UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1997 to April 5, 1997
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 14, 1997: 13,251,511.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 5, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 12,360,676 $ 11,981,246
Accounts receivable - net 28,705,187 30,252,964
Inventories 49,364,413 49,782,555
Deferred income tax benefits 3,605,725 3,666,344
Prepaid expenses and other current assets 1,896,981 1,942,791
--------- ----------
Total current assets 95,932,982 97,625,900
Property, plant and equipment - net 16,973,912 16,718,976
Intangible and other assets 4,817,645 4,633,193
--------- ----------
$ 117,724,539 $ 118,978,069
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
NOTES PAYABLE $ 11,506,661 $ 10,506,144
ACCOUNTS PAYABLE 4,787,109 7,476,324
ACCRUED EXPENSES:
CO-OP ADVERTISING 6,928,228 7,857,196
COMPENSATION 2,024,937 2,154,996
OTHER 5,033,130 7,931,693
INCOME TAXES PAYABLE 3,715,775 1,838,656
--------- ----------
TOTAL CURRENT LIABILITIES 33,995,840 37,765,009
LONG-TERM DEBT 4,300,000 4,350,000
MINORITY INTERESTS IN SUBSIDIARIES 1,138,686 2,295,026
STOCKHOLDERS' EQUITY:
COMMON STOCK, SHARES ISSUED AND OUTSTANDING,
13,373,791 AND 13,242,994, RESPECTIVELY 133,738 132,430
ADDITIONAL PAID-IN CAPITAL 24,021,508 22,766,468
RETAINED EARNINGS 55,289,493 52,315,069
CUMULATIVE TRANSLATION ADJUSTMENT (1,154,726) (645,933)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY 78,290,013 74,568,034
---------- ----------
$ 117,724,539 $ 118,978,069
============= =============
1
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
FOR THE QUARTER ENDED
---------------------
APRIL 5, March 31,
1997 1996
---- ----
Net Sales $ 47,449,712 $ 42,909,068
Cost of sales 24,254,354 23,873,281
---------- ----------
Gross profit 23,195,358 19,035,787
Operating Expenses:
Selling and distribution 12,001,025 9,495,149
General and administrative 5,733,569 5,291,847
--------- ----------
Total operating expenses 17,734,594 14,786,996
---------- ----------
Operating income 5,460,764 4,248,791
Interest expense (229,550) (176,010)
Other income (expense) - net (189,790) (170,817)
--------- ---------
Income before income taxes 5,041,424 3,901,964
Provision for income taxes 2,067,000 1,562,000
--------- ---------
Net income $ 2,974,424 $ 2,339,964
============ ============
Earnings per share $ 0.22 $ 0.18
============ ============
Weighted average common and
common equivalent shares
outstanding 13,603,828 13,248,347
========== ============
See notes to condensed consolidated financial statements.
2
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
FOR THE QUARTER ENDED
---------------------
APRIL 5, March 31,
1997 1996
---- ----
Operating Activities:
Net income $ 2,974,424 $ 2,339,964
Noncash item affecting net income:
Minority interests in subsidiaries 69,045 145,230
Depreciation and amortization 716,250 710,712
Increase in allowance for doubtful accounts 78,792 180,829
(Decrease) increase in allowance for returns -
net of related inventory in transit (503,478) 124,541
Deferred income tax benefits 60,619 186,562
Cumulative translation adjustment (508,793) (245,137)
Cash from (used for) changes in assets and liabilities:
Accounts receivable 2,853,218 119,412
Inventories (462,612) 430,573
Prepaid expenses and other current assets 45,810 76,660
Accounts payable (2,689,215) 1,504,767
Accrued expenses (3,957,590) (3,448,034)
Income taxes payable 1,877,118 1,857,508
--------- ---------
Net cash from operations 553,588 3,983,587
Investing Activities:
Net assets acquired in business combination/consolidation,
net of cash received (931,088) ---
Additions to property, plant and equipment (919,852) (813,666)
(Increase) decrease in intangible and other assets (235,786) 19,075
--------- ---------
Net cash used in investing activities (2,086,726) (794,591)
Financing activities:
Issuance of common stock 1,256,348 ---
Decrease in minority interests in subsidiaries (294,297) (87,660)
Increase (repayments) in notes payable 950,517 (2,465,784)
------- -----------
Net cash from (used in) financing activities 1,912,568 (2,553,444)
--------- -----------
Net increase in cash and cash equivalents 379,430 635,552
Cash and cash equivalents:
Beginning of period 11,981,246 5,980,535
---------- ---------
End of period $ 12,360,676 $ 6,616,087
============ ============
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 5, 1997
and the results of operations for the thirteen and one-half and thirteen week
periods ended April 5, 1997 and March 31, 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 one- half week
period ended April 5, 1997 ("First Quarter") 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 First Quarter 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:
April 5, December 31,
1997 1996
---- ----
Components and parts $ 2,716,053 $ 2,294,750
Work-in-process 1,254,937 657,125
Finished merchandise on hand 37,206,994 38,404,535
Merchandise at Company's stores 4,337,741 3,962,199
Merchandise in transit from estimated
customers' returns 3,848,688 4,463,946
--------- ---------
$49,364,413 $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, are deferred until the inventory is sold or the forward contract is
completed. On April 5, 1997, the Company had hedge contracts to sell 12,010,000
deutsche marks (DM) for approximately $7.7 million, expiring through July 1997.
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.
4. DEBT
BANK. In April 1997, the Company extended the maturity date on its short-term
revolving credit facility with its primary bank to July 5, 1997. The Company
anticipates renewing its short-term credit facility during May 1997 for a period
of one year at terms no less favorable than those contained in the current
credit facility.
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 one-half week period
ended April 5, 1997 (the "First Quarter"), as compared to the thirteen
week period ended March 31, 1996 (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 First Quarter
contained an additional one-half week for the transition period. This
change had an immaterial impact on comparability to the Prior Year
Quarter. 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, the United Kingdom, Spain, France 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
The Company acquired the remaining 40% of the capital stock of Fossil
Italia, S.R.L. from its minority stockholders.
During March 1997, FOSSIL brand neckwear became available through the
Company's first licensing agreement of the FOSSIL brand name.
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 products should be available to
the public for the 1997 holiday season.
The Company announced in May 1997 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 First
Quarter and the Prior Year Quarter.
Percentage of Percentage
Net Sales Change From
------------- -----------
The Quarter Ended The Quarter Ended
----------------- -----------------
APRIL 5, March 31,
1997 1996 1997
---- ---- ----
Net sales 100.0% 100.0% 10.6%
Cost of sales 51.1 55.6 1.6
----- ----- -----
Gross profit margin 48.9 44.4 21.9
Selling and distribution
expenses 25.3 22.1 26.4
General and
administrative expenses 12.1 12.4 8.4
---- ---- -----
Operating income 11.5 9.9 28.5
Interest expense (0.5) (0.4) 30.4
Other income (expense)- net (0.4) (0.4) 11.1
----- ----- -----
Income before income taxes 10.6 9.1 29.2
Income taxes 4.3 3.6 32.3
--- ---
Net income 6.3% 5.5% 27.1%
===== === ====
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
------- ----------
The Quarter Ended The Quarter Ended
----------------- -----------------
April 5, MARCH 31, APRIL 5, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
International:
Europe $ 10.6 $ 11.5 22% 27%
Other 4.8 4.1 10 9
--- --- ---- ----
Total International 15.4 15.6 32 36
---- ---- ---- ----
Domestic:
Watch products 18.0 16.6 38 39
Other products 11.2 9.2 24 21
---- --- ----- ---
Total 29.2 25.8 62 60
Stores 2.8 1.5 6 4
--- --- -- --
Total Domestic 32.0 27.3 68 64
---- ---- ----- ---
Total Net Sales $ 47.4 $ 42.9 100% 100%
====== ====== ===== ====
Sales volume increases during the First Quarter were principally
derived from domestic sales of FOSSIL Leather products in addition to
sales from additional FOSSIL outlet and retail stores opened during
1996. The comparability of the sales increase in the First Quarter was
negatively impacted by the volume of certain low margin sales made in
the Prior Year Quarter, which however positively impacted the
comparability of the gross profit margin in the First Quarter. A
reduction in sales volumes from the Company's European-based operations
was almost fully offset by increased export sales from the United
States, resulting in relatively flat International-based sales volumes
in the First Quarter as compared to the Prior Year Quarter. The Company
believes that its European- based sales reflect the continuing poor
economic conditions throughout Europe and a consumer preference shift
from leather to metal banded watches. Retail tests in Europe of the
latest FOSSIL metal banded watches have been successful. Therefore,
management has recently begun implementing a line change in Europe to
include a higher concentration of these metal banded watches.
Management believes this influx of new product will yield positive
results beginning the second quarter of 1997.
8
GROSS PROFIT. The increase in the gross profit margin principally
resulted from a change in the Company's sales mix in the First Quarter as
compared to the Prior Year Quarter, including:
Sales from the Company's Japan-based operations ("Fossil Japan"),
acquired in April 1996, at substantially higher gross margins than the
Company attained through distributor sales to Japan in the Prior Year
Quarter.
A reduction in the sales volume in France and the United Kingdom where
the Company has historically sold its products at lower gross profit
margins in an attempt to obtain brand-name recognition.
A reduction in the sales volume of discontinued product through
traditional discounters which generally yield low gross margins.
Increased sales volume through the Company's three retail stores
opened after the Prior Year Quarter at gross profit margins in excess
of the Company's normal wholesale margins.
In addition, increased production and sales volume of goods produced from the
Company's majority-owned factories positively impacted the Company's gross
profit margins. Management believes that the Company's gross profit margin for
the balance of the year will be sustained in the 48% range.
OPERATING EXPENSES. Selling, general and administrative expenses, as a
percentage of net sales, increased from 34.5% in the Prior Year Quarter
to 37.4% in the First Quarter. Operating expenses increased in the
aggregate primarily due to increased sales volumes, operating costs of
Fossil Japan and the operating costs from the Company's additional
outlet and retail stores opened during 1996. The operating expense
ratio for the First Quarter was negatively impacted by the operating
costs of Fossil Japan and the impact of Company-owned outlet and retail
stores, both of which operate at substantially higher operating costs
than the Company's consolidated average. Management believes the
Company's operating expense ratio will decline from the First Quarter
levels as it reaches its anniversary date of its acquisition of Fossil
Japan and several FOSSIL Store locations and as the portion of the
sales mix attributable to the Company-owned stores declines.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has not required substantial financing in the
First Quarter but has increased its debt needs starting in the second
quarter, while 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 will
additionally require approximately $5 million in financing for the
construction of a 138,000 sq. ft. warehouse facility being built
adjacent to its main headquarters. Currently, the construction costs
are being funded through the Company's short-term credit facilities,
but management intentions to secure long-term financing for this
facility upon its completion.
Management believes the Company's financial position as of April 5,
1997 remains extremely strong with working capital of approximately $62
million and $12 million in cash. As of May 13, 1997, the Company had
approximately $12 million borrowed against its combined $38 million
bank credit facilities. The current bank borrowings are primarily
related to financing the expansion of the Company 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 as well as financing for the Company's 1997
building project 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 Operation 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
10.1 Stock Purchase Agreement dated February 1, 1997,
by and between Bluewhale Holding S.a, and Fossil Europe B.V.
10.2 Fourth Amendment to Second Amended and Restated
Loan Agreement dated April 2, 1997, by and among Wells Fargo
Bank (Texas), National Association, a national banking
association formerly known as First Interstate Bank of Texas,
N.A., Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust , Fossil New York, Inc.,
Fossil Stores I, Inc. and Fossil Stores II, Inc. (without
Exhibits)
27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during
the period covered by this Report:
1. Current Report on Form 8-K filed on March 13, 1997
regarding "Item 8. Change in Fiscal Year."
2. Current Report on Form 8-K filed on March 31, 1997
regarding "Item 5. Other Events" identifying certain risk
factors associated with the Company's securities.
11
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 16, 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
10.1 Stock Purchase Agreement dated February 1, 1997, by and between
Bluewhale Holding S.a, and Fossil Europe B.V.
10.2 Fourth Amendment to Second Amended and Restated Loan Agreement
dated April 2, 1997, by and among Wells Fargo Bank (Texas),
National Association, a national banking association formerly
known as First Interstate Bank of Texas, N.A., Fossil Partners,
L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust ,
Fossil New York, Inc., Fossil Stores I, Inc. and Fossil Stores
II, Inc. (without Exhibits)
27 Financial Data Schedule
13