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: October 4, 1997
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
November 14, 1997: 13,486,084.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 4, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,741,038 $ 11,981,246
Accounts receivable - net 37,023,103 30,252,964
Inventories 58,632,984 49,782,555
Deferred income tax benefits 4,317,703 3,666,344
Prepaid expenses and other current assets 4,166,163 1,942,791
--------- ---------
Total current assets 115,880,991 97,625,900
Property, plant and equipment - net 20,756,017 16,718,976
Intangible and other assets 4,863,598 4,633,193
----------- ----------
$ 141,500,606 $ 118,978,069
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 11,690,080 $ 10,506,144
Accounts payable 15,176,038 7,476,324
Accrued expenses:
Co-op advertising 6,331,980 7,857,196
Compensation 2,620,783 2,154,996
Other 6,250,514 7,931,693
Income taxes payable 5,948,058 1,838,656
---------- ----------
Total current liabilities 48,017,453 37,765,009
Long-term debt 4,200,000 4,350,000
Minority interests in subsidiaries 1,248,133 2,295,026
Stockholders' equity:
Common stock, shares issued and outstanding,
13,481,626 and 13,242,994, respectively 134,816 132,430
Additional paid-in capital 25,050,264 22,766,468
Retained earnings 64,433,684 52,315,069
Cumulative translation adjustment (1,583,744) (645,933)
----------- -----------
Total stockholders' equity 88,035,020 74,568,034
----------- -----------
$ 141,500,606 $ 118,978,069
============= ============
See notes to condensed consolidated financial statements.
1
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
For the 13 For the 3 For the 39 1/2 For the 9
Weeks Ended Months Ended Weeks Ended Months Ended
October 4, September 30, October 4, September 30,
1997 1996 1997 1996
Net Sales $ 61,012,584 $ 52,821,348 $ 165,393,762 $ 140,968,652
Cost of sales 31,322,436 27,064,790 86,204,180 73,713,876
---------- ---------- ----------- -----------
Gross profit 29,690,148 25,756,558 79,189,582 67,254,776
Operating Expenses:
Selling and distribution 13,719,495 12,668,558 38,862,609 34,405,548
General and administrative 6,155,239 5,809,763 18,273,318 16,721,491
---------- ---------- ---------- ----------
Total operating expenses 19,874,734 18,478,321 57,135,927 51,127,039
---------- ---------- ---------- ----------
Operating income 9,815,414 7,278,237 22,053,655 16,127,737
Interest expense (252,573) (383,127) (749,289) (823,549)
Other income (expense) - net (259,753) (404,429) (822,751) (447,001)
----------- ----------- ----------- -----------
Income before income taxes 9,303,088 6,490,681 20,481,615 14,857,187
Provision for income taxes 3,793,000 2,661,000 8,363,000 6,103,000
---------- ---------- ---------- ----------
Net income $ 5,510,088 $ 3,829,681 $ 12,118,615 $ 8,754,187
=========== =========== ============ =============
Earnings per share $ 0.39 $ 0.29 $ 0.88 $ 0.66
=========== =========== ============ =============
Weighted average common and
common equivalent shares
outstanding 14,031,229 13,328,601 13,814,073 13,346,549
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
2
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the 39 1/2 For the 9
Weeks Ended Months Ended
October 4, September 30,
1997 1996
Operating Activities:
Net income $ 12,118,615 $ 8,754,187
Noncash item affecting net income:
Minority interests in subsidiaries 35,644 594,038
Depreciation and amortization 2,351,535 2,310,059
Increase in allowance for doubtful accounts 12,310 909,722
Increase (decrease) in allowance for returns -
net of related inventory in transit 309,234 (591,443)
Deferred income tax benefits (651,359) (395,000)
Cumulative translation adjustment (937,811) (530,210)
Cash from (used in) changes in assets and liabilities:
Accounts receivable (7,311,546) (9,279,791)
Inventories (8,630,565) (13,077,501)
Prepaid expenses and other current assets (2,223,372) (637,136)
Accounts payable 7,699,711 2,450,243
Accrued expenses (2,740,607) 873,300
Income taxes payable 4,109,402 (711,859)
--------- ---------
Net cash from (used in) operations 4,141,191 (9,331,391)
Investing Activities:
Net assets acquired in business combination/consolidation,
net of cash received (1,315,703) 805,891
Additions to property, plant and equipment (6,195,990) (3,292,698)
Decrease (increase) in intangible and other assets 308,960 (380,089)
------- ---------
Net cash used in investing activities (7,202,733) (2,866,896)
Financing activities:
Issuance of common stock 2,286,182 73,958
Decrease in minority interests in subsidiaries (498,784) (111,809)
Increase in notes payable 1,033,936 12,624,890
--------- ----------
Net cash from financing activities 2,821,334 12,587,039
--------- ----------
Net (decrease) increase in cash and cash equivalents (240,208) 388,752
Cash and cash equivalents:
Beginning of period 11,981,246 5,980,535
---------- ---------
End of period $ 11,741,038 $ 6,369,287
============ ===========
See notes to condensed consolidated financial statements.
3
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include
the accounts of Fossil, Inc., a Delaware corporation, and its majority-owned
subsidiaries (the "Company"). The condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of October 4,
1997 and the results of operations for the thirteen and thirty-nine and one-half
week periods ended October 4, 1997, respectively, and the results of operations
for the three- and nine-month periods ended September 30, 1996, 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 31, 1996. Operating results for the thirteen and thirty-nine and
one-half week periods ended October 4, 1997 ("Third Quarter" and "Three-fourths
Year Period", respectively), 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 first quarter ended April 5, 1997 contained an additional
one-half week for the transition period.
Business. The Company designs, develops, markets and distributes fashion watches
and other accessories, principally under the "FOSSIL", "FSL" and "RELIC" brands
names. The Company's products are sold primarily through department stores and
other major retailers, both domestically and internationally.
2. INVENTORIES
Inventories consist of the following:
October 4, December 31,
1997 1996
---- ----
Components and parts $ 3,558,149 $ 2,294,750
Work-in-process 1,565,556 657,125
Finished merchandise on hand 43,726,186 38,404,535
Merchandise at Company's stores 5,096,125 3,962,199
Merchandise in transit from estimated
customers' returns 4,686,968 4,463,946
--------- ---------
$ 58,632,984 $49,782,555
============ ===========
The Company periodically enters into forward contracts principally to hedge the
expected 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, is deferred until the inventory is sold or the forward contract is
completed. On October 4, 1997, the Company had hedge contracts to sell 15.3
million German Marks for approximately $8.5 million, expiring through April 1998
and 432.1 million Japanese Yen for approximately $3.8 million, expiring through
February 1998.
4
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
3. ACQUISITIONS
Effective February 1, 1997, Fossil Europe B.V. acquired the remaining 40% of the
capital stock of Fossil Italia, S.R.L. from its minority stockholders in
exchange for the issuance of 128,109 shares of the Company's $0.01 par value
common stock ("Common Stock") valued at $1.2 million. The acquisition has been
accounted for as a purchase and, in connection therewith, the Company recorded
goodwill of approximately $300,000.
Effective April 1997, Fossil (East) Limited acquired the remaining 35% of
capital stock of Amazing Time, Ltd. from its minority stockholder in exchange
for approximately $380,000 in cash. The acquisition has been accounted for as a
purchase and, in connection therewith, the Company recorded goodwill of
approximately $210,000.
4. DEBT
Bank. In June 1997, the Company renewed its U.S. short-term revolver
through June 1998. At the time of the renewal, the Company increased the funds
available under the facility by $10,000,000 to $40,000,000, not subject to any
borrowing base calculation. The U.S. short-term revolver is collateralized by
substantially all the Company's assets and requires maintenance of specific
levels of net worth, net income, working capital and financial ratios.
5
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 and thirty-nine and one-half week
periods ended October 4, 1997 (the "Third Quarter" and "Three-fourths Year
Period", respectively), as compared to the three- and nine-month periods ended
September 30, 1996. 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
first quarter during 1997 contained an additional one-half week for the
transition period. This change had an immaterial impact on comparability to the
three- and nine-month periods in 1996. This discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and the related
Notes attached hereto.
General
Since the Company's organization in 1984, sales growth has been principally
attributable to increased sales of FOSSIL brand watches both domestically and in
a growing number of international markets. Adding to the Company's sales growth
has been the addition of FOSSIL brand leather goods and sunglasses, the
diversification into FOSSIL outlet and retail stores and the introduction of
other watch brands (RELIC and FSL). Increased sales volume has also been
generated through leveraging the Company's infrastructure of sourcing, design
and developmental systems for the production of its products for corporate gift
programs as well as under the names of internationally recognized specialty
retailers, entertainment companies and theme restaurants. The Company's products
are marketed internationally, mainly through major department stores and
specialty retailers.
The Company maintains sales and distribution offices in the United States,
Germany, Italy, Japan, Spain and Hong Kong. In addition to sales through the
Company's offices, FOSSIL also currently distributes its products to over 50
additional countries through authorized distributors.
1997 Highlights
Effective February 1997, the Company acquired the remaining 40% of the
capital stock of Fossil Italia, S.R.L. from its minority stockholders.
Effective April 1997, the Company acquired the remaining 35% of the capital
stock of Amazing Time, Ltd. from its minority stockholder.
The Company entered into a multi-year licensing agreement for the design,
production, and marketing of FOSSIL brand underwear and lounge wear
throughout the United States. The product should be available to the public
for the 1997 holiday season.
The Company announced in May that it had entered into a worldwide,
multi-year licensing agreement with Giorgio Armani for the rights to
design, produce and market a line of Emporio Armani watches.
6
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 of
Net Sales Net Sales
--------- ---------
For the 13 For the For the 39 For the
Weeks 3 Months 1/2 Weeks 9 Months
Ended Ended Ended Ended
October 4, September 30, Percentage October 4, September 30, Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
Net sales 100.0% 100.0% 15.5% 100.0% 100.0% 17.3%
Cost of sales 51.3 51.2 15.7 52.1 52.3 16.9
---- ---- ---- ----
Gross profit margin 48.7 48.8 15.3 47.9 47.7 17.7
Selling and
distribution expenses 22.5 24.0 8.3 23.5 24.4 13.0
General and
administrative expenses 10.1 11.0 5.9 11.1 11.9 9.3
---- ---- ---- ----
Operating income 16.1 13.8 34.9 13.3 11.4 36.7
Interest expense (0.4) (0.7) (34.1) (0.4) (0.6) (9.0)
Other income
(expense)- net (0.5) (0.8) (35.8) (0.5) (0.3) 84.1
----- ----- ----- -----
Income before income taxes
15.2 12.3 43.3 12.4 10.5 37.9
Income taxes 6.2 5.0 42.5 5.1 4.3 37.0
--- --- --- ---
Net income 9.0% 7.3% 43.9% 7.3% 6.2% 38.4%
===== ===== ===== =====
7
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 For the For the For the For the 39 For the For the For the
13 Weeks 3 Months 13 Weeks 3 Months 1/2 Weeks 9 Months 39 1/2 9 Months
Ended Ended Ended Ended Ended Ended Weeks Ended
October September October September October September October September
4, 30, 4, 30, 4, 30, 4, 30,
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
International:
Europe $ 11.0 $ 10.3 8% 20% $ 31.4 $ 32.7 19% 23%
Other 5.5 2.4 9 4 21.9 9.8 13 7
--- --- --- --- ---- ---- --- ---
Total 16.5 12.7 27 24 53.3 42.5 32 30
---- ---- --- --- ---- ---- --- ---
International
Domestic:
Watch products 26.9 24.4 44 46 66.9 59.5 40 42
Other products 12.1 11.6 20 22 32.5 30.7 20 22
---- ---- --- --- ---- ---- --- ---
Total 39.0 36.0 64 68 99.4 90.2 60 64
Stores 5.5 4.1 9 8 12.6 8.2 8 6
Total Domestic 44.5 40.1 73 76 112.0 98.4 68 70
---- ---- --- --- ----- ---- --- ---
Total Net Sales $ 61.0 $ 52.8 100% 100% $165.3 $140.9 100% 100%
====== ====== ==== ==== ====== ====== ==== ====
Sales of FOSSIL branded watches and sales from additional FOSSIL outlet and
retail stores opened after September 1996 accounted for the majority of the
sales volume increase during the Third Quarter. Worldwide sales of FOSSIL
branded watches showed strong gains due to the increase of metal bracelet
watches in the Company's sales mix and the popularity of two FOSSIL watch lines,
FOSSIL Blue and FOSSIL Steel, introduced in the second quarter of 1996 and 1997,
respectively. Five additional stores of the Company's combined thirty-one outlet
and retail stores, were in operation during the Third Quarter in comparison to
the comparable quarter in 1996. The Company had a combined total of 17 and 27
Store locations as of January 1, 1996 and September 30, 1996, respectively. The
majority of the store locations opened at least a full year also showed an
increase in sales volumes as FOSSIL brand recognition and product offerings
continued to broaden and improve. FOSSIL leather goods sales continued to show
strong growth in the women's handbag and small leather good products, offset in
part by lower sales volumes in men's small leather goods. Strong domestic watch
volume increases were offset in part by a 30% reduction in watches sold under
licensing agreements as the Company continues to reduce its exposure in
non-branded collectible licensed products. Internationally, the Company's
European-based sales showed an increase for the first time this year as the
Company's product mix of FOSSIL watches became more closely aligned with the
assortment in use within the United States. Export sales also increased
substantially as the number of foreign countries the Company's products are sold
into increased, as did market penetration for the Company's watch products in
key foreign countries. Sales volume increases on a year-to-date basis generally
followed the same trends as the Third Quarter with two exceptions. First, the
Company's sunglass product sales, while improving in the Third Quarter, were
down more substantially in the first half of the year and second, year-to-date
sales volumes were positively impacted by an approximate $5.9 million sale of
premium watches sold into Europe during the Company's 1997 second quarter.
Management believes sales trends during the Company's 1997 fourth quarter should
follow the same general trends as reported during 1997 with the exception that
sales volume will also be positively impacted by the shipping of the Company's
Emporio Armani watch line.
Gross Profit. During 1997, increased sales volumes through the Company's retail
and Japan-based operations and increased production of the Company's watch
product through its
8
majority-owned assembly factories had a positive influence on the Company's
gross profit margins. However, more aggressive pricing on certain of the
Company's FOSSIL branded watches this year, and higher markdowns taken in the
leather and sunglass products during the 1997 second quarter had an offsetting
effect on gross profit margins. Management believes that the Company's gross
profit margins will remain in the 48% range for the balance of the year.
Operating Expenses. Selling, general and administrative expenses, as a
percentage of net sales, decreased for the Third Quarter and Three-fourths Year
Period to 32.6% and 34.6%, respectively, from 35.0% and 36.3% in the prior year
comparable periods. 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 1996 and 1997. The operating expense
ratios for the Third Quarter and Three-fourths Year Period were positively
impacted by leveraging expenses against higher sales volumes and as a result of
the reduction in operating expenses incurred in France and the United Kingdom,
where the Company has curtailed its Company-owned operations in favor of sales
through independent distributors. While the Company believes it will continue to
leverage its operating expenses against anticipated increased sales volumes in
the fourth quarter, operating expenses will be negatively impacted by over $1.5
million in advertising and other costs related to the start up of the Emporio
Armani watch line.
Other income (expense). Other income (expense) typically represents the minority
interests in the profit or loss of the Company's majority-owned operations,
interest income and foreign currency exchange gains or losses. The decrease in
other expense during the Third Quarter primarily reflects the impact of the
Company's decision to purchase certain minority interests of its profitable
European and manufacturing operations during the later part of 1996 and early
1997. On a year-to-date basis, additional expenses were incurred as result of
foreign currency losses and estimated costs of $175,000 to be incurred in the
curtailment of operations in the United Kingdom. During 1997, additional foreign
currency losses were incurred by the Company's foreign subsidiaries on certain
unhedged transactions as the United States Dollar has significantly increased in
value against the foreign currencies the Company deals with, mainly the German
Mark and Italian Lira.
Liquidity and Capital Resources
Historically the Company has not required substantial financing during the first
several months of its fiscal year but has increased its debt needs starting in
the second quarter, typically reaching its peak borrowing needs in the September
- - November time frame. The additional financing needs have generally been to
finance the accumulation of inventory and the build-up in accounts receivable.
During 1997, the Company additionally incurred approximately $4.5 million in
costs for the construction of a 138,000-sq. ft. warehouse facility, which has
been built adjacent to its main headquarters. The building costs are being
funded through the Company's short-term credit facilities.
Management believes the Company's financial position as of October 4, 1997
remains extremely strong with working capital of approximately $67 million and
$12 million in cash. As of November 11, 1997, the Company had approximately $14
million borrowed against it's combined $48 million bank credit facilities. The
current bank borrowings are primarily related to financing the Company's
expansion into company-owned retail locations and internationally as well as
financing its facility costs in Texas. Management believes that cash flow from
operations and existing credit facilities will be sufficient to satisfy its
working capital expenditure requirements for at least the next twelve months.
9
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 and involve a number of uncertainties. The actual
results of the future events could differ materially from those stated in such
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 on the Company's Current Report on Form 8-K dated March
31, 1997.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period
covered by this Report.
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: November 17, 1997 /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)
12
EXHIBIT INDEX
Exhibit
Number Document Description
27 Financial Data Schedule