable year may recognize a date using "00" as the year 1900 rather than the year 2000. This result is commonly referred to as the "Year 2000" problem. The Year 2000 problem could result in information system failures or miscalculations. Beginning in 1997, the Company initiated a program to evaluate whether internally developed and/or purchased computer programs that utilize embedded date codes could experience operational problems when the year 2000 is reached. The scope of this effort addressed internal computer systems and supplier capabilities. The Company has significantly completed an extensive review of its businesses to determine whether or not purchased and internally developed computer programs are Year 2000 compliant, as well as determine the extent of any remedial action and associated costs. Management believes it has substantially completed the review of the Company's internal computer systems 11 and substantially either made modifications or purchased new hardware and software to make the Company's internal computer systems Year 2000 compliant. In addition, the Company has significantly completed the testing phase of its main frame computer systems and applications and while no absolute assurances can be provided, management believes these systems and applications will function properly in handling Year 2000 related date calculations. The Company is now involved in finalizing the review and testing phase of its internal computer networks and applicable non-computer related areas to determine its ability to handle Year 2000 related date calculations. Based on the Company's evaluation to date, management believes that the Company will incur approximately $2.4 million in internal and external costs to address the Year 2000 problem of which $2.3 million has been expended as of the end of the Year to Date Period. The Company plans to complete all remediation efforts for its critical systems prior to Year 2000. The financial impact of the Year 2000 reviews, modifications, testing, replacements or related purchases are not expected to have a material adverse effect on the Company's business or its consolidated financial position, results of operations or cash flows. The Company is also contacting its key suppliers and customers to determine their Year 2000 readiness in order to ensure a steady flow of goods and services to the Company and continuity with respect to customer service. The Company has no information that indicates that a significant vendor may be unable to sell to the Company; that a significant customer may be unable to purchase from the Company; or that a significant service provider may be unable to provide services to the Company. The Company is formulating a contingency plan in the event of failure of production operations, the inability of major suppliers to fulfill their commitments and the inability of major customers to submit orders and receive product. The Company expects to have the majority of its contingency plans formalized during September 1999. Notwithstanding the above, the effect, if any, on the Company's future results of operations, due to the Company's major suppliers and customers not being Year 2000 compliant, cannot be reasonably estimated. Management believes that this latter risk is mitigated somewhat by the Company's broad base of customers and suppliers and the worldwide nature of its operations. LIQUIDITY AND CAPITAL RESOURCES The Company's general business operations historically have not required substantial cash needs during the first several months of its fiscal year. Generally, starting in the second quarter, the Company's cash needs begin to increase typically reaching its peak in the September-November time frame. The additional cash needs have generally been to finance the accumulation of inventory and the build-up in accounts receivable. During the Second Quarter the Company increased it's cash holdings slightly to $71 million in comparison to $69 million as of the end of the Company's 1999 first quarter. At the end of the second quarter, the Company had working capital of $128 million and borrowings of only $4 million against its combined $43 million bank credit facilities. Management believes that cash flow from operations combined with existing cash on hand will be sufficient to satisfy its working capital expenditures for at least the next eighteen months. FORWARD-LOOKING STATEMENTS Included within management's discussion of the Company's operating results, "forward-looking statements" were made within the meaning of the Private Securities Litigation Reform Act of 1995 regarding expectations for 1999. The actual results may differ materially from those expressed by these forward-looking statements. Significant factors that could cause the Company's 1999 operating results to differ materially from management's current expectations include, among other items, significant changes in consumer spending patterns or preferences, competition in the Company's product areas, international in comparison to domestic sales mix, changes in foreign currency valuations in relation to the United States Dollar, principally the European Union's Euro and Japanese Yen, an inability of management to control operating expenses in relation to net sales without damaging the long-term direction of the Company and the risks and uncertainties set forth in the Company's current report on Form 8-K dated March 30, 1999. 12 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on May 26, 1999. At such meeting, the stockholders elected two (2) Class I directors of the Company and no other matters were voted on at the meeting. A total of 20,130,083 shares (prior to giving effect to the 3-for-2 Stock Dividend) were represented at the meeting. The tabulation of nominees is as follows (prior to given effect to the 3-for-2 Stock Dividend): Director Nominee For Against Abstain Withheld - -------------------------------------------------------------------------------- Kenneth W. Anderson 19,814,441 315,642 Michael W. Barnes 19,735,491 394,592 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Fourth Amended and Restated Loan Agreement by and among Wells Fargo Bank (Texas), National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc. and Fossil Stores II, Inc. dated as of June 28, 1999 (without exhibits). 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the period covered by this Report. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOSSIL, INC. Date: August 16, 1999 /s/ Randy S. Kercho ------------------- Randy S. Kercho Executive Vice President and Chief Financial Officer (Principal financial officer duly authorized to sign on behalf of Registrant) 14 EXHIBIT INDEX Exhibit Number Document Description - ------- -------------------- 10.1 Fourth Amended and Restated Loan Agreement by and among Wells Fargo Bank (Texas), National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc. and Fossil Stores II, Inc. dated as of June 28, 1999 (without exhibits). 27 Financial Data Schedule. 15 EX-10 2 EX 10.1-FOURTH AMENDED AND RESTATED LOAN AGREEMENT FOURTH AMENDED AND RESTATED LOAN AGREEMENT This Fourth Amended and Restated Loan Agreement (the "Agreement") is entered into on June ___, 1999, to be effective for all purposes as of June 28, 1999, by and among WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association formerly known as First Interstate Bank of Texas, N.A. (the "Bank"), FOSSIL PARTNERS, L.P. (the "Borrower"), FOSSIL, INC. (the "Company"), FOSSIL INTERMEDIATE, INC. ("Fossil Intermediate"), FOSSIL TRUST ("Fossil Trust"), FOSSIL STORES I, INC. ("Fossil I"), and FOSSIL STORES II, INC. ("Fossil II") (the Company, Fossil Intermediate, Fossil Trust, Fossil I and Fossil II, are sometimes referred to herein individually as a "Guarantor" and collectively as the "Guarantors"). R E C I T A L S - - - - - - - - WHEREAS, the Bank, the Borrower and the Guarantors are parties to that certain Third Amended and Restated Loan Agreement, dated to be effective as of June 29, 1998 (the "Amended Agreement"), pursuant to which the Bank has agreed to make available to the Company a revolving line of credit of up to $40,000,000.00; and WHEREAS, the Bank, the Borrower and the Guarantors desire to amend and restate the Amended Agreement as set forth herein to, among other things, extend the final maturity date of the loans made by the Bank to the Borrower under the revolving line of credit. NOW, THEREFORE, in consideration of the foregoing, the Bank's making the following described loans, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the Bank, the Borrower and the Guarantors agree as follows: A G R E E M E N T - - - - - - - - - 1. The Line of Credit. Subject to, and upon the terms, conditions, covenants and agreements contained herein, the Bank agrees to loan the Borrower, at any time, and from time to time prior to the maturity of the Borrower's promissory note executed in conjunction with this Agreement such amounts as the Borrower may request up to, but not exceeding, an aggregate principal sum at any time outstanding equal to $40,000,000.00 (the "Total Commitment"); within such limits and during such period, the Borrower may borrow, repay, and re-borrow hereunder (the "Line of Credit"). All loans under the Line of Credit shall be evidenced by the Borrower's Tenth Amended and Restated Master Revolving Credit Note (the "Revolving Note"), substantially in form and substance satisfactory to the Bank, payable to the order of the Bank, and bearing interest upon the terms provided therein (but in no event to exceed the maximum non-usurious interest rate permitted by law). The principal of and interest on the Revolving Note shall be due and payable as set forth on the face of the Revolving Note. Notation by the Bank on its records shall constitute prima facie evidence of the amount and date of any payment or borrowing thereunder. 1 (a) Renewals and Extensions. All renewals, extensions, modifications and rearrangements of the Revolving Note, if any, shall be deemed to be made pursuant to this Agreement, and accordingly, shall be subject to the terms and provisions hereof, and the Borrower shall be deemed to have ratified, as of such renewal, extension, modification or rearrangement date, all of the representations, covenants and agreements herein set forth. (b) Letters of Credit. Advances under the Line of Credit may also be made to fund Documentary or Stand-by Letters of Credit (as hereinafter defined) that are issued under the Revolving Note and are drawn upon, provided, the Bank may, in its own discretion, advance funds under the Line of Credit to fund such Documentary or Stand-by Letters of Credit (as hereinafter defined) when the Borrower does not reimburse the Bank for such funding. All such advances shall be added to the principal amount of the Revolving Note. 2. Documentary and Stand-by Letters of Credit. Subject to the conditions herein, the Bank shall (a) from time to time, at the request of the Borrower, issue documentary or stand-by letters of credit to Borrower's vendors for the acquisition of inventory for the Borrower (the "Inventory Acquisition Letters of Credit") and (b) issue a stand-by letter of credit in an aggregate amount up to (Y)600,000,000.00 in favor of any Japanese domestic bank for the account of the Borrower (the "JDB Letter of Credit")(the Inventory Acquisition Letters of Credit and the JDB Letter of Credit are hereinafter collectively referred to as the "Documentary or Stand-by Letters of Credit"). The fees for issuance of all Inventory Acquisition Letters of Credit shall be in accordance with the Bank's schedule of fees for issuance of letters of credit existing as of the time of issuance. No fees shall be charged directly by Bank to Borrower in connection with the issuance of the JDB Letter of Credit. Immediately upon issuance, such Documentary and Stand-by Letters of Credit shall be considered in computing the amount of funds available to the Borrower, as provided in Section 5 herein. The Bank shall not be obligated: (x) to issue Documentary or Stand-by Letters of Credit if the issuance of same would cause the Outstanding Revolving Credit to exceed the Total Commitment; (y) to issue such Letters of Credit with an expiration date more than one hundred eighty (180) days after the maturity date of the Revolving Note; and (z) to extend the expiration date of such Letters of Credit to a date more than one hundred eighty (180) days after the maturity date of the Revolving Note. 3. Foreign Currency Exchange Contracts. Subject to the conditions contained herein, the Bank may, in its discretion, from time to time at the request of the Borrower, issue foreign currency exchange contracts to Borrower for use by Borrower in the ordinary course of its business. Immediately upon issuance, such foreign currency exchange contracts shall be considered in computing the amount of funds available to the Borrower, as provided in Section 5 hereof. The Bank shall not be obligated: (a) to issue any such foreign currency exchange contract if the issuance of the same would cause the Outstanding Revolving Credit to exceed the Total Commitment, (b) to issue any foreign currency exchange contract with a settlement date after the maturity date of the Revolving Note, or (c) to issue any such foreign currency exchange contract if (i) the Bank's futures contract risk under such contract and all other contracts then outstanding would exceed $20,000,000.00 or (ii) the Bank's 2 delivery risk under such contract and all other contracts then outstanding would exceed $5,000,000.00. 4. Use of Proceeds. The proceeds of the Revolving Note shall be used by the Borrower to provide working capital for the short-term, seasonal working capital needs of the Borrower and for general corporate purposes. No part of the proceeds received hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying, or the payment in full or in part, of indebtedness which was incurred for the purposes of purchasing or carrying margin of stock, as such term is defined in Section 221.3 of Regulation U of the Board of Governors of the Federal Reserve System 12 C.F.R., Chapter II, Part 221. 5. Availability. ------------ (a) Revolving Note. The aggregate principal amount at any time outstanding under the Revolving Note, plus, one hundred twenty percent (120%) of the face amount of the JDB Letter of Credit (calculated by reference to the amount of United States of America dollars into which Bank determines it could, in accordance with its practice from time to time in the interbank foreign exchange market, convert such amount of Yen at its spot rate of exchange in effect at approximately 8:00 a.m. (Dallas, Texas time) on the date of determination), plus the face amount of all outstanding Documentary and Stand-by Letters of Credit (other than the JDB Letter of Credit) issued for the account of the Borrower, plus twenty percent (20%) of the aggregate amount of all foreign currency exchange contracts issued by the Bank for the account of the Borrower (said sum being herein referred to as the "Outstanding Revolving Credit") shall not at any time exceed the Total Commitment. (b) Total Commitment Compliance. In the event the Outstanding Revolving Credit at any time exceeds the Total Commitment then, upon notice from the Bank, the Borrower shall immediately make such payments to the Bank necessary to reduce the Outstanding Revolving Credit to an amount such that the Outstanding Revolving Credit is less than or equal to the Total Commitment. 6. Advances. Advances under the Line of Credit may be made by written or telephone facsimile request signed by an authorized officer of the Borrower or by telephone oral request by an authorized officer of the Borrower, provided that any such advance shall be deposited in an account of the Borrower, unless such authority for telephone oral request or telephone facsimile request is revoked in writing by the President or an authorized officer of the Borrower, and such revocation is actually received by the Bank (the "Revocation"). In consideration of the Bank's permitting the Borrower to make telephone oral requests and telephone facsimile requests for advances under the Revolving Note until Revocation, the Borrower covenants and agrees to assume liability for and to protect, indemnify and hold harmless the Bank, its predecessors, agents, officers, directors, employees, successors and assigns (individually and collectively, an "Indemnified Party") from any and all liabilities, obligations, damages, penalties, claims, causes of action, costs, charges and expenses, including attorneys' fees and expenses of employees, which may be imposed, incurred by or asserted against any Indemnified Party by reason of any loss, 3 damage or claim howsoever arising or incurred because of or out of or in connection with (i) any action of any Indemnified Party pursuant to telephone oral requests or telephone facsimile requests for advances under the Line of Credit, (ii) the breach of any provisions of this Agreement by the Borrower, (iii) the transfer of funds pursuant to such telephone oral requests or telephone facsimile requests, or (iv) any Indemnified Party's honoring or failing to honor any telephone oral request or telephone facsimile request for any reason. The Bank is entitled to rely upon and act upon telephone oral requests and telephone facsimile requests made or purportedly made by any of the officers or employees specified in the resolutions delivered to the Bank of even date herewith, as supplemented in writing from time to time and accepted by the Bank, and the Borrower shall be unconditionally and absolutely estopped from denying (i) the authenticity and validity of any such transaction so acted upon by the Bank once the Bank has advanced funds under the Line of Credit and deposited or transferred such funds as requested in any such telephone oral request or telephone facsimile request, and (ii) the Borrower's liability and responsibility therefore. 7. Prepayments. Any prepayment on the Revolving Note shall be paid at the offices of the Bank. The Borrower shall be entitled to prepay the Revolving Note from time to time and at any time, in whole or in part, without notice or penalty except as set forth in the Revolving Note. The Borrower may re-borrow the principal amount of the Line of Credit so prepaid subject to the terms of Section 5(a) hereof. All prepayments on the Revolving Note shall be applied first to accrued interest and then to principal in the order of maturity. No prepayment shall relieve the Borrower of the obligation to pay the principal and interest on the Revolving Note until such time as all obligations are paid in full. 8. Collateral for the Loans. The Line of Credit shall be unsecured. Upon execution of this Agreement and upon satisfaction of the condition precedent set forth in Section 9 hereof, the Bank shall terminate its existing security interests in the "Collateral", as such term is defined in the existing Commercial Security Agreements to which Borrower and each Guarantor is a party to or for the benefit of the Bank. 9. Execution of Loan Documents. The Borrower shall execute and deliver, or cause to be executed and delivered, to Bank the following described documents: (a) In connection with advances under the Revolving Note, the Borrower shall execute and deliver to the Bank the following documents and instruments, provided the Bank shall have no obligation to make any advance under the Revolving Note to the Borrower until each of said documents and instruments are fully executed by the Borrower and delivered to the Bank: (i) This Agreement; (ii) The Revolving Note; and (iii) Ordinary and customary certificates and documents satisfactory to the Bank and its counsel. 4 (b) In connection with the Bank's issuance of each Documentary or Stand-by Letter of Credit, the Borrower shall, in addition to the documents required in Section 9(a) above, execute and deliver to the Bank a Letter of Credit Application and Agreement (herein so called), provided the Bank shall have no obligation to issue a Documentary or Stand-by Letter of Credit for the account of the Borrower until a Letter of Credit Application and Agreement has been executed by the Borrower and delivered to the Bank. (c) The Borrower shall cause to be executed and delivered to the Bank the following documents and instruments, provided the Bank shall have no obligation to make any advance under the Revolving Note to the Borrower until each of said documents and instruments are fully executed by the applicable third party and delivered to the Bank: (i) Guaranty Agreements, in form and substance satisfactory to the Bank, from each of the Guarantors, guaranteeing the prompt payment and performance by the Borrower of its obligations hereunder (collectively, the "Guaranty Agreements") (the receipt of which are hereby acknowledged by the Bank); and (ii) A Stock Pledge Agreement from the Company, in form and substance satisfactory to the Bank, pursuant to which the Company shall pledge to the Bank as collateral security for the Borrower's obligations to the Bank hereunder, a security interest in sixty-five percent (65%) of any and all issued and outstanding shares of stock of Fossil Europe B.V. and Fossil (East) Ltd., whether now or hereafter issued by such subsidiaries of the Company (the "Stock Pledge Agreement") (the receipt of which is hereby acknowledged by the Bank). 10. Conditions Precedent to each Loan and Issuance of each Documentary or Stand-by Letter of Credit. Notwithstanding any other provision of this Agreement or any other Loan Document to the contrary, it is understood and agreed that the Bank's obligation to make any advance or extension of credit hereunder on any date (including the issuance of any Documentary or Stand-by Letter of Credit) is subject to the satisfaction of the following conditions precedent: (a) The Borrower shall have executed and delivered, or cause to have been executed and delivered, to the Bank this Agreement and the other loan documentation referred to in Section 9 hereof. (b) There shall have been no material adverse change in the financial condition of the Borrower or any Guarantor. (c) There shall be no material adverse litigation, either pending or threatened, against the Borrower or any Guarantor that could reasonably be expected to have a material adverse effect on the Borrower or such Guarantor. 5 (d) The representations and warranties contained herein and in the other Loan Documents (as hereinafter defined) shall be true and correct as of such date. (e) No default or event of default shall have occurred and be continuing hereunder or under any of the other Loan Documents. (f) The Bank shall have received from the Company or the Borrower, as appropriate, all fees and expenses required to be paid to the Bank pursuant to this Agreement. 11. Representations and Warranties. Until payment and performance in full of the Revolving Note, unless the Borrower receives prior written approval of a deviation therefrom from the Bank, the Borrower and each of the Guarantors jointly and severally represent, warrant and covenant that: (a) The Borrower and each of the Guarantors is a limited partnership, corporation or business trust, as the case may be, duly organized, validly existing and in good standing under the laws of the state of its organization and is duly licensed, qualified to do business and in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such licensing and qualification and where the failure to be so licensed or qualified would have a material adverse effect upon (i) its business, operations, properties, assets or condition (financial or otherwise), or (ii) its ability to perform or of the Bank to enforce its obligations under the Loan Documents to which it is a party. Borrower and each of the Guarantors has all powers and all permits consents and authorizations necessary to own and operate properties and to carry on its business as presently conducted. The execution, delivery and performance of this Agreement and the Guaranty Agreements by the Guarantors and the execution, delivery and performance of this Agreement by the Borrower, the borrowings hereunder and the execution and delivery of the Revolving Note, the Letter of Credit Applications, the Guaranty Agreements, the Stock Pledge Agreement, and the several agreements and instruments contemplated thereby, (i) have been duly authorized by proper corporate, partnership or trust proceedings, as appropriate, and (ii) will not contravene, or constitute a default under, any provision of applicable law or regulation or of the Agreement of Limited Partnership, Articles of Incorporation, By-Laws or Trust Agreement, as applicable, of the Borrower or any Guarantor, or of any mortgage, indenture, contract, agreement or other instrument, or any judgment, order or decree, binding upon the Borrower or any Guarantor. To the best of Borrower's and Guarantors' knowledge, no consent or authorization of, filing with or other act by or in respect of, any governmental authority or any other person (other than the Bank) is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of any of the Loan Documents, except for such consents, authorizations, filings or acts as have been obtained, filed or taken by the Borrower and the Guarantors prior to the date hereof. This Agreement, the Revolving Note, the Letter of Credit Applications, the Guaranty Agreements, the Stock Pledge Agreement, and any other agreements, documents and instruments contemplated herein and thereby, or in any 6 way related thereto whether executed simultaneously herewith or hereafter (all of same being hereinafter sometimes called the "Loan Documents"), when duly executed and delivered in accordance with this Agreement, will each constitute a legal, valid and binding obligation of each of the Borrower and the Guarantors, if a party thereto, enforceable against each such party in accordance with its respective terms. (b) The audited balance sheet of the Company at January 2, 1999, the related statement of income and retained earnings for the period then ended, copies of which have been delivered to the Bank, accurately represent the financial position of the Company at January 2, 1999, and the results of its operations for the periods then ended materially prepared in conformity with generally accepted accounting principles applied on a basis consistent with the preceding year. No material adverse change has occurred since January 2, 1999 position or in the results of operations of the Company or in its business. (c) No approvals or consents of any governmental department, administrative agency or instrumentality having jurisdiction over the Borrower or any Guarantor are necessary to permit the Borrower or any Guarantor to enter into the Loan Documents to which it is a party, except for such approvals and covenants as have been obtained. (d) There is no action, suit or proceeding pending or, to the knowledge of the Borrower or any Guarantor, threatened against the Borrower or any Guarantor or the Collateral (hereinafter defined) before any court, governmental department, administrative agency or instrumentality which, if such action, suit or proceeding were adversely determined, would materially affect the financial position or the results of operations of the Borrower or any Guarantor or its business or the ability of the Borrower or any Guarantor to perform its obligations under the Loan Documents. (e) To the best of the Company's management's knowledge, no default or Event of Default (hereinafter defined) has occurred and is continuing. (f) To the best of the Company's management's knowledge, each of the Borrower and the Guarantors has good and indefeasible title to all of its assets and properties, free and clear of all security interests, mortgages, liens or encumbrances, except as otherwise permitted under this Agreement or reflected in the Company's financial statements submitted to the Bank and dated as of January 2, 1999. (g) Neither the Borrower nor any Guarantor is an investment company within the meaning of the Investment Company Act of 1940. (h) To the best of the Company's management's knowledge, each of the Borrower and the Guarantors has filed all United States federal returns and all material State and foreign tax returns required to be filed by it and paid all sums required thereby to the extent the same have become due and before they may have become delinquent in accordance with such returns, or is contesting the payment of same diligently and in good faith before the proper taxing authority. To the best of the Company's management's knowledge, all other material tax 7 returns required to be filed by the Borrower and the Guarantors with any taxing jurisdiction have been filed and all tax liabilities shown thereon to be due have been paid to the extent the same have become due and before they may have become delinquent in accordance with such returns, or the payment of such tax liabilities is being contested diligently and in good faith before the proper taxing authority, and such returns properly reflect the taxes of the Borrower and the Guarantors, as applicable, for the periods covered thereby in all material respects. (i) Borrower and each Guarantor (a) is solvent and will continue to be solvent after giving effect to the transactions contemplated hereunder, and (b) is able to pay its debts as they mature and has (and has reason to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business and all businesses in which it is about to engage. The assets and properties of Borrower and each Guarantor at a fair valuation and at their present fair salable value are, and will be, greater than the indebtedness of Borrower and each such Guarantor, respectively (including subordinated and contingent liabilities computed at the amount which, to the best of the Company's management's knowledge, represents an amount which can reasonably be expected to become an actual or matured liability). 12. Affirmative Covenants. The Borrower and the Company hereby agree that, until payment and performance in full of the Revolving Note, unless the Borrower receives prior written approval of a deviation therefrom from the Bank, the Borrower and the Company shall, and except in the case of delivery of financial information, reports and notices, shall cause each of the Guarantors to: (a) Annual Statements. Furnish the Bank, within one hundred (100) days after the end of each fiscal year of the Company, (i) a copy of the Company's audited consolidated financial statements, consisting of at least a balance sheet and related statement of income, retained earnings and changes in financial condition of the Company prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year, and certified by an independent certified public accountant selected by the Company and reasonably satisfactory to the Bank, (ii) a copy of the consolidating financial statements of the Company prepared by the Company, and (iii) a copy of the Form 10-K of the Company for such fiscal year. (b) Quarterly Statements. Furnish the Bank within fifty (50) days after the end of each fiscal quarter of the Company during the term hereof, (i) a copy of its unaudited consolidating financial statements for such fiscal quarter, consisting of at least a balance sheet and related statement of income, materially prepared in conformity with generally accepted accounting principles and certified by an authorized officer of the Company, and (ii) a copy of the Form 10-Q of the Company for such fiscal quarter. (c) Compliance Certificate. Furnish the Bank concurrently with the delivery of the financial statements required to be delivered pursuant to clauses (a) and (b) above, a Compliance Certificate in a 8 form similar to the Compliance Certificate attached hereto as Exhibit B, but including all representations and warranties to the satisfaction of the Bank, signed by an authorized officer of Borrower and the Company. (d) Accounts Receivable Summary. Furnish the Bank within fifty (50) days after the end of each fiscal quarter of the Borrower during the term hereof a summary of the Borrower's accounts receivable (including, without limitation, a list of the ten account debtors who owe the Borrower the greatest amount of accounts receivable), which summary shall be in form satisfactory to the Bank. (e) Accounts Receivable Listing and Aging. Furnish the Bank, (i) within ten (10) days of any request by the Bank, a listing and aging of Borrower's domestic accounts receivable for a period end not more than 45 days prior to such request by the Bank, and (ii) within forty-five (45) days of any request by the Bank, a listing and aging of Borrower's international accounts receivable for the previous month end, in each case with aging of accounts receivable on the basis of, but not limited to, current, 30, 60, and over 90 days from date of original invoice, all to the satisfaction of the Bank. (f) Accounts Payable Listing and Aging. Furnish the Bank, (i) within ten (10) days of any request by the Bank, a listing and aging of Borrower's domestic accounts payable for a period end not more than 45 days prior to such request by the Bank, and (ii) within forty-five (45) days of any request by the Bank, a listing and aging of Borrower's international accounts payable for the previous month end, which listing and aging shall be in form satisfactory to the Bank. (g) Inventory Summaries. Furnish the Bank, (i) within ten (10) days of any request by the Bank, a listing of Borrower's domestic inventory, and (ii) within forty-five (45) days of any request by the Bank, a listing of Borrower's international inventory, which listing shall be in form and detail acceptable to the Bank. (h) Insurance. Maintain insurance with reasonable companies in the amounts and types and against the risks, liabilities and contingencies as is usually carried by a similar business in the same general area and of similar size to the Borrower and the Company with the Bank named as loss payee as its interest may appear, such policies to be non-cancelable without ten (10) days prior written notice to the Bank. (i) Taxes. Pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which such taxes, assessments and governmental charges or levies become due and payable; provided, however, that neither the Borrower nor any Guarantor shall be required to pay and discharge or cause to be paid and discharged any such taxes, assessments and governmental charges or levies so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings diligently pursued and appropriate reserves have been provided therefor; and in any event, pay and discharge all taxes, assessments and governmental charges or levies imposed on the Borrower or any Guarantor or on its income or profits or 9 on any of its property prior to the date on which liens attach thereto and become of public record for a period in excess of fifteen (15) days. (j) Litigation. Promptly give notice to the Bank of all litigation and all proceedings before governmental or regulatory agencies affecting the Borrower or any Guarantor except litigation or proceedings that could not reasonably be expected to have material adverse effect upon the financial condition of the Borrower or any such Guarantor. (k) Further Assurances. At any time and from time to time, execute and deliver such further instruments and take such further action as may reasonably be requested by the Bank, in order to cure any defects in the execution and delivery of, or to comply with or accomplish the covenants and agreements contained in the Loan Documents. (l) Books and Records. Make available to the Bank during normal business hours at the Borrower's main office its books and records, including, but not limited to, the subsidiary journals, accounts receivable files, inventory records, general ledger, and correspondence files. Bank shall have the right to examine its collateral at any reasonable time without prior notice. (m) Existence. Continue to be a limited partnership, corporation or business trust, as the case may be, duly organized and existing in good standing under the law of the jurisdiction under which it is organized and continue to be duly licensed or qualified as a foreign limited partnership, corporation or business trust, as the case may be, in all jurisdictions wherein the character of the property owned or leased by it or the nature of the business transacted by it makes licensing or qualification necessary by a foreign limited partnership, corporation or business trust, as the case may be, except where the failure to qualify would not have a material adverse affect on its business or operations as a whole. (n) Expenses. Pay reasonable expenses, including reasonable legal expenses and attorney's fees, of the Bank which have been or may be incurred by the Bank in connection with the preparation of this Agreement and the lending and incurring of obligations or liabilities hereunder, the collection of any note authorized hereby, or for the enforcement of Borrower's or any Guarantor's obligations hereunder and under any document executed to secure the payment of any note authorized hereunder and for the recording and filing and recording and refiling of any such document. (o) Default, Name Change, Casualty. Give notice to Bank in writing of the occurrence of any default or Event of Default under this Agreement, any change in name, identity or structure of Borrower or any Guarantor, and any uninsured or partially uninsured loss in excess of $1,000,000 through fire, theft, liability or property damage. (p) Guarantees/Domestic Subsidiaries Stock Pledges. At the discretion of the Company, either (i) cause each majority-owned subsidiary of the Company or Borrower which is incorporated or formed 10 in the United States of America and which owns or holds tangible assets having an aggregate book value of $2,000,000.00 or more (each, a "Significant Domestic Subsidiary") to execute a Guaranty Agreement in the form of Exhibit A attached hereto, or (ii) pledge to the Bank, as collateral security for the Borrower's obligations to the Bank hereunder, a security interest in one hundred percent (100%) of the stock of each such Significant Domestic Subsidiary which is owned by Borrower or Company by executing a Stock Pledge Agreement in the form of Exhibit B attached hereto. 13. Negative Covenants. The Borrower and the Guarantors hereby agree that, so long as the Revolving Note is outstanding and unpaid, unless the Borrower receives prior written approval of a deviation therefrom from Bank, the Borrower and the Guarantors shall not directly or indirectly: (a) Debt. Create, incur, assume or suffer to exist any debt for borrowed money, whether by way of loan, or the issuance or sale of bonds, debentures, notes or securities, including deferred debt for the purchase price of assets, except (i) the loans described herein, (ii) revolving credit loans in an aggregate principal amount of up to (Y)600,000,000.00 from any Japanese domestic bank; provided, that the only security for such revolving credit loans shall be the JDB Letter of Credit, (iii) loans from one or more Guarantors to the Borrower or another Guarantor, so long as the indebtedness in respect of such loans is unsecured and fully subordinated to the indebtedness owing to the Bank pursuant to a written subordination agreement in form and substance satisfactory to the Bank, and (iv) current accounts payable and other current obligations (other than for borrowed money) arising out of transactions in the ordinary course of business. (b) Liabilities. Assume, guarantee, endorse, suffer to exist or otherwise become liable upon, or agree to purchase or otherwise furnish funds for the payment of, the obligations of any person, firm or corporation, except for (i) the obligations hereunder; (ii) endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (iii) obligations under operating leases; (iv) obligations for indebtedness secured by purchase money liens, not to exceed $1,000,000 in the aggregate; (v) obligations under foreign currency exchange contracts, so long as such obligations are incurred in the ordinary course of its business; (vi) indebtedness to shareholders, officers or partners, so long as such indebtedness is unsecured, fully subordinated to the indebtedness owing to the Bank in 11 form and substance satisfactory to the Bank, and evidenced by debt instruments satisfactory in form and substance to the Bank; (vii)obligations under guaranties securing indebtedness of SII Marketing International Inc. ("SMI") provided that the aggregate principal amount of all such guaranteed indebtedness does not exceed $10,000,000; and (viii) any other unsecured indebtedness which is subordinated to the indebtedness owing to the Bank pursuant to a written subordination agreement in form and substance satisfactory to the Bank. (c) Encumbrances. Create, incur, assume or suffer to exist any mortgage, deed of trust, pledge, encumbrance, lien or security interest of any kind, upon any of its property now owned or hereafter acquired, except (i) liens, mortgages, encumbrances or security interest to secure payment of the borrowings authorized hereunder; (ii) pledges or deposits to secure obligations under workmen's compensation laws or of similar legislation; (iii) deposits to secure public or statutory obligations; (iv) statutory mechanics', carriers', workmen's, repairmen's liens or other like items in the ordinary course of business in respect to obligations which are not overdue or are being contested in good faith; (v) existing liens not contemplated under this Agreement as reflected by the financial statements of the Company submitted to the Bank and dated as of January 2, 1999 or disclosed to Bank; (vi) liens for taxes, assessments or other governmental charges or levies not yet due or liens which are being contested in good faith by appropriate action but which are in an amount less than $10,000; (vii) legal or equitable encumbrances not in excess of $250,000 in the aggregate deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted; and (viii) additional purchase of equipment and furniture and fixtures not to exceed $6,000,000 per year. (d) Subsidiaries. Form any new subsidiary or merge or invest in or consolidate with any corporation or other entity, or sell, lease, assign, transfer, or otherwise dispose of (whether in one transaction or as a series of related transactions) all or substantially all of its assets, whether now owned or hereafter acquired; or acquire by purchase or otherwise, all or substantially all of the assets of any corporation or other entity; provided, however, that (i) the Borrower and the Company may form new subsidiaries, so long as the Bank has given its prior, written approval, and (ii) the Company may merge or consolidate one or more of its wholly-owned subsidiaries (other than Borrower) with or into (A) the Company (provided that the Company shall be the surviving corporation) or (B) any one or more of its wholly-owned subsidiaries, (iii) the Company may merge or consolidate one or more of its wholly-owned subsidiaries with or into Borrower (provided that Borrower shall be the surviving corporation), (iv) Company may make a capital investment in SMI not to exceed to $10,000,000, and (v) Company or Borrower may invest in or acquire by purchase or otherwise, all or substantially all of the assets of any corporation or other entity (other than SMI) so long as (A) the consideration utilized by Company or Borrower to effect any such investment or acquisition consists 12 solely of cash and/or capital stock of the Company or any subsidiary of the Company (to whose existence the Bank has previously consented), (B) the cash portion of any such individual acquisition or investment does not exceed $10,000,000 and (C) the cash portion of all such acquisitions or investments does not exceed $40,000,000 in the aggregate. (e) Business. Change the nature of its business or engage in a kind of business different from that which it presently conducts. (f) Loans to Officers. Make any loans or advances to its shareholders or officers in excess of $200,000 to any individual officer or shareholder or $500,000 in the aggregate to all officers and shareholders. (g) Sale/Lease-back Transactions. Except for transactions involving property or assets with a fair market value in the aggregate less than $1,000,000, enter into (i) any lease as a lessor which calls for the purchase or equivalence of a purchase or rental materially below the fair market value of the property or an option to purchase at a price below the fair market value of the property; (ii) any agreement in which it sells and then leases back any property or assets. (h) Pledges. Pledge any of its assets without prior consent of the Bank, including, but not limited to, any purchase money liens in an amount in excess of $1,000,000 (which $1,000,000 amount shall be in addition to the amount allowed in Section 13(c)(viii) above), not already disclosed to Bank. 14. Financial Covenants. The Company covenants and agrees that so long as the Revolving Note is outstanding and unpaid, the Company will, on a consolidated basis: (a) Quick Ratio. Maintain a ratio of cash and account receivables to current liabilities of not less than 0.75 to 1.0 throughout the term hereof. Cash, accounts receivable and current liabilities are defined according to generally accepted accounting principles, with the exception that current liabilities will include all indebtedness of the Borrower under the Revolving Note. (b) Net Worth. Maintain minimum net worth of not less than (1) $117,000,000 during the period beginning the date hereof and ending January 1, 2000 and (2) beginning January 2, 2000, and during each subsequent fiscal year of the Company, the amount of the minimum net worth required under this Agreement during the immediately preceding fiscal year of the Company plus seventy percent (70%) of the Company's net income after taxes, on a consolidated basis, during such preceding fiscal year (with net income after taxes being determined in accordance with generally accepted accounting principles and no reductions being made to the minimum net worth for any fiscal year during which the Company's net income after taxes, on a consolidated basis, is a negative number). 13 (c) Fixed Charge Coverage Ratio. Maintain a ratio of Cash Flow to Fixed Charges of not less than 2.0 to 1.0 throughout the term hereof. "Cash Flow" is defined as the Company's net income, plus depreciation and amortization, plus interest expense, plus rental expense, all on a consolidated basis, and each determined in accordance with generally accepted accounting principles. "Fixed Charges" is defined as the Company's current portion of long-term debt and capitalized leases, plus interest expense, plus rental expense, plus dividends, all on a consolidated basis, and each determined in accordance with generally accepted accounting principles. Cash Flow and Fixed Charges shall be determined as of the end of the immediately preceding fiscal quarter for the twelve-month period ended as of the end of such fiscal quarter for which the determination is being made (i.e., on a rolling four-quarter basis). (d) Minimum Net Income. Achieve net income of not less than $1,000,000.00 for each fiscal quarter of the Company, commencing with the fiscal quarter ending July 3, 1999 (with net income to be determined in accordance with generally accepted accounting principles). 15. Default. The Borrower shall be in default hereunder if any one of the following events of default ("Events of Default") shall occur and be continuing, namely: (a) Default by the Borrower, any Guarantor or any other party to the Loan Documents in the payment of any sums owing to the Bank; or (b) Default by the Borrower, any Guarantor or any other party to the Loan Documents in the payment of any sums owing to others for borrowed money or the deferred payment of goods or services (excluding trade payables) in excess of $100,000 (hereinafter referred to as the "Other Indebtedness") or if the holder of any such Other Indebtedness declares or may declare such Other Indebtedness due prior to the stated maturity because of any default thereunder; or (c) Any representation, statement, warranty, projection, or certificate made by the Borrower or any Guarantor in the Loan Documents, or in any agreement, document or instrument executed pursuant hereto or concurrently herewith, or hereafter furnished to the Bank in connection with any loan or loans hereunder, shall prove to have been incorrect in any material respect at the time of making or issuance thereof; or (d) Borrower or any Guarantor, as applicable, shall fail or neglect to perform, keep or observe any covenant contained in Section 12(l), 12(m), 12(o) or 13 hereof on the date that Borrower or any such Guarantor, as applicable, is required to perform, keep or observe such covenant. 14 (e) Company shall fail or neglect to perform, keep or observe any covenant contained in Section 3 of the Stock Pledge Agreement on the date that Company is required to perform, keep or observe such covenant. (f) Borrower, any Guarantor or any other party to the Loan Documents shall fail or neglect to perform, keep or observe any covenant or agreements set forth in the Loan Documents or in any other agreement, document or instrument executed pursuant hereto (other than a covenant or agreement the performance of which is dealt with specifically elsewhere in this Section 15), and such default is not cured to the Bank's satisfaction within thirty (30) days of the occurrence thereof; provided, however, that the provisions of this Agreement shall control in the event that any of such provisions are in conflict with the provisions of any other agreement, mortgage, indenture or instrument executed pursuant hereto and all of such provisions in such other instruments shall be deemed to be cumulative of the provisions hereof to the extent such provisions are not inconsistent herewith; or (g) The Borrower, any Guarantor or any other party to the Loan Documents shall apply for or consent to, or acquiesce in the appointment of a receiver, trustee, or liquidator of itself or himself or of its or his property, or admit in writing its or his inability to pay its or his debts as they mature, or make a general assignment for the benefit of creditors or an Order of Relief be entered with respect to the Borrower, any guarantor or any other party to the Loan Documents by any court having competent jurisdiction in the premises, or file a voluntary petition in bankruptcy or a petition or answer seeking reorganization, composition, readjustment or arrangement, or similar relief with creditors, under any present or future statute, law or regulation, or otherwise, or take advantage of any insolvency law or file an answer admitting the material allegations of a petition filed against it or him in bankruptcy, reorganization, or insolvency proceedings, or corporate action shall be taken by it or him for the purpose of effecting any of the foregoing, or it or he shall have a receiver or trustee or assignee in bankruptcy or insolvency appointed for it or him, or its or his property, without its or his application or consent; or (h) Except for liabilities permitted pursuant to Sections 13 (a),(b), (c) or (d) hereof and the contingent liabilities previously disclosed to the Bank or other liabilities not contemplated by this Agreement which are incurred in the ordinary course of business, the Borrower or any Guarantor shall become or remains liable, directly or indirectly, for or in connection with obligations in excess of $250,000, stock or dividends of any other person or entity, whether by guaranty, endorsement, agreement to purchase or repurchase, agreement to lease, agreement to supply or advance funds (including, without limitation, agreements to maintain working capital, solvency or other balance sheet conditions or agreements to purchase stocks or make capital contributions), or otherwise. Thereupon, in any such case, the obligation of the Bank to make any advance or extend credit hereunder (including the issuance of Documentary or Stand-by Letters of Credit) to or for the account of the Borrower pursuant 15 hereto shall immediately terminate and the Bank shall be entitled to each and every remedy and to take each and every action permitted by the Loan Documents. 16. Notice. All notices and other communications given to any party hereto, in accordance with the provisions of this Agreement, shall be deemed to have been given to any party when sent by registered or certified mail, if by mail, or when delivered to the telegraph company, charges prepaid, if by telegram, in each case addressed to the party as provided as follows: if to the Bank: Wells Fargo Bank (Texas), National Association 1445 Ross Avenue MAC 5303-031, 3rd Floor Dallas, Texas 75202 Attention: Carol A. Polasky if to the Borrower: Fossil Partners, L.P. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks if to Guarantors: Fossil, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks Fossil Intermediate, Inc. 1105 N. Market Street Suite 1300 P. O. Box 8985 Wilmington, Delaware 19899 Attention: Corporate Trust Administration with a copy to: Fossil Intermediate, Inc. c/o Fossil, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks 16 Fossil Trust 1100 N. Market Street Rodney Square North Wilmington, Delaware 19890 Attention: Corporate Trust Administration with a copy to: Fossil Trust c/o Fossil, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks Fossil Stores I, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks with a copy to: Fossil Stores I, Inc. c/o Fossil, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks Fossil Stores II, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks with a copy to: Fossil Stores II, Inc. c/o Fossil, Inc. 2280 N. Greenville Avenue Richardson, Texas 75082-4412 Attention: Don G. Hicks 17. Waiver. No failure to exercise and no delay in exercising on the part of the Bank of any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law or in any other agreement. 18. Survival of Agreements. All agreements, representations and warranties herein made shall survive the execution and delivery of the Revolving Note, and the making and renewal thereof. 17 19. Amendment. This Agreement may not be amended except in writing signed by the Borrower, the Guarantors and the Bank. 20. Successors. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Guarantors, the Bank and the successors and assigns of each party hereto. 21. Severability. In the case any one or more of the provisions contained in the Loan Documents should be invalid, illegal, or unenforceable, in any respect, the validity, legality, and enforceability of the remaining provisions contained therein shall not in any way be affected thereby. 22. Interest. It is the intention of the parties hereto to comply with the laws of the State of Texas accordingly, it is agreed that notwithstanding any provisions to the contrary in the Loan Documents, in no event shall said Loan Documents require the payment or permit the collection of interest, as defined under the laws of the State of Texas, in excess of the maximum amount permitted by such laws. If any such excess of interest is contracted for, charged or received, under the Loan Documents, or in the event the maturity of the indebtedness evidenced by the Revolving Note or is accelerated in whole or in part, or in the event that all or part of the principal or interest of the Revolving Note shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged, or received under the Loan Documents on the amount of principal actually outstanding from time to time thereunder shall exceed the maximum amount of interest permitted by the laws of the State of Texas, then in any such event (a) the provisions of this section shall govern and control, (b) neither the Borrower nor any other person or entity now or hereafter liable for the payment of the Revolving Note shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted to be contracted for by, charged to or received from the party obligated thereon under the laws of the State of Texas, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount on the Revolving Note or refunded to the person paying the same, at the holder's option, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful rate of interest permitted to be contracted for by, charged to or received from the party obligated thereon under the laws of the State of Texas as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under the Loan Documents, for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by the laws of the State of Texas, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated terms of the Revolving Note all interest at any time contracted for, charged or received from the undersigned or otherwise by the holder or holders thereof in connection with such Revolving Note. 23. Participations, Etc. The Borrower expressly recognizes and agrees that, so long as the total indebtedness of the Borrower to the Bank is $40,000,000 or less, upon the mutual consent of the Borrower and the Bank (unless an Event of Default has occurred hereunder in which case no consent of the Borrower shall be necessary), the Bank may sell to other lenders 18 participations in the loans incurred by the Borrower pursuant hereto. The Borrower expressly recognizes and agrees that, if the total indebtedness of the Borrower to the Bank is more than $40,000,000, the Bank, without the consent of the Borrower, may sell to other lenders participations in the loans incurred by the Borrower pursuant hereto. Therefore, as security for the due payment and performance of all indebtedness and other liabilities and obligations of the Borrower to the Bank under the Loan Documents and any other obligation of the Borrower to the Bank, whether now existing or hereafter arising, and to such lenders arising now by reason of such participations or otherwise, the Borrower hereby grants to the Bank and to such lenders, a lien on and security interest in any and all deposits or other sums at any time credited by or due from the Bank and such lenders or either or any of them to the Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other property of the Borrower, and the proceeds thereof now or hereafter held or received by or in transit to the Bank and such lenders or either or any of them, from or for the Borrower whether for safekeeping, custody, pledge, transmission, collection or otherwise and any such deposit, sums, monies securities and other property may at any time after Default be set-off, appropriated and applied by the Bank and by such lenders, or either or any of them, against any indebtedness, liabilities or other obligations, whether now existing or hereafter arising, of the Borrower or any of them, under this Agreement, the Revolving Note, or otherwise whether or not such indebtedness, liabilities or other obligation is then due or secured by any indebtedness, liabilities or other obligation is then due or secured by any collateral or if it is so secured whether or not such collateral held by the Bank or such lenders is considered to be adequate. 24. Merger. This Agreement represents the final agreement between the Borrower and the Bank pertaining the transactions contemplated by the Amended Agreement. All prior agreements (including the Amended Agreement) between the Borrower and the Bank pertaining to the Line of Credit, and the other matters set forth in this Agreement are merged into and replaced by this Agreement. 25. Ratification of Guaranties. Each of the Guarantors hereby acknowledges and consents to all of the terms and conditions of this Agreement and hereby ratifies and confirms the Guaranty Agreement to which it is a party to or for the benefit of the Bank. Each of the Guarantors hereby acknowledges that it has no claims, counterclaims, offsets, credits or defenses to the Loan Documents or the performance of its obligations thereunder. Furthermore, each Guarantor agrees that nothing contained in this Agreement shall adversely affect any right or remedy of the Bank under the Guaranty Agreement to which such Guarantor is a party. Each Guarantor hereby agrees that with respect to the Guaranty Agreement to which it is a party, all references in such Guaranty Agreement to the "Guaranteed Obligations" shall include, without limitation, the obligations of Borrower to Bank under this Agreement. Each Guarantor hereby also agrees that with respect to the Guaranty Agreement to which it is a party, all references in such Guaranty Agreement to "First Interstate Bank of Texas, N.A." shall be deemed references "Wells Fargo Bank (Texas), National Association". Finally, each of the Guarantors hereby acknowledges that the execution and delivery of this Agreement and the other Loan Documents executed in connection herewith shall in no way change or modify its obligations as a guarantor, debtor, pledgor, assignor, obligor and/or grantor under its respective Guaranty Agreement except as specifically provided in this Section 25 and shall not 19 constitute a waiver by the Bank of any of the Bank's rights against such Guarantor. 26. Ratification of Security Interests. The Company hereby agrees that the Stock Pledge Agreement is hereby expressly amended such that the definition of "Secured Obligations" contained therein includes, without limitation, all indebtedness and other obligations of Borrower now or hereafter existing hereunder this Agreement, the Revolving Note, and the other Loan Documents, as amended hereby. Furthermore, the Company hereby ratifies and reaffirms its obligations under the Stock Pledge Agreement, as the same is amended hereby, and acknowledges that the Stock Pledge Agreement is not subject to any claims, defenses or offsets. The Company hereby agrees that all references in the Stock Pledge Agreement to "First Interstate Bank of Texas, N.A." shall be deemed references "Wells Fargo Bank (Texas), National Association". Finally, the Company hereby acknowledges that the execution and delivery of this Agreement and the other Loan Documents executed in connection herewith shall in no way change or modify its obligations as a debtor, pledgor, assignor, obligor and/or grantor under the Stock Pledge Agreement except as specifically provided in this Section 26 and shall not constitute a waiver by the Bank of any of the Bank's rights against the Company. 27. AGREEMENT FOR BINDING ARBITRATION. The parties agree to be bound by the terms and provisions of the Bank's current Arbitration Program which is incorporated by reference herein and is acknowledged as received by the parties pursuant to which any and all disputes shall be resolved by mandatory binding arbitration upon the request of any party. 28. Judgment Currency. ----------------- (a) If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or under the Revolving Note from a currency (the `Original Currency') into another currency (the `Other Currency'), the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be the rate of exchange prevailing on the business day immediately preceding the day on which final judgment is given. (b) The obligation of Borrower in respect of any sum due in the Original Currency from it to Bank hereunder or under the Revolving Note shall, notwithstanding any judgment in any Other Currency, be discharged only if and to the extent that on the business day following receipt by Bank of any sum adjudged to be so due in such Other Currency Bank may in accordance with normal banking procedures purchase such amount of the Original Currency with such Other Currency at the rate of exchange prevailing on the business day preceding the day on which the final judgment referred to in Section 28 (a) is given; if the amount of the Original Currency so purchased is less than the amount of the Original Currency which the Bank could have purchased at the rate of exchange prevailing on the business day preceding the day on which such final judgment is given, Borrower agrees, as a separate obligation of Borrower to Bank and notwithstanding any such judgment, to indemnify Bank against such difference, and if the amount of the Original 20 Currency so purchased exceeds the amount of the Original Currency which the Bank could have purchased at the rate of exchange prevailing on the business day preceding the day on which such final judgment is given, Bank agrees to remit to Borrower such excess. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 21 EXECUTED as of the day and year first above written. "BANK" WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, By: /s/ Carol A. Polasky ---------------------------------------- Name: Carol A. Polasky Title: Vice President "BORROWER" FOSSIL PARTNERS, L.P. By: Fossil, Inc., its general partner By: /s/ Randy S. Kercho ------------------------------ Randy S. Kercho Executive Vice President and Chief Financial Officer "GUARANTORS" FOSSIL, INC. By: /s/ Randy S. Kercho ---------------------------------------- Randy S. Kercho Executive Vice President and Chief Financial Officer FOSSIL INTERMEDIATE, INC. By: /s/ Kosta N. Kartsotis ---------------------------------------- Kosta N. Kartsotis, President FOSSIL TRUST By: /s/ Randy S. Kercho ---------------------------------------- Randy S. Kercho, Treasurer FOSSIL STORES I, INC. By: /s/ Randy S. Kercho ---------------------------------------- Randy S. Kercho, Treasurer FOSSIL STORES II, INC. By: /s/ Randy S. Kercho ---------------------------------------- Randy S. Kercho, Treasurer Exhibits: - -------- A - Guaranty Agreement B - Stock Pledge Agreement EXHIBIT A --------- GUARANTY AGREEMENT (See Attached) EXHIBIT B --------- STOCK PLEDGE AGREEMENT (See Attached) EX-27 3 FDS -- FINANCIAL DATA SCHEDULE FOR FOSSIL, INC.
5 Part I Item Financial Statements of Fossil, Inc. and Subsidiaries as of and for the twenty-six weeks ended July 3, 1999 filed on Form 10Q. 0000883569 Fossil, Inc. 1,000 U.S. Dollars 6-MOS JAN-01-2000 JAN-03-1999 JUL-03-1999 1 70,648 0 45,829 7,415 74,359 196,045 42,242 15,676 228,434 67,759 0 0 0 213 158,573 228,434 173,548 173,548 86,126 138,912 0 501 49 34,403 14,106 0 0 0 0 20,297 0.64 0.61
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