Joint Venture Agreement

JOINT VENTURE AGREEMENT



This Stock Purchase and Joint Venture Agreement (the "Agreement") is entered into as of the ____ day of June 2001, by and between Fossil, Inc. ("Fossil"), a corporation organized and existing under the laws of the State of Delaware, U.S.A., with its principal offices at 2280 N. Greenville Avenue, Richardson, Texas 75082 and Seiko Instruments Inc. ("SII"), a corporation organized and existing under the laws of Japan, with its principal offices located at 8, Nakase 1-chome, Mihama-ku, Chiba-shi, Chiba 261-8507, Japan.



RECITALS



WHEREAS, Fossil is engaged in the business of manufacturing, marketing and distributing fashion watches and accessories throughout the world; and



WHEREAS, SII is engaged in the business of manufacturing and marketing watches and other products throughout the world; and



WHEREAS , Fossil has previously formed Fossil Japan K.K., (the "Company"), a corporation organized and existing under the laws of Japan, with its principal offices at 8F Shibuya-Hashimoto Bldg., 5-5, Maruyamacho, Shibuya-Ku, Tokyo, which is engaged in the business ofmarketing, distributing, importing and exporting watches, including, but not limited to, watches under the FOSSIL Brand in Japan; and



WHEREAS , Fossil owns one hundred percent (100%) of the issued and outstanding common stock of the Company; and



WHEREAS , Fossil desires to sell to SII and SII desires to purchase from Fossil, five hundred (500) common shares of the Company representing fifty percent (50%) of the Total Outstanding Shares (as defined below) in the Company upon the terms and conditions hereinafter described; and



WHEREAS , following Closing, the Parties desire to change the name of the Company to SFJ, Inc. (kabusikigaisha SFJ); and



WHEREAS, SII and Fossil desire to enter into this Agreement in order to define their respective rights and obligations hereunder.



NOW, THEREFORE, the Parties hereby agree as follows:

ARTICLE 1

DEFINITIONS



For the purposes of this Agreement, the following terms shall have the respective meanings indicated below:



"Affected Stockholder" has a meaning set forth in Section 13.1(f) hereof.



"Affiliate" means any person or entity that directly or indirectly through one or more intermediaries controls, is controlled by or is under the common control with such first person or entity.



"Agreement" means this Joint Venture Agreement, as it may be amended from time to time in accordance with the terms hereof.



"Articles of Incorporation" means the articles of incorporation ( Teikan ) of the Company, substantially in the form attached hereto as Exhibit A.



"Board" means the Board of Directors of the Company.



"Business" has the meaning set forth in Section 3.1 hereof.



"Capital" has the meaning set forth in Section 4.1 hereof.



"Closing" means the consummation of the transactions set forth in Section 11.2 of this Agreement.



"Closing Date" shall mean July 9, 2001, or such other date as may be agreed upon by the Parties.



"Commercial Code" means the Commercial Code of Japan (Law No. 48, March 9, 1899), as amended and in effect from time to time.



"Corporate Auditor" shall mean a corporate auditor ( Kansa-yaku ) of the Company with the powers and duties specified in the Commercial Code.



"Deadlock" has the meaning set forth in Section 12.1 hereof.



"Defaulting Stockholder" has the meaning set forth in Section 13.1(b) hereof.



"Director" means any member of the Board with the powers and duties specified in the Commercial Code and the Articles of Incorporation.



"Fair Market Value" means the fair value in the open market as between a willing seller and a willing buyer as determined by an independent third party mutually acceptable to the Stockholders.



"GAAP" means generally accepted accounting principles in Japan.

"Government Approval" of any action to be taken by a Party under this Agreement means such approval of, or consent to such action, together with such licenses, authorizations, or permits as will be reasonably required for such action, as the laws, statutes, decrees, regulations and rulings of the appropriate government authorities may require to be obtained in connection with such action. Whenever the term "Government Approval" is used herein, it shall be interpreted and construed to include the requirements that such approval be in form and substance reasonably acceptable to the Parties.



"Insolvent Stockholder" has the meaning set forth in Section 13.1(c) hereof.



"Merging Stockholder" has the meaning set forth in Section 13.1(d) hereof.



"Net Book Value" means net book value in accordance with GAAP as of any date of determination.



"Non-Transferring Stockholder" has the meaning set forth in Section 6.1(b) hereof.



"Operating Plan" means the plan for the operations of the Company to be prepared by management and approved by the Board pursuant to Section 3.2 hereof.



"Party" means either of Fossil or SII, and collectively, the "Parties".



"Person" means any natural person, partnership, corporation, limited liability company, association, trust, estate or any other legal entity.



"Prevented Stockholder" has the meaning set forth in Section 13.1(e) hereof.



"Products" means the products distributed by the Company from time to time, including, but not limited to, watches and clocks bearing the FOSSIL Brand.



"Prospective Purchaser" has the meaning set forth in Section 6.1(b) hereof.



"Purchase Notice" has the meaning set forth in Section 6.1(b) hereof.



"Representative Director" means one of the Directors, with the powers and duties specified in the Commercial Code and the Articles of Incorporation.



"Resolution Date" has the meaning set forth in Section 12.3 hereof.



"Sale Notice" has the meaning set forth in Section 6.1(b) hereof.



"Shareholding Percentage," with respect to either Stockholder, means the percentage represented by dividing (a) the number of shares in the Company issued to such Stockholder, by (b) the number of all shares in the Company issued to all of the Stockholders.

"SII" means Seiko Instruments Inc., a Japanese corporation.



"Stockholder" means either of Fossil or SII, and collectively, the "Stockholders".



"Stockholder Loans" has the meaning set forth in Section 4.2(c) hereof.



"Subject Shares" has the meaning set forth in Section 6.1(b) hereof.



"Third Party Loans" has the meaning set forth in Section 4.2(a) hereof.



"Total Outstanding Shares" has the meaning set forth in Section 2.1 hereof.



"Transfer" has the meaning set forth in Section 6.1(b) hereof.



"Transferring Stockholder" has the meaning set forth in Section 6.1(b) hereof.



ARTICLE 2

PURCHASE AND SALE OF SHARES



Section 2.1 Transfer of the Shares . Subject to the terms and conditions contained in this Agreement, Fossil shall transfer, assign and sell to SII, by delivering share certificates representing fifty percent (50%) of the total number of the issued and outstanding Shares (the "Total Outstanding Shares) in the Company, and SII shall acquire, free and clear of all liens and encumbrances, five hundred (500) shares of the common stock of the Company (the "Shares") at the Closing, which number represents fifty percent (50%) of the Total Outstanding Shares.



Section 2.2 Rights Attached . The transfer of the Shares shall include all rights attached or accruing to the Shares, including all dividends and distributions declared or made after the Closing.



Section 2.3 Purchase Price. In consideration of the transfer of the Shares, SII shall (i) pay Fossil the sum of twenty-five million Japanese Yen (a525,000,000) (the "Purchase Price"); and (ii) carry out the obligations herein specified.



Section 2.4 Payment . The Purchase Price shall be payable at the Closing by wire transfer in Japanese yen to the bank account as specified by Fossil prior to Closing.



ARTICLE 2A

ADDITIONAL UNDERTAKINGS



Section 2A.1 Pre-Closing Undertakings . The Parties agrees to take the following actions at, or prior to, Closing:



(a) Fossil shall cause the Company to clear deficit (" Kessonkin " in GAAP) of the Company after performing undertakings of this Section 2A.1;

(b) Fossil agrees to cause the Company to return all non-watch products currently in inventory to Fossil and Fossil agrees to accept such returns;



(c) Fossil shall cause the Company to return any inventory items shown as discontinued (or "R" goods) by the Company as of the date hereof to Fossil and Fossil agrees to accept such returns;



(d) Any items in inventory that have not been ordered by the Company during the eighteen (18) month period preceding the date hereof, shall be returned to Fossil by the Company and Fossil agrees to accept such return;



(e) Fossil shall cause the Company to write-off (i) any displays held in inventory as of the date hereof that will not be used by the Company; and (ii) any displays located at a retail customer that the Company no longer does business with;



(f) Fossil shall cause the Company to write-off any fixed assets that are not currently being utilized in the ordinary course of business of the Company;



(g) Fossil shall cause the Company to record any guaranteed retirement benefits applicable to the employees of the Company, reserve for any guaranteed retirement benefits in full amount calculated based on the number of employees of the Company and periods of the employment of such employees elapsed as of the end of June, 2001, and any allowance relating to possible dismissal, which have not previously been recorded;



(h) Fossil shall cause the Company to pay invoices issued by Fossil Partners, L.P., which are overdue subject to the terms and conditions of the International Marketing and Distribution Agreement between the Company and Fossil Partners, L.P;



(i) SII shall perform a simple check on all other balance sheet items of the Company;



(j) Fossil shall, at its own costs, cause the Company to dismiss certain of its employees as listed on Schedule 1 hereto, the method of dismissal carefully being overseen by Fossil to assure no violation of relevant laws;



(k) Fossil shall cause any secret partnership or other agreement regarding the investments and distribution between the Company and any of Fossil or its Affiliates, including the Partnership Agreement between Fossil Intermediate Inc. and the Company dated April 1, 1996 and the Intercompany Service Agreement between the Company and Fossil Partners, L.P. dated January 1, 2000, to be terminated and shall settle all the Tokumei Kumiai Syussikin in GAAP (the TK receivable);

(l) Fossil shall estimate any tax liabilities in the course of or in relation to performing the Pre-Closing Undertakings (which would not have been imposed on or incurred by the Company if it were not for the obligations under the Pre-closing Undertaking) as set forth in this Section2A.1 and cause the Company to reflect such estimation of tax liabilities on the anticipated balance sheet as set forth in item (m) of the Section 2A.1 as the provision for such tax liabilities; and



(m) Fossil shall submit and attach to this Agreement as Exhibit B the anticipated balance sheet of the Company as of the end of June 2001. Fossil shall pay to the Company for the adverse difference, if any, in order to make the Company92s actual balance sheet same as the anticipated balance sheet as of the end of June 2001.



Section 2A.2 Post-Closing Undertakings . The Parties agree to take the following actions following Closing:



(a) The Parties agree to review the accounts and notes receivable of the Company as of the end of month in October 2001, and Fossil agrees to remit to the Company any amounts owed for any uncollected accounts arising from such review; provided that , the Company can demonstrate that such amounts were invalid due to non-payment or dispute;



(b) The Parties agree that any accounts receivable paid by a customer of the Company following Closing will first be credited against the older receivable unless the older receivable is demonstrated by the Company to be invalid or is subject to genuine dispute, with the exception of balances that are received following October 2001, and in such case those amounts shall be credited back to Fossil;



(c) The Parties agree that any invoices received after Closing that relate to goods or services purchased by the Company prior to Closing, will be paid by the Company according to the terms applicable to such invoice and Fossil shall promptly reimburse the Company for such amounts upon receipt of adequate documentation of such expenditure;



(d) The Parties agree that the Company will be entitled to the same privileges as to timing of return, replacement, reimbursement, credit for return, shipping fees, and similar privileges from Fossil with respect to inventory returns as Fossil affords to its wholly owned subsidiaries and Fossil agrees to cause such provision to be reflected in the International Marketing and Distribution Agreement by and between the Company and Fossil Partners, L. P., unless SII requests any such privilege not to be so included. Fossil shall cause Fossil Partners, L.P. to negotiate, upon the requests of the Company, the amendment of other terms and conditions as set forth in such International Marketing and Distribution Agreement.



ARTICLE 3

BUSINESS OF THE COMPANY



Section 3.1 General Description of the Company . The business (the "Business") of the Company will be the marketing and distribution of watches and clocks, including, but not limited to, watches under the FOSSIL Brand and such other matters as may be approved from time to time by the Board or as may be contemplated within the scope of this Agreement.

Section 3.2 Operating Plan . In order to implement the Business, at least thirty (30) days prior to the beginning of each fiscal year, the Representative Director of the Company shall present an Operating Plan to the Board for approval by the Board. The Operating Plan shall set forth the plans according to which the Company shall be operated for such fiscal year and shall include, at a minimum, the following: (i) operating budgets; (ii) budgets for working capital requirements; (iii) three-year summary budget projections; (iv) projected stock keeping unit ("SKU" ) count levels by product category and introduction dates for the upcoming year; and (v) the manner (third party financing, additional capital contribution or Stockholder financing) by which to raise the working capital requirements and detailed terms and conditions thereof.



Notwithstanding the foregoing, within thirty (30) days after the Closing, the Representative Director of the Company shall present to the Board an Operating Plan for fiscal year 2001 for approval by the Board. Any Operating Plan approved by the Board may be amended from time to time by the Board.



ARTICLE 4

CAPITALIZATION OF THE COMPANY AND FINANCING



Section 4.1 Authorized Capital . The Company currently has authorized capital consisting of 1,000 shares of common stock with par value of a550,000 per share (the "Capital"). All of the Company92s shares shall be the same class in all respects and the holders thereof shall be entitled to identical rights and privileges including, without limitation of the foregoing, identical rights and privileges with respect to dividends, voting power and distribution of assets in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company.



Section 4.2 Working Capital .



(a) Third Party Financing . The working capital requirements of the Company shall primarily be met, to the extent possible, by obtaining third party financing (the "Third Party Loan" ). In the event the Board determines that all or part of the working capital requirements of the Company shall be met through obtaining Third Party Loan, such Third Party Loan shall be in such amounts and subject to such terms as the Board may determine (including, but not limited to, after discussing the conditions of obtaining Third Party Loan, such as any requirements by any third party lender to subordinate the Stockholder Loan to the Third Party Loan). To the extent one of the conditions of the extension of the Third Party Loan so approved by the Board is the subordination of any Stockholder Loans to such Third Party Loan, then the Stockholders agree to take such action as necessary to subordinate such Stockholder Loan. To the extent that the Board determines that it is necessary to provide a guaranty of the Stockholders to obtain such Third Party Loan, then each of SII and Fossil shall negotiate in good faith to provide a guaranty in favor of the lender of such Third Party Loan so that SII and Fossil each guarantees an amount equal to their respective Shareholding Percentage.

(b) Additional Capital Contributions. In the event the Board unanimously determines that the working capital requirements of the Company should not be raised by obtaining Third Party Loan pursuant to Section 4.2(a), then the working capital requirements of the Company may be met through additional capital contribution by the Stockholders, subject that the authorized capital of the Company as provided in the Article of Incorporation then in effect shall allow such additional capital contributions by the Stockholders. In the event the Board unanimously determines that all or part of the working capital requirements of the Company shall be met through additional capital contributions of the Stockholders, then the Stockholders shall accept to subscribe such additional capital and provide such additional capital contributions to the Company, provided, however, that (i) such additional capital contribution is made in cash; (ii) each Stockholder shall make such additional capital contribution in an amount equal to the total amount of such additional capital contribution, multiplied by such Stockholder92 s Shareholding Percentage; and (iii) such additional capital contribution shall otherwise be made in accordance with the resolution of the Board. Upon contribution of the capital by the Parties pursuant to this Section, the Company shall issue additional shares at a550,000 per share to SII and to Fossil in proportion to such subsequent capital contribution and deliver share certificates representing such shares as provided in the Articles of Incorporation.



(c) Stockholder Loans . In the event the Board determines unanimously that the working capital requirements of the Company should not be raised by obtaining Third Party Loan pursuant to Section 4.2(a), then the working capital requirements of the Company may be met by obtaining financing from the Stockholders (the " Stockholder Loan"). In the event the Board unanimously determines that all or part of the working capital requirements of the Company shall be met by obtaining a Stockholder Loan, then the Stockholders shall provide such Stockholder Loan to the Company, provided, however, that (i) such Stockholder Loan is made and repaid in Japanese yen; (ii) each Stockholder shall provide such Stockholder Loan in an amount equal to the total amount of such Stockholder Loan, multiplied by the applicable percentage set forth in Section 14.13; The Stockholders may provide its portion of the Stockholder Loan by extending the payment date of any invoice issued for products sold to the Company by the Stockholder or any affiliate of such Stockholder. and (iii) such Stockholder Loan shall otherwise be made in accordance with the resolution of the Board. Unless otherwise determined by the Board, the interest rate of such Stockholder Loan shall not exceed the interest rate available to the Company through Third Party Loans with similar terms, conditions and principal amounts as the Stockholder Loan in question, and shall be payable only at such times as the principal amount of such Stockholder Loan shall become payable in accordance with Section 5.1 hereof.



(d) Pre-closing Loans . Fossil shall be sole guarantor all working capital requirements or funds borrowed by the Company on or prior to Closing. All working capital requirements or funds borrowed by the Company following Closing shall be governed by Sections (a), (b) and (c) of this Article as respectively applicable.

ARTICLE 5

DIVIDENDS AND REPAYMENTS OF STOCKHOLDER LOANS



Section 5.1 Stockholder Loan Repayment Policy . Except as otherwise determined by the Board, the Company shall covenant to repay all of the outstanding principal and interest on all Stockholder Loans pursuant to the terms of the loan agreement before the Company is permitted under the terms of such loan agreement to make distributions of any dividends to the Stockholders.



Section 5.2 Dividend Policy . Subject to Section 5.1, dividends may be distributed to the Stockholders subject to Japanese Commercial Code and related regulations.



ARTICLE 6

TRANSFER OF SHARES



Section 6.1 ...