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: AprilJuly 4, 1998

                                       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 May 15,August 14,
                                1998: 20,842,272.20,926,805





PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
AprilJuly 4, January 3, 1998 1998 ---- ---- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 25,402,97930,787,882 $ 21,103,581 Accounts receivable - net 28,429,30229,572,160 34,237,526 Inventories 53,812,26861,050,474 51,382,160 Deferred income tax benefits 4,605,0925,040,813 4,503,749 Prepaid expenses and other current assets 2,276,5742,966,345 2,432,282 --------- ----------------------- -------------- Total current assets 114,526,215129,417,674 113,659,298 Property, plant and equipment - net 20,761,20821,253,691 21,073,333 Intangible and other assets 4,827,3884,763,277 4,837,259 --------- --------- 140,114,811-------------- -------------- $ 155,434,642 $ 139,569,890 ============= =========================== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: - 2 - CORPDAL:111408.1 25513-00001 Notes payable $ 3,808,9403,653,925 $ 7,862,145 Accounts payable 10,744,15714,036,486 9,609,805 Accrued expenses: Co-op advertising 8,051,9009,255,260 8,700,696 Compensation 2,569,7402,562,884 2,665,485 Other 5,172,6065,467,487 8,714,067 Income taxes payable 7,993,9937,874,653 5,504,304 --------- ----------------------- -------------- Total current liabilities 38,341,33642,850,695 43,056,502 Minority interest in subsidiaries 975,4121,071,944 1,250,405 Stockholders' equity: Common stock, shares issued and outstanding, 20,475,21720,879,135 and 20,308,503, respectively 204,752208,791 203,085 Additional paid-in capital 27,208,03232,150,578 26,021,255 Retained earnings 75,923,15881,627,116 71,257,176 Cumulative translation adjustment (2,537,879)(2,474,482) (2,218,533) ---------- ------------------------- ------------- Total stockholders' equity 100,798,063111,512,003 95,262,983 ----------- ------------------------ ------------- $ 140,114,811155,434,642 $ 139,569,890 ============== =============
See notes to condensed consolidated financial statements. - 3 -
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED For the 13 For the 13 For the 26 For the 26 Weeks Weeks Weeks 1/2 Weeks Ended Ended Ended Ended July 4, July 5, July 4, July 5, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 64,363,019 $ 56,931,466 $ 121,247,906 $ 104,381,178 Cost of sales 32,457,569 30,627,390 61,441,870 54,881,744 ------------ ------------ ------------- ------------- Gross profit 31,905,450 26,304,076 59,806,036 49,499,434 Operating expenses: Selling and distribution 15,109,978 13,142,089 28,945,885 25,143,114 General and administrative 6,908,985 6,384,510 13,123,411 12,118,079 ------------ ------------ ------------- ------------- Total operating expenses 22,018,963 19,526,599 42,069,296 37,261,193 ------------ ------------ ------------- ------------- Operating income 9,886,487 6,777,477 17,736,740 12,238,241 Interest expense (59,639) (267,166) (116,941) (496,716) Other income (expense) - net (129,890) (373,208) (40,859) (562,998) ------------ ------------ ------------- ------------- Income before income taxes 9,696,958 6,137,103 17,578,940 11,178,527 Provision for income taxes 3,993,000 2,503,000 7,209,000 4,570,000 ------------ ------------ ------------- ------------- Net income $ 5,703,958 $ 3,634,103 $ 10,369,940 $ 6,608,527 ============ ============ ============= ============= Basic earnings per share $ 0.28 $ 0.18 $ 0.50 $ 0.33 ============ ============ ============= ============= Diluted earnings per share $ 0.26 $ 0.18 $ 0.48 $ 0.32 ============ ============ ============= ============= Weighted average shares outstanding: Basic 20,714,523 20,104,094 20,550,544 20,049,813 ============ ============ ============= ============= Diluted 21,795,794 20,710,743 21,616,692 20,558,242 ============ ============ ============= =============
See notes to condensed consolidated financial statements. -1-- 4- FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED
For the 13 For the 13 1/2 Weeks Ended Weeks Ended April 4, 1998 April 5, 1997 ------------- ------------- Net sales $ 56,884,887 $ 47,449,712 Cost of sales 28,984,301 24,254,354 ---------- ---------- Gross profit 27,900,586 23,195,358 Operating expenses: Selling and distribution 13,835,907 12,001,025 General and administrative 6,214,426 5,733,569 --------- --------- Total operating expenses 20,050,333 17,734,594 ---------- ---------- Operating income 7,850,253 5,460,764 Interest expense (57,302) (229,550) Other income (expense) - net 89,031 (189,790) ------ --------- Income before income taxes 7,881,982 5,041,424 Provision for income taxes 3,216,000 2,067,000 --------- --------- Net income $ 4,665,982 $ 2,974,424 ============ ============ Basic earnings per share $ 0.23 $ 0.15 ============ ============ Diluted earnings per share $ 0.22 $ 0.15 ============ ============ Weighted average shares outstanding: Basic 20,386,448 19,995,533 ========== ========== Diluted 21,439,596 20,405,742 ========== ==========
See notes to condensed consolidated financial statements. -2- FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
For the 1326 For the 1326 1/2 Weeks Ended Weeks Ended AprilJuly 4, AprilJuly 5, 1998 1997 ---- ---- Operating activities: Net income $ 4,665,98210,369,940 $ 2,974,4246,608,527 Noncash item affecting net income: Minority interest in subsidiaries (21,147) 69,045148,295 (178,664) Depreciation and amortization 794,352 716,2501,700,517 1,481,617 Increase (decrease) in allowance for doubtful accounts 1,024,977 78,792 Decrease697,328 (291,184) Increase (decrease) in allowance for returns - net of related inventory in transit (157,950) (503,478)211,584 (143,350) Deferred income tax benefits (101,343) 60,619(537,064) (230,656) Cash from changes in assets and liabilities: Accounts receivable 5,361,412 2,853,2183,541,536 1,495,544 Inventories (2,850,323) (462,612)(9,453,396) (2,259,386) Prepaid expenses and other current assets 155,708 45,810(534,063) (2,241,403) Accounts payable 951,284 (2,740,040)4,253,472 (1,212,736) Accrued expenses (4,286,002) (3,957,590)(2,794,617) (3,367,013) Income taxes payable 2,489,689 1,877,118 --------- ---------2,370,349 2,156,446 ------------ ----------- Net cash from operations 8,026,639 1,011,5569,973,881 1,817,742 - 5 - Investing activities: Net assets acquired in business combination/consolidation, net of cash received - (931,088)(1,315,703) Additions to property, plant and equipment (479,301) (1,039,644) Increase(1,773,505) (4,048,679) (Increase) decrease in intangible and other assets (50,502) (235,786) -------- ---------(56,457) 224,220 ------------ ----------- Net cash used in investing activities (529,803) (2,206,518)(1,829,962) (5,140,162) Financing activities: Issuance of common stock 1,188,444 1,256,3486,135,029 1,794,071 Decrease in minority interests in subsidiaries (253,846) (294,297) Repayments in notes payable-affiliates - (120,408)(326,756) (498,785) (Repayments) increase in notes payable-banks (4,053,205) 1,070,925(4,208,220) 1,510,746 ------------ ----------- --------- Net cash (used in) from financing activities (3,118,607) 1,912,5681,600,053 2,806,032 Effect of exchange rate changes on cash and cash equivalents (78,831) (338,176) -------- ---------(59,671) (510,492) ------------ ----------- Net increase (decrease) in cash and cash equivalents 4,299,398 379,4309,684,301 (1,026,880) Cash and cash equivalents: Beginning of period 21,103,581 11,981,246 ---------- ---------------------- ----------- End of period $ 25,402,97930,787,882 $ 12,360,67610,954,366 ============ ============
See notes to condensed consolidated financial statements. -3-- 6 - 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 AprilJuly 4, 1998 and the results of operations for the thirteen and twenty-six week periods ended July 4, 1998, respectively and the results of operations for the thirteen and twenty-six and one-half week periods ended April 4, 1998, and AprilJuly 5, 1997, respectively. 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 3, 1998. Operating results for the thirteen-week periodthirteen and twenty-six week periods ended AprilJuly 4, 1998, are not necessarily indicative of the results to be achieved for the full year. Beginning January 1, 1997, the Company changed its fiscal year to reflect the retail-based calendar (containing 4-4-5 week calendar quarters). Due to this change, the Company's 1997 first quarterhalf-year period ended AprilJuly 5, 1997 contained an additional one-half week for the transition period. This change had an immaterial impact on comparability. On March 4, 1998, 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 paid on April 8, 1998 to stockholders of record on March 25, 1998. Retroactive effect has been given to the stock split in stockholders' equity accounts beginning as of the fiscal year ended January 3, 1998, 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","FOSSIL," "FSL" and "RELIC" brands names. The Company's products are sold primarily through department stores and other major retailers, both domestically and internationally. New Accounting Standards. Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," became effective as of the first quarter 1998. This statement requires companies to report and display comprehensive income and its components (revenues, expenses, gains and losses). Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income consists of the following: First QuarterFor the 13 For the 26 Weeks Ended Weeks Ended July 4, 1998 ----July 4, 1998 ------------ ------------ Net income, as reported $4,665,982$5,703,958 $10,369,940 Current period change in foreign currency translation adjustment 319,346 -------63,397 (255,949) ---------- ------------ Comprehensive income $4,346,636$5,767,355 $10,113,991 ========== -4-============ - 7 - FOSSIL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 2. INVENTORIES
Inventories consist of the following: April 4, January 3, 1998 1998 ---- ---- Components and parts $ 3,825,470 $ 2,751,719 Work-in-process 1,264,254 2,064,623 Finished merchandise on hand 37,989,541 35,707,813 Merchandise at Company's stores 5,012,900 5,484,479 Merchandise in transit from estimated Customers' returns 5,720,103 5,373,526 --------- --------- $53,812,268 $51,382,160 =========== ===========
Inventories consist of the following: July 4, January 3, 1998 1998 ------------ ------------ Components and parts $ 6,034,851 $ 2,751,719 Work-in-process 3,572,151 2,064,623 Finished merchandise on hand 39,451,754 35,707,813 Merchandise at Company's stores 6,468,660 5,484,479 Merchandise in transit from estimated Customers' returns 5,523,058 5,373,526 ------------ ------------ $ 61,050,474 $ 51,382,160 ============ ============ 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 AprilJuly 4, 1998, the Company had hedge contracts to sell 17.814.0 million German Marks for approximately $10.3$8.1 million, expiring through December 1998 and 207.8283.9 million Japanese Yen for approximately $1.6$2.2 million, expiring through AugustNovember 1998. 3. SUBSEQUENT EVENT1. STOCKHOLDERS' EQUITY On May 11, 1998, the Company completed a secondary offering of the Company's Common Stock (the "Offering"). The Offering consisted of 2,150,000 shares of Common Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to an underwriter's over-allotment allocation)for an aggregate of which the2,302,500 shares. The Company sold 215,000 shares with the remaining shares sold by selling stockholders. The Offering was priced at $19.00 per share of Common Stock. -5-- 8 - FOSSIL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the thirteen-week periodthirteen and twenty-six week periods ended AprilJuly 4, 1998 (the "First"Second Quarter") and "Half Year Period," respectively), as compared to the thirteen and twenty-six and one-half week periodperiods ended AprilJuly 5, 1997 (the "Prior Year Quarter" and "Prior Year Half Year Period"). Due to a change in the Company's fiscal year to reflect the retail-based calendar (containing 4-4-5 week calendar quarters), the Company's Prior Year QuarterHalf Year Period contained an additional one-half week for the transition period. This change had an immaterial impact on the comparability toof the First Quarter.periods. 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 -Registered Trademark-FOSSIL(R) 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 -Registered Trademark-it RELIC(R) and FSL -TM-FSL(TM) brands 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 increasedincreasing awareness of the FOSSIL brand by entering into various license agreements for other categories of fashion accessories and apparel, such as men's underwear and lounge wear and, most recently, outerwear under the FOSSIL brand. In addition, the Company licenses the brands of other companies in order to further leverage its infrastructure. For example, the Company during 1997 entered into a multi-year license agreement with Giorgio Armani to design, manufacture, distribute and market a line of EMPORIO ARMANI -Registered Trademark-ARMANI(R) watches. The Company's products are sold to department stores and specialty retail stores in over 70 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 Europe, South and Central America, the Caribbean, Canada, the Far East, Australia, 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 in major airports in the United States, on cruise ships and in certain international markets. The Company's successful expansion of its product lines and leveraging of its infrastructure has contributed to its increasing net sales and operating profits. -6-- 9 - 1998 Highlights o During April 1998, the Company effected a three-for-two stock split in the form of a 50% stock dividend forto stockholders of record at the close of business on March 25, 1998. o During April 1998, the Company signed a five-year agreement with Eddie Bauer, Inc. appointing the Company as the exclusive supplier of Eddie Bauer brand watches. o During May 1998, the Company completed a 2,150,000 share secondary offering of 2,150,000 shares of its $0.01 par valuepar-value common stock (plus an additional 152,500 shares in June 1998 pursuant to an underwriter's over-allotment allocation) of which the Company sold 215,000 shares. 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 Net Sales Change For the Quarter For the Quarter Ended Ended ----- ----- April 4, April 5, April 4, 1998 1997 1998 ---- ---- ---- Net sales 100.0% 100.0% 19.9% Cost of sales 51.0 51.1 19.5 ----- ----- Gross profit margin 49.0 48.9 20.3 Selling and distribution expenses 24.3 25.3 15.3 General and administrative expenses 10.9 12.1 8.4 ---- ---- Operating income 13.8 11.5 43.8 Interest expense (0.1) (0.5) (75.0)
Percentage of Percentage of Net Sales Net Sales For the 13 For the 26 For the 26 Weeks Weeks 1/2 Weeks Ended Ended Ended ----- ----- ----- July 4, July 5, Percentage July 4, July 5, Percentage 1998 1997 Change 1998 1997 Change ---- ---- ------ ---- ---- ------ Net sales 100.0% 100.0% 13.1% 100.0% 100.0% 16.2% Cost of sales 50.4 53.8 6.0 50.7 52.6 12.0 ----- ----- ---- ----- ----- ---- Gross profit margin 49.6 46.2 21.3 49.3 47.4 20.8 Selling and distribution expenses 23.5 23.1 15.0 23.9 24.1 15.1 General and administrative expenses 10.7 11.2 8.2 10.8 11.6 8.3 ----- ----- ----- ----- Operating income 15.4 11.9 45.9 14.6 11.7 44.9 Interest expense (0.1) (0.5) (77.7) (0.1) (0.5) (76.5) Other income (expense)- net (0.2) (0.6) (65.2) (0.0) (0.5) (92.7) ------ ------ ----- ----- Income before income taxes 15.1 10.8 58.0 14.5 10.7 57.2 Income taxes 6.2 4.4 59.5 5.9 4.4 57.8 ----- ----- ----- ----- Net income 8.9% 6.4% 57.0% 8.6% 6.3% 56.9% ===== ===== ===== =====
- net 0.2 (0.4) (146.9) --- ----- Income before income taxes 13.9 10.6 56.3 Income taxes 5.7 4.3 55.6 --- --- Net income 8.2% 6.3% 56.9% ==== ==== -7-10 - 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 Amounts % of Total ------- ---------- ------- ---------- For the Quarter Ended For the QuarterFor the For the For the For the 26 For the For the 26 13 Weeks 13 Weeks 13 Weeks 13 Weeks 26 Weeks 1/2 Weeks 26 Weeks 1/2 Weeks Ended --------------------- --------------------- AprilEnded Ended Ended Ended Ended Ended Ended July 4, AprilJuly 5, AprilJuly 4, AprilJuly 5, July 4, July 5, July 4, July 5, 1998 1997 1998 1997 -------- -------- -------- --------1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- International: Europe $ 12.213.8 $ 10.6 21% 22%9.8 21 % 17 % $ 26.0 $ 20.4 21 % 19 % Other 5.6 4.86.2 11.6 10 21 11.8 16.4 10 --- --- -- --16 ------ ----- ------- ----- ------ ------ ------ ------- Total International 17.8 15.420.0 21.4 31 32 ---- ---- -- --38 37.8 36.8 31 35 ------ ----- ------- ----- ------ ------ ------ ------- Domestic: Watch products 23.3 18.0 4128.2 22.0 44 39 51.5 40.1 42 38 Other products 12.2 11.2 22 24 ---- ---- -- --10.6 9.2 16 16 22.8 20.4 19 20 ------ ----- ------- ----- ------ ------ ------ ------- Total 35.5 29.2 63 6238.8 31.2 60 55 74.3 60.5 61 58 Stores 3.6 2.8 6 6 --- --- - -5.5 4.3 9 7 9.1 7.1 8 7 ------ ----- ------- ----- ------ ------ ------ ------- Total Domestic 39.1 32.044.3 35.5 69 68 ---- ---- -- --62 83.4 67.6 69 65 ------ ----- ------- ----- ------ ------ ------ ------- Total Net Sales $ 56.9 $ 47.4 100% 100%64.3 $56.9 100 % 100 % $121.2 $104.4 100 % 100 % ====== ===== ======= ===== ====== ====== === ========= =======
Exclusive of a one-time international non-branded premium watch sale of $6 million in the Prior Year Quarter, net sales of $64 million in the Second Quarter represented a $13 million increase (26% as a percentage of net sales) over the Prior Year Quarter. Sales volume increases during the FirstSecond Quarter and Half Year Period were principally derived from sales of FOSSIL brand watches both domestically and internationally, in addition to sales generated from the continued roll-out of the Company's EMPORIO ARMANI licensed brand watches. In addition, continued volume growth in the Company's various leather and sunglass product categories and retail businesses added to the sales increases.increases during the Second Quarter and Half Year Period. The sales generated from the Company's FOSSIL Blue watch category, in addition to new watch lines introduced since mid-1997, have been responsible for the majority of the FOSSIL brand watch sales increases in the First Quarter.increases. European-based watch sales increased in excess of 15%,continued to increase by double digit growth, on a U.S. dollar denominated basis, during the First Quarter as comparedin comparison to the Prior Year Quartercomparable prior year periods despite the strength of the U.S. dollar compared to a year ago. The process of aligning the Company's watch collection offered in Europe with the Company's best selling styles in the U.S., which the Company began - 11 - mid-year 1997, has resulted in significant increases in the European sales momentum. Sales classified as "International - Other" decreased in the Second Quarter compared to the Prior Year Quarter as a result of the significant one-time international non-branded premium watch sale of $6 million in the Prior Year Quarter. Management anticipates that sales volumes will continue to increase in 1998 at approximatelyvolume over the First Quarter rate with the exceptionbalance of the second quarter whichyear will likely fall belowincrease approximately 20% over the First Quarter growth rate. During the second quarter of 1997, the Company had a one-time international-based sale amounting to approximately $6 million of non-branded watches used as a premium incentive.comparable period in 1997. In addition, management believes that the areas of highest growth over the past several fiscal quarters will continue to represent the greatest opportunities for continued sales growth throughout 1998. Gross Profit. The Company'sincrease in gross profit margin during the FirstSecond Quarter and Half Year Period was nearlyprincipally a result of the same as thatlow gross profit margin realized on the sale of the non-branded premium watches in the Prior Year Quarter. TheExclusive of that sale, gross profit margin realized in the Company's first quarter of the year has generally beenmargins were slightly higher than the yearly gross profit margin average. The increase is primarilyCompany's historical rate due to the positive gross profit margin influence stemming from the Company's European-based sales, sunglassof EMPORIO ARMANI watch sales and the Company's foreign-based assembly facility sales. These sales categories generally result in higher gross profit margins thanimpact the Company's consolidated average and account for a larger portionstronger U.S. dollar had on the purchase costs of the sales mix in the first quarter than the remainder of the year.certain watch components. Management believes that the Company's gross profit margin over the balance of the year will be in the 1998 second quarter will reach the 48% level as opposed to the 46% level achieved in the second quarter of 1997. The increase is principally due to the low gross profit margin realized on the significant sale of non-branded watches in the Prior Year Quarter. -8- - 50% range. Operating expenses. Selling, general and administrative expenses, as a percentage of net sales, decreasedfor the Second Quarter were similar to the Prior Year Quarter. Leveraging of expenses off higher sales and from 37.4%cost containment experienced in the first quarter of 1998, were somewhat masked in the Second Quarter, since the operating expense ratio in the Prior Year Quarter to 35.2% inwas aided by the First Quarter. Operating expenses increased in the aggregate primarily due to increased sales volumes and the operating costs from the Company's additional outlet and retail stores opened during 1997. The operating expense ratio for the First Quarter decreased, as the Company was able to positively leverage its operating expenses through cost containment and increased sales levels.one-time non-branded premium sale. Other income (expense) - net. Other income (expense) positively contributed to the Company's net incomecompared favorably in the First Quarter as opposed1998 periods when compared to a net expense in the Prior Year Quarter.their respective 1997 periods. The improvementfavorable comparison was mainly due to increased interest income and a reduction in minority interest expenses resulting from the Company's purchase of minority interests in both an assembly facility and its Italy-based operations last year. 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 software that utilizes 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 is completing an extensive review of its businesses to determine whether or not purchased and internally developed computer programs are Year 2000 compliant, as well as the remedial action and related costs associated with any required modifications or replacements. A significant amount of information has been collected and analyzed as part of this review; however, the process will not be completed until the end of 1998. The Company plans to complete all remediation efforts for its critical systems prior to the year 2000. Based upon its evaluation to date, management currently believes that, while the Company will incur internal and external costs to address the Year 2000 problem, such costs will not have a material impact on the operations, cash flows or financial condition of the Company in future years. Liquidity and Capital ResourcesResources. Historically the Company has not requiredincurred substantial financingcash requirements during the first several months of its fiscal year but has increased cash needs starting in the second quarter, typically reaching its peak borrowing needs in the September - - November time frame. The additional financingcash needs have generally been to finance the accumulation of inventory and the build-up in accounts receivable. During 1997 and the First QuarterHalf Year Period of 1998, the Company has significantly increased its cash flow from operations leaving the Company with approximately $25$31 million in cash as of AprilJuly 4, 1998 in comparison to $12$11 million at the same point in the prior year. In addition, the Company had working capital of $76$87 million and borrowings of only $4 million against it'sits - 12 - combined $43 million bank credit facilities. TheOn May 11, 1998, the Company also completed during May 1998, a secondary offering of its common stock from which the2,150,000 shares of Common Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to an underwriter's over-allotment allocation) for an aggregate of 2,302,500 shares. The Company will receivereceived approximately $3.5$3.6 million in cash for working capital needs.needs from the proceeds of the offering. Management believes that the combined cash on hand and cash receipts from the secondary offering will allow the Company to significantly reduce its financing needs during 1998 and combined with the credit facilities available to the Company will be sufficient to satisfy its working capital expenditure requirements for at least the next eighteen months. Forward Looking Statements The statements contained in this Quarterly Report on Form 10-Q, including, but not limited to statements in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical facts are forward-looking statements"forward-looking statements" and involve a number of uncertainties. The actual results of the future events could differ materially from those stated in such forward-looking"forward-looking statements." Among the factors that could cause actual results to differ materially are general economic conditions, competition, government regulation and possible future litigation, as well as the risks and uncertainties set forth onin the Company's Current Report on Form 8-K dated March 31, 1997. -9-- 13 - PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders (the "Meeting") on May 27, 1998. At the Meeting, the stockholders voted upon (i) a proposed amendment to the Company's Amended and Restated Certificate of Incorporation to create a classified Board of Directors ("Proposal 1"); (ii) a proposal to elect seven (7) directors of the Company ("Proposal 2"); and (iii) a proposed amendment to the 1993 Long-Term Incentive Plan of Fossil to increase the number of shares of common stock that may be made the subject of grants ("Proposal 3"). No other matters were voted on at the Meeting. A total of 12,958,422 shares were represented at the Meeting (prior to giving effect to a three-for-two stock split effected as a fifty percent stock dividend paid on April 8, 1998 to stockholders of record as of March 25, 1998). The number of shares that were voted for, against and abstained from Proposal 1 is as follows: For Against Abstain ---- ------- ------- 10,126,550 2,569,534 4,265 The number of shares that were voted for, and that were withheld from, each of the director nominees in Proposal 2 is follows: Director Nominee For Withheld ---------------- --- -------- Tom Kartsotis 12,793,678 164,744 Kosta Kartsotis 12,793,718 164,704 Michael W. Barnes 12,793,718 164,704 Jal S. Shroff 12,793,678 164,744 Donald J. Stone 12,820,118 138,304 Kenneth W. Anderson 12,820,118 138,304 Alan J. Gold 12,820,318 138,104 The number of shares that were voted for, against and abstained from Proposal 3 is as follows: For Against Abstain ---- ------- ------- 9,889,206 3,047,544 4,775 - 14 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. 4.1(1) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan 4.2(1) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan 10.1 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) 27 Financial Data Schedule (1) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the period covered by this Report. -10-- 15 - 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: May 15,August 16, 1998 /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) -11-- 16 - EXHIBIT INDEX Exhibit Number Document Description - ------------- -------------------- 3.1 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. 4.1 (1) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan 4.2 (1) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan 10.1 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) 27 Financial Data Schedule -12-(1) Management contract or compensatory plan or arrangement. - 17 -