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: July 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 August
17, 2001: 30,162,470.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
July 7, December 30,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 67,252 $ 79,501
Short-term marketable investments 5,328 11,312
Accounts receivable - net 56,003 62,876
Inventories 97,930 81,118
Deferred income tax benefits 7,500 7,779
Prepaid expenses and other current assets 10,192 10,245
---------- ----------
Total current assets 244,205 252,831
Investment in joint venture 5,896 5,935
Property, plant and equipment - net 51,429 42,252
Intangible and other assets - net 10,601 6,573
---------- ----------
$ 312,131 $ 307,591
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,651 $ 5,107
Accounts payable 14,933 18,325
Accrued expenses:
Co-op advertising 10,947 14,320
Compensation 5,285 6,179
Other 18,981 19,145
Income taxes payable 20,238 19,964
---------- ----------
Total current liabilities 75,035 83,040
Minority interest in subsidiaries 2,933 3,852
Stockholders' equity:
Common stock, 30,162,791 and 30,136,824 shares
issued and outstanding, respectively 301 301
Additional paid-in capital 13,730 14,214
Retained earnings 225,712 208,429
Accumulated other comprehensive loss (5,580) (2,245)
---------- ----------
Total stockholders' equity 234,163 220,699
---------- ----------
$ 312,131 $ 307,591
========== ==========
See notes to condensed consolidated financial statements.
-1-
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands, except per share amounts)
For the 13 For the 13 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
---- ---- ---- ----
Net sales $ 112,357 $ 113,393 $ 233,462 $ 216,962
Cost of sales 55,453 56,833 116,823 106,743
---------- ---------- ---------- ----------
Gross profit 56,904 56,560 116,639 110,219
Operating expenses:
Selling and distribution 34,545 27,329 67,127 51,512
General and administrative 10,775 8,779 21,587 17,096
---------- ---------- ---------- ----------
Total operating expenses 45,320 36,108 88,714 68,608
---------- ---------- ---------- ----------
Operating income 11,584 20,452 27,925 41,611
Interest expense 27 18 51 45
Other income (expense) - net 588 (185) 932 88
---------- ---------- ---------- ----------
Income before income taxes 12,145 20,249 28,806 41,654
Provision for income taxes 4,862 8,301 11,523 17,078
---------- ---------- ---------- ----------
Net income $ 7,283 $ 11,948 $ 17,283 $ 24,576
Other comprehensive income, net of taxes:
Currency translation adjustment (2,603) 841 (4,123) (1,188)
Unrealized (loss) gain on short-term investments (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 431 - 1,112 -
---------- ---------- ---------- ----------
Total comprehensive income $ 5,106 $ 12,756 $ 13,948 $ 23,432
========== ========== ========== ==========
Earnings per share:
Basic $ 0.24 $ 0.37 $ 0.57 $ 0.77
========== ========== ========== ==========
Diluted $ 0.23 $ 0.36 $ 0.55 $ 0.74
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic 30,073 32,107 30,125 32,108
====== ====== ====== ======
Diluted 31,259 33,236 31,221 33,255
====== ====== ====== ======
See notes to condensed consolidated financial statements.
-2-
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
For the 27 For the 26
Weeks Ended Weeks Ended
July 7, July 1,
2001 2000
---- ----
Operating activities:
Net income $ 17,283 $ 24,576
Noncash items affecting net income:
Minority interest in subsidiaries 658 1,028
Equity in losses of joint ventures 204 385
Depreciation and amortization 4,258 2,936
Increase in allowance for doubtful accounts 251 468
Decrease in allowance for returns -
net of related inventory in transit (1,058) (533)
Deferred income tax benefits 279 (364)
Changes in operating assets and liabilities:
Accounts receivable 10,604 70
Inventories (16,574) (32,840)
Prepaid expenses and other current assets 56 (2,699)
Accounts payable (7,891) 11,192
Accrued expenses (5,465) (9,592)
Income taxes payable 983 1,005
--------- ---------
Net cash from (used in) operating activities 3,588 (4,368)
Investing activities:
Additions to property, plant and equipment (13,207) (7,006)
Sale of marketable investments 5,984 6,080
Net assets acquired in business combinations (5,121) -
Investment in joint venture (165) (2,000)
Increase in intangible and other assets (244) (321)
--------- ---------
Net cash used in investing activities (12,753) (3,247)
Financing activities:
Issuance of common or treasury stock for stock option exercises 1,671 498
Acquisition and retirement of common stock (3,539) -
Purchase of treasury stock - (267)
Distribution of minority interest earnings (676) (493)
Repayments of notes payable-banks (456) (185)
--------- ---------
Net cash used in financing activities (3,000) (447)
Effect of exchange rate changes on cash and cash equivalents (84) (997)
--------- ---------
Net decrease in cash and cash equivalents (12,249) (9,059)
Cash and cash equivalents:
Beginning of period 79,501 90,908
--------- ---------
End of period $ 67,252 $ 81,849
========= =========
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 that are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of July 7, 2001,
and the results of operations for the thirteen- week periods ended July 7, 2001
and July 1, 2000, respectively and the twenty-seven week and twenty-six week
periods ended July 7, 2001 and July 1, 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 thirteen and twenty-seven
week periods ended July 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" brands 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:
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 July 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 $712,000, net of 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."
-4-
4. GEOGRAPHIC INFORMATION
(In thousands)
For the 13 Weeks Ended For the 13 Weeks Ended
July 7, 2001 July 1, 2000
------------ ------------
Operating Operating
Net Sales Income Net Sales Income
--------- ------ --------- ------
U.S.- exclusive of Stores:
External customers $ 58,965 $ 6,292 $ 62,813 $ 8,890
Intergeographic 14,275 - 13,317 -
Far East and Export:
External customers 11,255 7,215 16,354 9,361
Intergeographic 49,162 - 54,787 -
Stores 14,307 (2,373) 11,199 1,961
Europe 26,805 814 21,257 (17)
Japan 1,025 (364) 1,763 257
Intergeographic items (63,437) - (68,097) -
-------- ------- -------- -------
Consolidated $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 13 For the 13 For the 27 For the 26
(In thousands, except per share data) Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 7, July 1, July 7, July 1,
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS computation:
Numerator:
Net income $ 7,283 $ 11,948 $ 17,283 $ 24,576
--------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 30,073 32,107 30,125 32,108
--------- -------- -------- --------
Basic EPS $ 0.24 $ 0.37 $ 0.57 $ 0.77
========= ======== ======== ========
Diluted EPS computation:
Numerator:
Net income $ 7,283 $ 11,948 $ 17,283 $ 24,576
--------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 30,073 32,107 30,125 32,108
Stock option conversion 1,186 1,129 1,096 1,147
--------- -------- -------- --------
31,259 33,236 31,221 33,255
--------- -------- -------- --------
Diluted EPS $ 0.23 $ 0.36 $ 0.55 $ 0.74
========= ======== ======== ========
6. ACQUISITIONS/JOINT VENTURES
On July 3, 2001, Fossil (East) Limited ("Fossil East") increased its equity
interest in Pulse Time, Ltd. to 90% by acquiring an additional 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 80% of the capital stock of FSLA,Pty.
Limited, the Company's current distributor in Australia, for a purchase
price of approximately $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 terms of
this transaction include a future earnout payment of an amount up to $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 $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 thirteen and twenty-seven week periods ended July 7, 2001 (the "Second
Quarter" and "Year To Date Period," respectively), as compared to the thirteen
and twenty-six week periods ended July 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 during the last five fiscal years.
Second Quarter and Year To Date Period Highlights
o Despite a strong U.S. dollar, sales from the Company's European
operations increased 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 YTD
Period.
o Leather 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 27% and 37% during the Second Quarter and Year To
Date Period, respectively.
o The Company operated 78 retail locations consisting of 43 outlet, 18
accessory and 17 jeanswear stores at the end of the Second Quarter
compared to 52 stores (35 outlet and 17 accessory) at the end of the
Prior Year Quarter. This retail store expansion generated sales volume
growth in excess of 37% for the Year 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 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 13 Weeks Ended For the 13 Weeks Ended
---------------------- ----------------------
July 7, July 1, July 7, July 1,
2001 2000 2001 2000
---- ---- ---- ----
International:
Europe $ 26.8 $ 21.2 24 % 19 %
Other 12.3 18.1 11 16
------ ------ --- ---
Total International 39.1 39.3 35 35
------ ------ --- ---
Domestic:
Watch products 37.4 43.6 33 38
Other products 21.6 19.2 19 17
------ ------ --- ---
Total 59.0 62.8 52 55
Stores 14.3 11.3 13 10
------ ------ --- ---
Total Domestic 73.3 74.1 65 65
------ ------ --- ---
Total Net Sales $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 increased 9% during the Second Quarter, excluding the
$8.3 million non-branded premium watch sale in the Prior Year Quarter and the
effects 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 that 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 the Company's retail stores grew 27% from
additional store openings. Excluding the $8.3 million sale and 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 the Company's international businesses
benefited from increasing licensed watch product sales and the launch of FOSSIL
jewelry. 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 increased handbag sales and increased sales
from RELIC leather. The Second Quarter and Year To Date Period increases were
offset by a 14% and 10% decline, respectively, in the Company's domestic watch
business resulting from a slowdown in
-10-
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 while 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 increased markdowns in the Company's
leather and eyewear product divisions and a weaker Euro. The Year To Date Period
was further impacted unfavorably by an increase in sales from the Company's
leather products business that generates gross margins substantially below the
Company's historical consolidated gross margin. Positively impacting gross
profit margins for 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 margin. 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 a continued higher mix of licensed watch and retail store sales.
Operating Expenses. Operating expenses, as a percentage of net sales, increased
to 40.3% in the Second Quarter compared to 31.8% 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 costs added primarily in the latter half of fiscal 2000 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, related
to the retail stores are significantly 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. On a percentage of sales
basis, management believes operating expenses in the second half of fiscal 2001
will be less than the corresponding period in the 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 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) weaker Euro on a comparable basis
in the first half of fiscal year 2001 and (iii) infrastructure costs added in
the latter half of fiscal year 2000.
Other Income (Expense). Other income (expense) increased favorably by
approximately $770,000 during the Second Quarter and $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 Company for web design consultation and (ii) decreased
minority interest expense resulting from the Company's acquisition of additional
equity interests in 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, typically reaching its peak in the September-November time frame.
During the Second Quarter, the Company's cash holdings and short-term marketable
securities decreased to $73 million in comparison to $87 million at the end of
Prior Year Quarter. This decrease is primarily related to the Company acquiring
in excess of $30 million of its common stock during the second half of fiscal
2000 and the first quarter of fiscal 2001. Approximately 475,000 shares are
still available for repurchase under the previous buyback authorizations.
-11-
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 in May,
inventory levels decreased approximately 6%.
At the end of the Second Quarter, the Company had working capital of $169
million compared to working capital of $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 facilities at the end of the Second 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 the cash requirements of its new
distribution facility and other working capital expenditures for at least the
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, 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. 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 Second 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.
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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
4.1 (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.
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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: 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)
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EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
4.1 (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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