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: April 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, 1998: 20,842,272.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 4, January 3,
1998 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,402,979 $ 21,103,581
Accounts receivable - net 28,429,302 34,237,526
Inventories 53,812,268 51,382,160
Deferred income tax benefits 4,605,092 4,503,749
Prepaid expenses and other current assets 2,276,574 2,432,282
--------- ---------
Total current assets 114,526,215 113,659,298
Property, plant and equipment - net 20,761,208 21,073,333
Intangible and other assets 4,827,388 4,837,259
--------- ---------
140,114,811 $ 139,569,890
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,808,940 $ 7,862,145
Accounts payable 10,744,157 9,609,805
Accrued expenses:
Co-op advertising 8,051,900 8,700,696
Compensation 2,569,740 2,665,485
Other 5,172,606 8,714,067
Income taxes payable 7,993,993 5,504,304
--------- ---------
Total current liabilities 38,341,336 43,056,502
Minority interest in subsidiaries 975,412 1,250,405
Stockholders' equity:
Common stock, shares issued and outstanding,
20,475,217 and 20,308,503, respectively 204,752 203,085
Additional paid-in capital 27,208,032 26,021,255
Retained earnings 75,923,158 71,257,176
Cumulative translation adjustment (2,537,879) (2,218,533)
---------- -----------
Total stockholders' equity 100,798,063 95,262,983
----------- ----------
$ 140,114,811 $ 139,569,890
============= =============
See notes to condensed consolidated financial statements.
-1-
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 13 For the 13 1/2
Weeks Ended Weeks Ended
April 4, April 5,
1998 1997
---- ----
Operating activities:
Net income $ 4,665,982 $ 2,974,424
Noncash item affecting net income:
Minority interest in subsidiaries (21,147) 69,045
Depreciation and amortization 794,352 716,250
Increase in allowance for doubtful accounts 1,024,977 78,792
Decrease in allowance for returns -
net of related inventory in transit (157,950) (503,478)
Deferred income tax benefits (101,343) 60,619
Cash from changes in assets and liabilities:
Accounts receivable 5,361,412 2,853,218
Inventories (2,850,323) (462,612)
Prepaid expenses and other current assets 155,708 45,810
Accounts payable 951,284 (2,740,040)
Accrued expenses (4,286,002) (3,957,590)
Income taxes payable 2,489,689 1,877,118
--------- ---------
Net cash from operations 8,026,639 1,011,556
Investing activities:
Net assets acquired in business combination/consolidation,
net of cash received - (931,088)
Additions to property, plant and equipment (479,301) (1,039,644)
Increase in intangible and other assets (50,502) (235,786)
-------- ---------
Net cash used in investing activities (529,803) (2,206,518)
Financing activities:
Issuance of common stock 1,188,444 1,256,348
Decrease in minority interests in subsidiaries (253,846) (294,297)
Repayments in notes payable-affiliates - (120,408)
(Repayments) increase in notes payable-banks (4,053,205) 1,070,925
----------- ---------
Net cash (used in) from financing activities (3,118,607) 1,912,568
Effect of exchange rate changes on cash and cash equivalents (78,831) (338,176)
-------- ---------
Net increase in cash and cash equivalents 4,299,398 379,430
Cash and cash equivalents:
Beginning of period 21,103,581 11,981,246
---------- ----------
End of period $ 25,402,979 $ 12,360,676
============ ============
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 April 4, 1998
and the results of operations for the thirteen and thirteen and one-half week
periods ended April 4, 1998, and April 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 period ended
April 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 quarter ended April 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", "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 Quarter
1998
----
Net income, as reported $4,665,982
Current period change in foreign
currency translation adjustment 319,346
-------
Comprehensive income $4,346,636
==========
-4-
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
=========== ===========
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 April 4,
1998, the Company had hedge contracts to sell 17.8 million German Marks for
approximately $10.3 million, expiring through December 1998 and 207.8 million
Japanese Yen for approximately $1.6 million, expiring through August 1998.
3. SUBSEQUENT EVENT
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 of which 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-
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 period ended April 4, 1998 (the
"First Quarter"), as compared to the thirteen and one-half week period ended
April 5, 1997 (the "Prior Year Quarter"). 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 Quarter contained an additional one-half
week for the transition period. This change had an immaterial impact on the
comparability to the First Quarter. 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- 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- and 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 increased 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- 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-
1998 Highlights
During April 1998, the Company effected a three-for-two stock split in the
form of a 50% stock dividend for stockholders of record at the close of
business on March 25, 1998.
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.
During May 1998, the Company completed a 2,150,000 share secondary
offering of its $0.01 par value common stock 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)
Other income
(expense)- 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-
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 Quarter Ended For the Quarter Ended
--------------------- ---------------------
April 4, April 5, April 4, April 5,
1998 1997 1998 1997
-------- -------- -------- --------
International:
Europe $ 12.2 $ 10.6 21% 22%
Other 5.6 4.8 10 10
--- --- -- --
Total International 17.8 15.4 31 32
---- ---- -- --
Domestic:
Watch products 23.3 18.0 41 38
Other products 12.2 11.2 22 24
---- ---- -- --
Total 35.5 29.2 63 62
Stores 3.6 2.8 6 6
--- --- - -
Total Domestic 39.1 32.0 69 68
---- ---- -- --
Total Net Sales $ 56.9 $ 47.4 100% 100%
====== ====== === ===
Sales volume increases during the First Quarter 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 product categories and retail businesses added to the
sales increases. 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. European-based watch sales increased in excess of 15%, on a U.S.
dollar denominated basis, during the First Quarter as compared to the Prior Year
Quarter 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 mid-year
1997, has resulted in significant increases in the European sales momentum.
Management anticipates that sales volumes will continue to increase in 1998 at
approximately the First Quarter rate with the exception of the second quarter
which will likely fall below 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.
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's gross profit margin during the First Quarter was
nearly the same as that of the Prior Year Quarter. The gross profit margin
realized in the Company's first quarter of the year has generally been higher
than the yearly gross profit margin average. The increase is primarily due to
the positive gross profit margin influence stemming from the Company's
European-based sales, sunglass sales and the Company's foreign-based assembly
facility sales. These sales categories generally result in higher gross profit
margins than the Company's consolidated average and account for a larger portion
of the sales mix in the first quarter than the remainder of the year. Management
believes that the Company's gross profit margin 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-
Operating expenses. Selling, general and administrative expenses, as a
percentage of net sales, decreased from 37.4% in the Prior Year Quarter to 35.2%
in 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.
Other income (expense) - net. Other income (expense) positively contributed to
the Company's net income in the First Quarter as opposed to a net expense in the
Prior Year Quarter. The improvement 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.
Liquidity and Capital Resources
Historically, the Company has not required substantial financing 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 financing needs have generally been to
finance the accumulation of inventory and the build-up in accounts receivable.
During 1997 and the First Quarter of 1998, the Company has significantly
increased its cash flow from operations leaving the Company with approximately
$25 million in cash as of April 4, 1998 in comparison to $12 million at the same
point in the prior year. In addition, the Company had working capital of $76
million and borrowings of only $4 million against it's combined $43 million bank
credit facilities. The Company also completed, during May 1998, a secondary
offering of its common stock from which the Company will receive approximately
$3.5 million in cash for working capital needs. 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 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.
-9-
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.
-10-
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, 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-
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
27 Financial Data Schedule
-12-