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 7, 2001
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
18,August
17, 2001: 29,992,66830,162,470.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
AprilJuly 7, December 30,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 84,68367,252 $ 79,501
Short-term marketable investments 5,2625,328 11,312
Accounts receivable - net 58,97856,003 62,876
Inventories 88,57997,930 81,118
Deferred income tax benefits 7,4587,500 7,779
Prepaid expenses and other current assets 9,85210,192 10,245
--------- ------------------- ----------
Total current assets 254,812244,205 252,831
InvestmentsInvestment in joint ventures 6,195venture 5,896 5,935
Property, plant and equipment - net 43,41651,429 42,252
Intangible and other assets - net 6,79810,601 6,573
--------- ------------------- ----------
$ 311,221312,131 $ 307,591
========= =================== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,7344,651 $ 5,107
Accounts payable 18,18514,933 18,325
Accrued expenses:
Co-op advertising 11,70410,947 14,320
Compensation 4,6605,285 6,179
Other 16,73918,981 19,145
Income taxes payable 25,00820,238 19,964
--------- ------------------- ----------
Total current liabilities 81,03075,035 83,040
Minority interest in subsidiaries 3,7232,933 3,852
Stockholders' equity:
Common stock, 29,971,28030,162,791 and 30,136,824 shares
issued and outstanding, respectively 300301 301
Additional paid-in capital 11,14113,730 14,214
Retained earnings 218,430225,712 208,429
Accumulated other comprehensive loss (3,403)(5,580) (2,245)
--------- ------------------- ----------
Total stockholders' equity 226,468234,163 220,699
--------- ------------------- ----------
$ 311,221312,131 $ 307,591
========= =================== ==========
See notes to condensed consolidated financial statements.
1-1-
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands, except per share amounts)
For the 1413 For the 13 For the 27 For the 26
Weeks Ended Weeks Ended AprilWeeks Ended Weeks Ended
July 7, AprilJuly 1, July 7, July 1,
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 121,105112,357 $ 103,569113,393 $ 233,462 $ 216,962
Cost of sales 61,370 49,910
--------- ---------55,453 56,833 116,823 106,743
---------- ---------- ---------- ----------
Gross profit 59,735 53,65956,904 56,560 116,639 110,219
Operating expenses:
Selling and distribution 32,582 24,18334,545 27,329 67,127 51,512
General and administrative 10,812 8,317
--------- ---------10,775 8,779 21,587 17,096
---------- ---------- ---------- ----------
Total operating expenses 43,394 32,500
--------- ---------45,320 36,108 88,714 68,608
---------- ---------- ---------- ----------
Operating income 16,341 21,15911,584 20,452 27,925 41,611
Interest expense 24 27 18 51 45
Other income (expense) - net 345 273
--------- ---------588 (185) 932 88
---------- ---------- ---------- ----------
Income before income taxes 16,662 21,40512,145 20,249 28,806 41,654
Provision for income taxes 6,661 8,777
--------- ---------4,862 8,301 11,523 17,078
---------- ---------- ---------- ----------
Net income $ 10,0017,283 $ 12,62811,948 $ 17,283 $ 24,576
Other comprehensive income, (loss), net of taxes:
Currency translation adjustment (1,520) (2,029)(2,603) 841 (4,123) (1,188)
Unrealized (loss) gain on short-term investments 81 77(5) (33) 76 44
Forward contracts as hedge of intercompany
foreign currency payments:
Cumulative effect of implementing SFAS No. 133 - - (400) -
Change in fair values 681431 - --------- --------1,112 -
---------- ---------- ---------- ----------
Total comprehensive income $ 8,8435,106 $ 10,676
========= ========12,756 $ 13,948 $ 23,432
========== ========== ========== ==========
Earnings per share:
Basic $ 0.330.24 $ 0.39
========= ========0.37 $ 0.57 $ 0.77
========== ========== ========== ==========
Diluted $ 0.320.23 $ 0.38
========= ========0.36 $ 0.55 $ 0.74
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 30,134 32,04530,073 32,107 30,125 32,108
====== ====== ====== ======
Diluted 31,145 33,20831,259 33,236 31,221 33,255
====== ====== ====== ======
See notes to condensed consolidated financial statements.
2-2-
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
For the 14 Weeks27 For the 1326
Weeks Ended Weeks Ended
AprilJuly 7, AprilJuly 1,
2001 2000
---- ----
Operating activities:
Net income $ 10,00117,283 $ 12,62824,576
Noncash items affecting net income:
Minority interest in subsidiaries 548 421658 1,028
Equity in (income) losses of joint ventures (95) 258204 385
Depreciation and amortization 2,025 1,7564,258 2,936
Increase in allowance for doubtful accounts 313 232
(Decrease) increase251 468
Decrease in allowance for returns -
net of related inventory in transit (779) 81(1,058) (533)
Deferred income tax benefits 320 (106)279 (364)
Changes in operating assets and liabilities:
Accounts receivable 5,594 (7,760)10,604 70
Inventories (8,691) (9,295)(16,574) (32,840)
Prepaid expenses and other current assets 395 (865)56 (2,699)
Accounts payable (1,352) 8,493(7,891) 11,192
Accrued expenses (6,541) (10,187)(5,465) (9,592)
Income taxes payable 5,195 3,975
-------- --------983 1,005
--------- ---------
Net cash from (used in) operating activities 6,933 (369)3,588 (4,368)
Investing activities:
Additions to property, plant and equipment (3,054) (2,841)(13,207) (7,006)
Sale of marketable investments 6,049 6,0705,984 6,080
Net assets acquired in business combinations (5,121) -
Investment in joint venture (165) -(2,000)
Increase in intangible and other assets (313) (254)
-------- --------(244) (321)
--------- ---------
Net cash fromused in investing activities 2,517 2,975(12,753) (3,247)
Financing activities:
Issuance of common or treasury stock for stock option exercises 314 3831,671 498
Acquisition and retirement of common stock (3,539) -
Purchase of treasury stock - (267)
Distribution of minority interest earnings (677)(676) (493)
Repayments of notes payable-banks (373) (42)
-------- --------(456) (185)
--------- ---------
Net cash used in financing activities (4,275) (419)(3,000) (447)
Effect of exchange rate changes on cash and cash equivalents 7 (839)
-------- --------(84) (997)
--------- ---------
Net increasedecrease in cash and cash equivalents 5,182 1,348(12,249) (9,059)
Cash and cash equivalents:
Beginning of period 79,501 90,908
-------- ----------------- ---------
End of period $ 84,68367,252 $ 92,256
======== ========81,849
========= =========
See notes to condensed consolidated financial statements.
3-3-
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 that are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of AprilJuly 7, 2001,
and the results of operations for the fourteen-week periodthirteen- week periods ended AprilJuly 7, 2001
and thirteen-week periodJuly 1, 2000, respectively and the twenty-seven week and twenty-six week
periods ended AprilJuly 7, 2001 and July 1, 2000.2000, 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 December 30, 2000. Operating results for the fourteen-week periodthirteen and twenty-seven
week periods ended AprilJuly 7, 2001 are not necessarily indicative of the results to
be achieved for the full year.
Business. The Company designs, develops, markets and distributes fashion watches
and other accessories, principally under the "FOSSIL" and "RELIC" brandbrands names.
The Company's products are sold primarily through department stores and other
major retailers, both domestically and in over 80 countries worldwide.
2. INVENTORIES
Inventories consist of the following:
April 7, December 30,
(In thousands) 2001 2000
---- ----
Components and parts $ 5,571 $ 6,258
Work-in-process 2,870 1,182
Finished merchandise on hand 57,920 48,113
Merchandise at Company stores 11,178 13,296
Merchandise in-transit from estimated
customer returns 11,040 12,269
-------- --------
$ 88,579Inventories consist of the following:
July 7, December 30,
(In thousands) 2001 2000
---- ----
Components and parts $ 5,460 $ 6,258
Work-in-process 3,139 1,182
Finished merchandise on hand 65,193 48,113
Merchandise at Company stores 13,363 13,296
Merchandise in-transit from estimated
customer returns 10,775 12,269
-------- --------
$ 97,930 $ 81,118
======== ========
3. FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company periodically enters into forward contracts principally to hedge the
future payment of intercompany inventory transactions with its non-U.S.
subsidiaries. At AprilJuly 7, 2001, the Company had hedge contracts to sell 18.4
million Euro for approximately $17.0 million, expiring through December 2001. If
the Company were to settle its Euro based contracts at that date, the net result
would be a gain of approximately $281,000,$712,000, net of taxes.taxes for the twenty-seven
week period ended July 7, 2001. This net unrealized gain is recognized in
accounts payable and other comprehensive income under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities."
In implementing SFAS No. 133
as of December 31, 2000, the Company recognized a net unrealized loss of
approximately $400,000 in other comprehensive income.
4-4-
4. SEGMENT AND GEOGRAPHIC INFORMATION
(In thousands)
For the 1413 Weeks Ended For the 13 Weeks Ended
AprilJuly 7, 2001 Ended AprilJuly 1, 2000
------------------- ------------------------------- ------------
Operating Operating
Net Sales Income Net Sales Income
--------- ------ --------- --------- ---------------
U.S.- exclusive of Stores:
External customers $ 68,32558,965 $ 12,9416,292 $ 65,197 $10,40962,813 $ 8,890
Intergeographic 20,35514,275 - 17,10013,317 -
Far East:East and Export:
External customers 12,781 6,795 8,218 8,03211,255 7,215 16,354 9,361
Intergeographic 44,46549,162 - 42,70054,787 -
Stores 10,789 (3,171) 7,044 (810)14,307 (2,373) 11,199 1,961
Europe 27,667 (153) 21,672 4,04226,805 814 21,257 (17)
Japan 1,543 (71) 1,445 (514)1,025 (364) 1,763 257
Intergeographic items (64,820)(63,437) - (59,807)(68,097) -
-------- --------------- -------- -------
Consolidated $121,105 $ 16,341 $103,569 $21,159$112,357 $11,584 $113,393 $20,452
======== ======= ======== =======
For the 27 Weeks Ended For the 26 Weeks Ended
July 7, 2001 July 1, 2000
------------ ------------
Operating Operating
Net Sales Income Net Sales Income
--------- ------ --------- ------
U.S.- exclusive of Stores:
External customers $127,290 $19,233 $128,010 $19,299
Intergeographic 34,630 - 30,417 -
Far East and Export:
External customers 24,036 14,010 24,572 17,393
Intergeographic 93,627 - 97,487 -
Stores 25,096 (5,544) 18,243 1,151
Europe 54,472 661 42,929 4,025
Japan 2,568 (435) 3,208 (257)
Intergeographic items (128,257) - (127,904) -
-------- ------- -------- -------
Consolidated $233,462 $27,925 $216,962 $41,611
======== ======= ======== =======
-5-
5. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
For the 14 For the 13 For the 13 For the 27 For the 26
(In thousands, except per share data) Weeks Ended Weeks Ended AprilWeeks Ended Weeks Ended
July 7, AprilJuly 1, July 7, July 1,
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS computation:
Numerator:
Net income $ 10,0017,283 $ 12,62811,948 $ 17,283 $ 24,576
--------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 30,134 32,048
Treasury stock - (3)30,073 32,107 30,125 32,108
--------- -------- --------
30,134 32,045 -------- --------
Basic EPS $ 0.330.24 $ 0.390.37 $ 0.57 $ 0.77
========= ======== ======== ========
Diluted EPS computation:
Numerator:
Net income $ 10,0017,283 $ 12,62811,948 $ 17,283 $ 24,576
--------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 30,134 32,04830,073 32,107 30,125 32,108
Stock option conversion 1,011 1,163
Treasury stock - (3)1,186 1,129 1,096 1,147
--------- -------- -------- 31,145 33,208--------
31,259 33,236 31,221 33,255
--------- -------- -------- --------
Diluted EPS $ 0.320.23 $ 0.380.36 $ 0.55 $ 0.74
========= ======== ======== ========
6. SUBSEQUENT EVENT
In MayACQUISITIONS/JOINT VENTURES
On July 3, 2001, Fossil UK Holdings,(East) Limited ("Fossil East") increased its equity
interest in Pulse Time, Ltd., to 90% by acquiring an indirect wholly ownedadditional 30% of the
capital stock from its minority holders in exchange for approximately
24,000 shares of the Company's common stock valued at $450,000.
Additionally, on July 3, 2001, Fossil East increased its equity interest in
Trylink, Ltd. to 85% by acquiring an additional 34% of the capital stock
from its minority holders in exchange for $225,000 in cash and
approximately 14,000 shares of the Company's common stock valued at
$225,000. Both these acquisitions have been accounted for as a purchase and
no goodwill was recorded in connection with either transaction.
On July 9, 2001, the Company sold 50% of the equity of its wholly-owned
subsidiary in Japan to Seiko Instruments Incorporated (SII) pursuant to a
joint venture agreement for the marketing, distribution and sale of the
Company's products in Japan. The Company accounted for this investment
based upon the equity method from the effective date of the transaction.
The Company does not expect this change in accounting to materially affect
the results of operations for the remainder of its fiscal year.
On July 9, 2001, the Company acquired 100%80% of the capital stock of The Avia Watch Company Ltd.
("Avia") as well as certain trademarks utilized by Avia from Roventa-Henex S.A.
5
FSLA,Pty.
Limited, the Company's current distributor in Australia, for a purchase
price of approximately $5.0$300,000. This acquisition will be recorded as a
purchase and, in connection therewith, the Company will record goodwill of
approximately $200,000.
In August 2001, the Company acquired 99.6% of the outstanding capital stock
of Vedette Industries, SA, the Company's current distributor in France, for
a purchase price of approximately $5.3 million paid in cash. The purchase
price is subjectterms of
this transaction include a future earnout payment of an amount up to an adjustment based upon certain balance sheet adjustments
as of December 31, 2001.$1.5
million in the event that sales and operating income objectives are
achieved. The acquisition will be recorded as a purchase and, in connection
therewith, the Company will record goodwill of approximately $3.3
million.
6$1.0 million,
including amounts relating to the earnout provision.
-6-
The results of these business combinations are included in the accompanying
consolidated financial statements since the dates of their acquisition. The
proforma effects, as if transactions had occurred at the beginning of the
years presented, are not significant.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement No.
141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS
No. 142), "Goodwill and Other Intangible Assets." SFAS 142 includes
requirements to test goodwill and indefinite lived intangible assets for
impairment rather than amortize them. These standards will be adopted in
fiscal 2002. The Company is currently evaluating the impact that these
standards will have on its financial statements.
-7-
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 its majority owned subsidiaries (the "Company")
for the fourteenthirteen and twenty-seven week periodperiods ended AprilJuly 7, 2001 (the "First"Second
Quarter") and "Year To Date Period," respectively), as compared to the thirteen
and twenty-six week periodperiods ended AprilJuly 1, 2000 (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 FOSSIL brand
name was developed by the Company 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 company
offering a diversified range of accessories and apparel. The Company's current
product offerings include an extensive line of fashion watches sold under the
FOSSIL and RELIC brands, complementary lines of small leather goods, belts,
handbags, sunglasses, jewelry and FOSSIL brand apparel. In addition to
developing its own brands, the Company leverages its development and production
expertise by designing and manufacturing private label and licensed products for
some of the most prestigious companies in the world, including national
retailers, entertainment companies and fashion designers.
The Company's products are sold primarily to department stores and specialty
retail stores in over 80 countries worldwide through Company-owned foreign sales
subsidiaries and through a network of 47 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.
Firstprofits during the last five fiscal years.
Second Quarter and Year To Date Period Highlights
o Despite an overall weakness in the Euro, neta strong U.S. dollar, sales from the Company's European
operations increased 28%26% and 27% during the Second Quarter and Year To
Date Period, respectively.
o Sales from the Company's licensed watch line surpassed $40 million
during the Year To Date Period, a 34% increase over the Prior Year Quarter.YTD
Period.
o OtherLeather product sales increased by 24% over the Prior Year YTD Period
as FOSSIL handbags and RELIC brand leather lines continued to gain
market share.
o Excluding the impact of an $8.3 million non-branded premium watch sale
in the prior year, which did not reoccur, other international sales
which consist of export sales and sales from the Company's Far East
operations increased 48% over the Prior Year Quarter.
o Licensed watch line sales surpassed $20 million27% and 37% during the FirstSecond Quarter a
64% increase over the Priorand Year Quarter.
o Leather product sales increased by 38% over the Prior Year Quarter as
FOSSIL handbags and RELIC brand leather lines continued to gain market
share.To
Date Period, respectively.
o The Company operated 3978 retail locations consisting of 43 outlet, 18
accessory and 34 full-price retail17 jeanswear stores at the end of the FirstSecond Quarter
compared to 3552 stores (35 outlet and 17 full-price retail storesaccessory) at the end of the
Prior Year Quarter. This retail store expansion as well
as increases in same store sales, generated sales volume
growth in excess of 50%37% for the First Quarter.
7Year To Date Period.
-8-
o The Company acquired The Avia Watch Company, increasing its sales and
marketing presence in the U.K. and providing opportunities for the
Company to leverage its existing infrastructure in this market.
o The Company acquired additional equity interests in two of its
majority-owned factories in the Far East.
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 14 For the 13 For the 14
Weeks Ended Weeks Ended Weeks Ended
----------- ----------- -----------
April 7, April 1, April 7,
2001 2000 2001
---- ---- ----
Net sales 100.0% 100.0% 16.9%
Cost of sales 50.7 48.2 23.0
----- -----
Gross profit margin 49.3 51.8 11.3
Selling and distribution
expenses 26.9 23.4 34.7
General and administrative
expenses 8.9 8.0 30.0
----- -----
Operating income 13.5 20.4 (22.8)
Interest expense 0.0 0.0 (10.7)
Other income
(expense)- net 0.3 0.3 26.4
----- -----
Income before income taxes 13.8 20.7 (22.2)
Income taxes 5.5 8.5 (24.1)
----- -----
Net income 8.3% 12.2% (20.8)%
===== =====
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 periods and the comparable periods of the
prior year.
Percentage of Percentage Percentage of Percentage
Net Sales Change Net Sales Change
--------- ------ --------- ------
For the 13 For the 13 For the 27 For the 26 For the 27
Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended
----------- ----------- ----------- ----------- -----------
July 7, July 1, July 7, July 7, July 1, July 7,
2001 2000 2001 2001 2000 2001
---- ---- ---- ---- ---- ----
Net sales 100.0% 100.0% (0.9)% 100.0% 100.0% 7.6%
Cost of sales 49.4 50.1 (2.4) 50.0 49.2 9.4
------ ------ ------ ------
Gross profit 50.6 49.9 0.6 50.0 50.8 5.8
Selling and distribution
expenses 30.7 24.1 26.4 28.8 23.7 30.3
General and administrative
expenses 9.6 7.7 22.7 9.2 7.9 26.3
------ ------ ------ ------
Operating income 10.3 18.1 (43.4) 12.0 19.2 (32.9)
Interest expense 0.0 0.0 48.4 0.0 0.0 13.1
Other income
(expenses)- net 0.5 (0.2) (418.6) 0.3 0.0 953.8
------ ------ ------ ------
Income before income taxes 10.8 17.9 (40.0) 12.3 19.2 (30.8)
Income taxes 4.3 7.4 (41.4) 4.9 7.9 (32.5)
------ ------ ------ ------
Net income 6.5% 10.5% (39.0)% 7.4% 11.3% (29.7)%
====== ====== ====== ======
-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 1413 Weeks Ended For the 13 For the 14 For the 13
---------- ---------- ---------- ----------
Weeks Ended
Weeks Ended Weeks Ended Weeks Ended
----------- ----------- ----------- -----------
April---------------------- ----------------------
July 7, AprilJuly 1, AprilJuly 7, AprilJuly 1,
2001 2000 2001 2000
---- ---- ---- ----
International:
Europe $ 27.726.8 $ 21.7 23% 21%21.2 24 % 19 %
Other 14.3 9.7 12 912.3 18.1 11 16
------ ------ --- ---
Total International 42.0 31.439.1 39.3 35 3035
------ ------ --- ---
Domestic:
Watch products 38.9 41.4 32 4037.4 43.6 33 38
Other products 29.4 23.8 24 2321.6 19.2 19 17
------ ------ --- ---
Total 68.3 65.2 56 6359.0 62.8 52 55
Stores 10.8 7.0 9 714.3 11.3 13 10
------ ------ --- ---
Total Domestic 79.1 72.273.3 74.1 65 7065
------ ------ --- ---
Total Net Sales $121.1 $103.6 100% 100%$112.4 $113.4 100 % 100 %
====== ====== === ===
Amounts % of Total
------- ----------
For the 27 For the 26 For the 27 For the 26
---------- ---------- ---------- ----------
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
----------- ----------- ----------- -----------
July 7, July 1, July 7, July 1,
2001 2000 2001 2000
---- ---- ---- ----
International:
Europe $ 54.5 $ 42.9 23 % 20 %
Other 26.6 27.8 12 13
------ ------ --- ---
Total International 81.1 70.7 35 33
------ ------ --- ---
Domestic:
Watch products 76.3 85.0 32 39
Other products 51.0 43.0 22 20
------ ------ --- ---
Total 127.3 128.0 54 59
Stores 25.1 18.3 11 8
------ ------ --- ---
Total Domestic 152.4 146.3 65 67
------ ------ --- ---
Total Net Sales $233.5 $217.0 100 % 100 %
====== ====== === ===
The Company's net sales grew to $121.1increased 9% during the Second Quarter, excluding the
$8.3 million non-branded premium watch sale in the First Quarter, a 17%
increase over the Prior Year Quarter. DuringQuarter and the
Firsteffects of a weaker Euro. Excluding the impact of the weaker Euro, sales from
the Company's European based operations grew 35% in the Second Quarter as a
result of increased licensed brand watch sales, further penetration of FOSSIL
jewelry that was launched in the first quarter of 2001 and sales in the U.K. by
The Avia Watch Company benefited greatlythat was acquired in May 2001. Other domestic product
sales grew 13% to $22 million as FOSSIL brand leather goods continued to gain
market share and eyewear sales increased as a result of the launch of RELIC
eyewear. Additionally, sales from its geographicthe Company's retail stores grew 27% from
additional store openings. Excluding the $8.3 million sale and product diversification.the effects of a
weaker Euro, the Year To Date Period net sales increased 13% due primarily to
increases in sales from the Company's international operations, retail stores
and leather business. Net sales from non-US based operations grew 34% to $42 million despite the negative impact
8
of a weak Euro. Sales of licensed and FOSSIL brand watches primarily contributed
to the international sales growth. Domestically, watch sales declined 6% as
sales increases in the Company's RELICinternational businesses
benefited from increasing licensed watch product sales and corporate gift programs did not fully
offset declines in the Company'slaunch of FOSSIL
brand and private label watch brand.
Other domestic product net sales grew 23% to $29.4 million. The Company's
leather product group sales increased 38%, principally from continued growth in
FOSSIL leather handbags and RELIC brand leather goods. Additionally, netjewelry. Net sales from the Company's retail stores increased 37% during the
Year To Date Period from additional store openings while the Company's leather
business grew 27% primarily due to $10.8 million,increased handbag sales and increased sales
from RELIC leather. The Second Quarter and Year To Date Period increases were
offset by a 54% increase over14% and 10% decline, respectively, in the Company's domestic watch
business resulting from a slowdown in
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consumer spending and a decrease in retail inventory levels related primarily to
the Company's department store customers.
Gross Profit. Gross margins for the Second Quarter increased to 50.6% compared
to 49.9% in the Prior Year Quarter aswhile Year To Date Period gross margins
decreased to 50.0% compared to 50.8% in the Prior Year YTD Period. Gross margins
for both the Second Quarter and the Year To Date Period were favorably impacted
from the non-recurrence of the $8.3 million sale that carried a gross margin
lower than the Company's historical consolidated gross margin. Excluding the
effects of this sale, gross margins decreased approximately 140 and 180 basis
points in the Second Quarter and the Year To Date Period, respectively. These
decreases were primarily a result of additional doors being opened in the
later part of 2000 and same store sales increases of 3.5%.
Gross Profit. Gross profit margins decreased primarily as a result of the
weakness of the Euro against the U.S. dollar. Since the Company's European-based
operations primarily purchase products from the United States and Hong Kong, the
Company's European product costs escalated approximately 16% during the First
Quarter compared to the Prior Year Quarter, resulting in a 150 basis point
decreaseincreased markdowns in the Company's
consolidated gross margin. Additionally, the gross
profit margin decrease in the First Quarterleather and eyewear product divisions and a weaker Euro. The Year To Date Period
was further impacted unfavorably by (i) a higher
mix of leather product versus watchan increase in sales asfrom the Company's
leather products historically generatebusiness that generates gross margins substantially below the
Company's historical consolidated gross margin. Positively impacting gross
profit margins belowfor both periods, was an increase in the sales mix of licensed
watch and retail store sales that both generate gross margins in excess of the
Company's historical consolidated gross profit marginmargin. Management believes its gross
margins will be slightly higher in the second half of 2001 as compared to the
second half of 2000 due to a more favorable Euro comparison, based upon current
Euro rates, and (ii) additional markdowns taken to clear out holiday
gift packages and discontinued leather categories. These negative influences on
gross margin were partially offset bya continued higher gross profit margins resulting from
a greater mix of sales from licensed watcheswatch and Company-owned retail stores,
both of which historically generated margins above the Company's consolidated
gross profit margin.store sales.
Operating Expenses. Operating expenses, as a percentage of net sales, increased
principally due to increased
sales volume,40.3% in the impact of expenses relatingSecond Quarter compared to twenty-one new Company-owned
retail locations opened since31.8% in the Prior Year Quarter. For
the Year To Date Period, operating expenses as a percentage of sales increased
to 38.0% compared to 31.6% in the Prior Year YTD Period. For both the Second
Quarter and Year To Date Period, operating expenses increased due to
infrastructure increasescosts added primarily in the latter half of fiscal year 2000. As2000 and costs
attributable to the growth in the Company's retail store locations. The
infrastructure increases include the addition of key personnel, increased
distribution capacity and other costs necessary to support initiatives for
future sales growth. Operating expenses, as a percentage of net sales, operating expenses related
to the retail stores are generallysignificantly higher than the Company's consolidated
average during the first half of the year as retail stores sales are more
heavily weighted toward the second half of the year. The Company believes the infrastructure cost increases, primarily
related to personnel and distribution costs, will allow for continued
development of new concepts and product lines to fuel its future growth.
Operating Income. The decrease in the Company's gross profit margin and increase
in operating expenses asOn a percentage of sales
resultedbasis, management believes operating expenses in the reductionsecond half of fiscal 2001
will be less than the Company's operating profit margin to 13.5% for the First Quarter compared to
20.4%corresponding period in the Prior Year Quarter.prior year as it begins to
anniversary the increases discussed above.
Operating Income. Management believes the Company will achieve a full year
operating profit margin in the 17% range and expects EPS growth to
exceed 10%. However, from a quarterly perspective,16% plus range. Although operating income margins
were below this level during the first half of the year, the Company believes
earnings will be more heavily back-end weighted due to the significance of the
(i) Company's growing retail operations, (ii) non-anniversarying of an $8.3 million non-branded premium
incentive sale made in the second quarter of fiscal year 2000, (iii) weaker Euro on a comparable basis
in the first half of fiscal year 2001 and (iv)(iii) infrastructure costs added in
the latter half of fiscal year 2000.
Other Income (Expense) - Net.. Other income (expense) - net increased favorably by
$72,000approximately $770,000 during the FirstSecond Quarter as comparedand $844,000 during the Year To
Date Period. These increases were primarily related to: (i) a one-time fee paid
by a customer to the Prior Year Quarter. An
increase in equity in the earnings of affiliated companies was slightly offset
by a decrease inCompany for web design consultation and (ii) decreased
minority interest incomeexpense resulting from decreasesthe Company's acquisition of additional
equity interests in average invested
cash balances and interest rates during the comparable quarterly periods.
Provision For Income Taxes. The effective tax rate decreased to 40% during the
First Quarter compared to 41% during the Prior Year Quarter to reflect the lower
worldwide effective tax rate being achieved by the Company.its majority-owned factories.
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, and typically reach theirreaching its peak in the September-November time frame.
The additional cash needs have generally been to financeDuring the accumulation of
inventory and the build-up in accounts receivable. At the end of the FirstSecond Quarter, the Company's inventories increased by $15.6cash holdings and short-term marketable
securities decreased to $73 million or 21%, comparedin comparison to inventory balances$87 million at the end of
the Prior Year Quarter. This increase, in
comparisondecrease is primarily related to the 17% increaseCompany acquiring
in net sales, is primarily due to increased
inventory level in the Company's retail stores due to the additionexcess of twenty-one
new locations since the Prior Year Quarter. Annualized inventory turns, however,
9
remained relatively consistent with prior period results. First Quarter accounts
receivable balances remained relatively unchanged as the Prior Year Quarter
balances were elevated as a result of the launch of DKNY late in the quarter.
In addition to cash needs to support inventory levels, during the First Quarter
the Company acquired 206,000 shares$30 million of its common stock through open market
purchases at an aggregate costduring the second half of approximately $3.5 millionfiscal
2000 and immediately
retired these shares. At the endfirst quarter of the First Quarter, approximatelyfiscal 2001. Approximately 475,000 shares wereare
still available for repurchase under the previous buyback authorizations.
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Accounts receivable and inventory levels increased 10% and 1%, respectively,
over last year's comparable quarter. Days sales outstanding increased to 45 days
in the Second Quarter compared to 41 days in the previous year quarter. However,
when excluding the $8.3 million sale which occurred and was fully collected in
the Prior Year Quarter, days sales outstanding were virtually unchanged at 42
days. Inventory levels remained relatively unchanged, although the Company's
retail store inventories increased by approximately $5 million as a result of
additional stores being opened. Excluding the increase from retail stores and
inventory associated with the acquisition of The Avia Watch Company endedin May,
inventory levels decreased approximately 6%.
At the Firstend of the Second Quarter, with approximately $90 million in cash, cash
equivalents and short-term investments andthe Company had working capital of $174$169
million compared to working capital of $165$174 million and $170 million at the end
of the Prior Year Quarter and fiscal 2000 year-end, respectively. The Company
had outstanding borrowings of $4.7 million against its combined $43 million bank
credit facilityfacilities at the end of the FirstSecond Quarter. The Company anticipates that
during September it will spend approximately $20 million for the acquisition of
a new 500,000 square foot distribution facility located near its corporate
headquarters. Additionally, from the acquisition date until such time that the
distribution center opens (tentatively scheduled for the first quarter 2002) the
Company expects to spend approximately $10 million on related distribution
systems and equipment. Management believes that cash flow from operations
combined with existing cash on hand and amounts available under its credit
facility will be sufficient to satisfy its working capitalthe cash requirements including the approximate $25 million
it plans to spend in the second half of the year relating to its new
distribution facility and other working capital expenditures for at least the
remainder of the year.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 2001. The
actual results may differ materially from those expressed by these
forward-looking statements. Significant factors that could cause the Company's
2001 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational enterprise, the Company is exposed to changes in foreign
currency exchange rates. The Company employs a variety of practices to manage
this market risk, including its operating and financing activities and, where
deemed appropriate, the use of derivative financial instruments. Forward
contracts have been utilized by the Company to mitigate foreign currency risk.
The Company's most significant foreign currency risks relate to the Euro and the
Japanese Yen.Euro. The
Company uses derivative financial instruments only for risk management purposes
and does not use them for speculation or for trading. There were no significant
changes in how the Company managed foreign currency transactional exposures
during the FirstSecond Quarter and management does not anticipate any significant
changes in such exposures or in the strategies it employs to manage such
exposures in the near future.
10-12-
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 24,
2001. At the Meeting, the stockholders voted upon (i) a proposal to elect three
(3) Class III directors of the Company to serve for a term of three years
("Proposal 1"); and (ii) 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 2"). No other matters were voted on at the
Meeting. A total of 29,126,703 shares were represented at the Meeting.
The number of shares that were voted for, and that were withheld from, each of
the director nominees in Proposal 1 is as follows:
Director Nominee For Withheld
---------------- --- --------
Tom Kartsotis 27,103,513 2,023,190
Jal S. Shroff 27,104,033 2,022,670
Donald J. Stone 27,901,021 1,225,682
The directors whose term of office as a director continued after the
Meeting are Kosta Kartsotis, Michael W. Barnes, Richard H. Gundy, Kenneth W.
Anderson, Alan J. Gold, Junichi Hattori and Michael Steinberg.
The number of shares that were voted for, against and abstained from Proposal 2
is as follows:
For Against Abstain
---- ------- -------
21,646,654 7,467,788 12,261
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None4.1 (1) Third Amendment to the Fossil, Inc. 1993 Long-Term
Incentive Plan.
10.1 Agreement for the Sale and Purchase of the Avia Watch
Company Limited between Roventa-Henex S.A. and Fossil
(UK) Holdings Limited and Fossil, Inc. dated May 4,
2001.
(1) Management contract or compensatory plan or arrange-
ment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
Report.
11-14-
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 22,August 20, 2001 /s/ Mike L. Kovar
-----------------------------------------
Mike L. Kovar
Senior Vice President and
Chief Financial Officer
(Principal financial and
accounting officer duly
authorized to sign on
behalf of Registrant)
12-15-
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
None
134.1 (1) Third Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan.
10.1 Agreement for the Sale and Purchase of the Avia Watch Company Limited
between Roventa-Henex S.A. and Fossil (UK) Holdings Limited and Fossil,
Inc. dated May 4, 2001.
(1) Management contract or compensatory plan or arrangement.
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