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 from April 6, 1997 to July 5, 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
August 13, 1997: 13,453,238.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 5, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,954,366 $ 11,981,246
Accounts receivable - net 29,526,067 30,252,964
Inventories 51,707,828 49,782,555
Deferred income tax benefits 3,897,000 3,666,344
Prepaid expenses and other current assets 4,184,194 1,942,791
--------- ---------
Total current assets 100,269,455 97,625,900
Property, plant and equipment - net 19,224,777 16,718,976
Intangible and other assets 5,021,355 4,633,193
--------- ---------
$ 124,515,587 $ 118,978,069
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable $ 12,116,890 $ 10,506,144
Accounts payable 6,433,868 7,476,324
Accrued expenses:
Co-op advertising 7,126,691 7,857,196
Compensation 2,349,844 2,154,996
Other 5,100,337 7,931,693
Income taxes payable 3,995,102 1,838,656
--------- ---------
Total current liabilities 37,122,732 37,765,009
Long-term debt 4,250,000 4,350,000
Minority interests in subsidiaries 1,033,825 2,295,026
Stockholders' equity:
Common stock, shares issued and outstanding,
13,438,664 and 13,242,994, respectively 134,387 132,430
Additional paid-in capital 24,558,582 22,766,468
Retained earnings 58,923,596 52,315,069
Cumulative translation adjustment (1,507,535) (645,933)
----------- ---------
Total stockholders' equity 82,109,030 74,568,034
---------- ----------
$ 124,515,587 $ 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 26 1/2 For the 6
Weeks Ended Months Ended Weeks Ended Months Ended
July 5, June 30, July 5, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $ 56,931,466 $ 45,238,236 $ 104,381,178 $ 88,147,304
Cost of sales 30,627,390 22,775,805 54,881,744 46,649,086
---------- ---------- ---------- ----------
Gross profit 26,304,076 22,462,431 49,499,434 41,498,218
Operating Expenses:
Selling and distribution 13,142,089 12,241,841 25,143,114 21,736,990
General and administrative 6,384,510 5,619,881 12,118,079 10,911,728
--------- --------- ---------- ----------
Total operating expenses 19,526,599 17,861,722 37,261,193 32,648,718
---------- ---------- ---------- ----------
Operating income 6,777,477 4,600,709 12,238,241 8,849,500
Interest expense (267,166) (264,412) (496,716) (440,422)
Other income (expense) - net (373,208) 128,245 (562,998) (42,572)
--------- ------- --------- --------
Income before income taxes 6,137,103 4,464,542 11,178,527 8,366,506
Provision for income taxes 2,503,000 1,880,000 4,570,000 3,442,000
--------- --------- --------- ---------
Net income $ 3,634,103 $ 2,584,542 $ 6,608,527 $ 4,924,506
============ ============= ============ =============
Earnings per share $ 0.26 $ 0.19 $ 0.48 $ 0.37
================ ================= ================ =================
Weighted average common and
common equivalent shares
outstanding 13,807,162 13,462,680 13,705,495 13,355,513
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
2
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the 26 1/2 For the 6
Weeks Ended Months Ended
July 5, June 30,
1997 1996
---- ----
Operating Activities:
Net income $ 6,608,527 $ 4,924,506
Noncash item affecting net income:
Minority interests in subsidiaries (178,664) 251,625
Depreciation and amortization 1,481,617 1,473,399
(Decrease) increase in allowance for doubtful accounts (291,184) 531,647
Decrease in allowance for returns -
net of related inventory in transit (143,350) (1,239,963)
Deferred income tax benefits (230,656) 56,808
Cumulative translation adjustment (861,602) (319,024)
Cash from (used in) changes in assets and liabilities:
Accounts receivable 1,495,544 (1,872,572)
Inventories (2,259,386) (3,187,390)
Prepaid expenses and other current assets (2,241,403) (147,610)
Accounts payable (1,042,456) 1,428,387
Accrued expenses (3,367,013) (1,821,207)
Income taxes payable 2,156,446 (2,127,566)
--------- -----------
Net cash from (used in) operations 1,126,420 (2,048,960)
Investing Activities:
Net assets acquired in business combination/consolidation,
net of cash received (1,315,703) 805,891
Additions to property, plant and equipment (3,867,849) (2,527,328)
(Increase) decrease in intangible and other assets 224,220 (452,468)
------- ---------
Net cash used in investing activities (4,959,332) (2,173,905)
Financing activities:
Issuance of common stock 1,794,071 73,958
(Decrease) increase in minority interests in subsidiaries (498,785) 2,294
Increase in notes payable 1,510,746 6,067,771
--------- ---------
Net cash from financing activities 2,806,032 6,144,023
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,026,880) 1,921,158
Cash and cash equivalents:
Beginning of period 11,981,246 5,980,535
---------- ---------
End of period $ 10,954,366 $ 7,901,693
============ ============
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 July 5, 1997
and the results of operations for the thirteen and twenty-six and one-half week
periods ended July 5, 1997, respectively and the results of operations for the
three- and six-month periods ended June 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 twenty-six and
one-half week periods ended July 5, 1997 ("Second Quarter" and "Half 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:
July 5, December 31,
1997 1996
---- ----
Components and parts $ 2,688,817 $ 2,294,750
Work-in-process 981,146 657,125
Finished merchandise on hand 39,002,019 38,404,535
Merchandise at Company's stores 4,966,225 3,962,199
Merchandise in transit from estimated
customers' returns 4,069,621 4,463,946
--------- ---------
$51,707,828 $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 July 5, 1997, the Company had hedge contracts to sell 2.0 million
German Marks for approximately $1.2 million, expiring through August 1997 and
416.2 million Japanese Yen for approximately $3.6 million, expiring through
December 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.
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 twenty-six and one-half
week periods ended July 5, 1997 (the "Second Quarter" and "Half Year
Period", respectively), as compared to the three and six-month periods
ended June 30, 1996 (the "Prior Year Quarter" and "Prior Year Half Year
Period", respectively). 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 Prior Year Quarter and Prior
Year Half Year Period. 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 effective February 1997 the remaining 40% of the
capital stock of Fossil Italia, S.R.L. from its minority stockholders.
The Company acquired effective April 1997 the remaining 35% of the
capital stock of Amazing Time, Ltd. from its minority stockholder.
During March FOSSIL brand neckwear was 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 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 For the For the 26 For the
13 Weeks 3 Months 1/2 Weeks 6 Months
Ended Ended Ended Ended
July 5, June 30, Percentage July 5, June 30, Percentage
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
Net sales 100.0% 100.0% 25.8% 100.0% 100.0% 18.4%
Cost of sales 53.8 50.3 34.5 52.6 52.9 17.7
----- ----- ----- -----
Gross profit margin 46.2 49.7 17.1 47.4 47.1 19.3
Selling and
distribution expenses 23.1 27.1 7.4 24.1 24.6 15.7
General and
administrative expenses 11.2 12.4 13.6 11.6 12.4 11.1
---- ---- ---- ----
Operating income 11.9 10.2 47.3 11.7 10.1 38.3
Interest expense (0.5) (0.6) 1.0 (0.5) (0.5) 12.8
Other income
(expense)- net (0.6) 0.3 (391.0) (0.5) (0.1) 1,222.5
----- --- ----- -----
Income before income taxes 10.8 9.9 37.5 10.7 9.5 33.6
Income taxes 4.4 4.2 33.1 4.4 3.9 32.8
--- --- --- ---
Net income 6.4% 5.7% 40.6% 6.3% 5.6% 34.2%
==== ==== ==== ====
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 For the For the For the
13 Weeks 3 Months 13 Weeks 3 Months 26 1/2 6 26 1/2 6 Months
Ended Ended Ended Ended Weeks Months Weeks Ended
Ended Ended Ended
July 5, June 30, July 5, June 30, July 5, June 30, July 5, June 30,
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
International:
Europe $ 9.8 $ 10.9 17% 24% $ 20.4 $ 22.4 19% 25%
Other 11.6 3.3 21 7 16.4 7.4 16 8
---- --- -- - ---- --- -- -
Total 21.4 14.2 38 31 36.8 29.8 35 33
---- ---- -- -- ---- ---- -- --
International
Domestic:
Watch products 22.0 18.5 39 41 40.1 35.1 38 40
Other products 9.2 9.9 16 22 20.4 19.1 20 22
--- --- -- -- ---- ---- -- --
Total 31.2 28.4 55 63 60.5 54.2 58 62
Stores 4.3 2.6 7 6 7.1 4.1 7 5
--- --- - - --- --- - -
Total Domestic 35.5 31.0 62 69 67.6 58.3 65 67
---- ---- -- -- ---- ---- -- --
Total Net Sales $ 56.9 $ 45.2 100% 100% $104.4 $ 88.1 100% 100%
====== ====== === ==== ====== ====== === ===
Sales volume increases during the Second Quarter were principally derived from a
significant sale of non-branded watches used for premium incentives, domestic
sales of FOSSIL branded watch and leather products and sales from additional
FOSSIL outlet and retail stores opened during the second half of 1996. The
Company, through its foreign subsidiaries, negotiated a sale valued at $5.9
million of non-branded premium incentive watches sold in Europe during the
Second Quarter. In addition, domestic sales of FOSSIL branded watches showed
strong sales gains due to the increase of metal bracelet watches in the
Company's product mix and the popularity of two FOSSIL watch lines (FOSSIL Blue
and FOSSIL Steel) introduced mainly after the second quarter of last year. Sales
gains in the Company's leather goods during the Second Quarter were more than
offset by sales declines in the Company's sunglass products. Beginning in late
1996, the number of sunglass suppliers selling into the Company's distribution
channels significantly increased while the retail prices the average sunglass
customer showed a willingness to pay declined. In reaction to these changes in
the sunglass market place and in an attempt to increase its market share, the
Company is in the process of both increasing its sunglass assortment at its
opening price points and introducing a premium quality line of sunglasses during
the third quarter of 1997. Internationally, sales of FOSSIL branded watches by
the Company's European-based companies also increased during the Second Quarter.
These increases however were more than offset by declines in sales of sunglass
products and a reduction in sales derived from the Company's operations in
France and the United Kingdom. Based on current market conditions, the Company
has significantly curtailed its operations in France and the United Kingdom. The
Company's sales increases for the Half Year Period were similar to that
experienced in the Second Quarter.
Gross Profit. The decrease in gross profit margins during the Second Quarter was
principally a result of the low gross profit margin realized on the sale of the
non-branded premium watches sold in Europe. To a lesser extent, higher markdowns
taken in the leather and sunglass products and more aggressive pricing on
certain of the Company's FOSSIL branded watches had a negative effect on the
gross profit margins in the Second Quarter. Increased sales volumes through the
Company's retail and Japan-based operations and increased production of the
Company's watch
8
products through its majority-owned assembly factories had a positive influence
on the Company's gross profit margins for the Second Quarter and Half Year
Period as compared to the prior year. Management believes that the Company's
gross profit margin for the balance of the year will increase above the Second
Quarter levels to approximately the 48% range.
Operating expenses. Selling, general and administrative expenses, as a
percentage of net sales, decreased for the Second Quarter and Half Year Period
to 34.3% and 35.7%, respectively, from 39.5% and 37.0% 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. For the Second Quarter and Half
Year Period the Company had additional outlet or retail locations in operation
in comparison to comparable periods in the previous year of approximately nine
and twelve locations, respectively. The operating expense ratio derived from
FOSSIL outlet and retail locations is historically higher than the consolidated
average. The operating expense ratio for the Second Quarter and Half Year Period
were positively impacted by leveraging expenses against higher sales volumes.
Other income (expense) - net. The Company reported other expense for the Second
Quarter and Half Year Period of $0.37 million and $0.56 million, respectively,
as compared to other income of $0.13 million for the Prior Year Quarter and
other expense of $0.04 million for the Prior Year Half Year Period. The increase
in other expense during 1997 primarily reflects the minority interests in the
increased profits of the Company's majority-owned assembly factories. In
addition, during the Second Quarter the Company accrued $175,000 for costs to be
incurred in the curtailment of operations in the United Kingdom. To a lesser
extent, other expenses have increased in 1997 as a result of foreign currency
losses incurred at the Company's foreign subsidiaries as the United States
Dollar has significantly increased in value against the other 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, 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 incur 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. Currently, the building
costs are being funded through the Company's short-term credit facilities, but
management intends to secure long-term financing for this facility during
September 1997.
Management believes the Company's financial position as of July 5, 1997 remains
extremely strong with working capital of approximately $63 million and $11
million in cash. As of August 8, 1997, the Company had approximately $15 million
borrowed against its 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 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 22, 1997. At
such meeting, the stockholders elected directors of the Company and no other
matters were voted on at the meeting. A total of 12,796,211 shares were
represented at the meeting.
The tabulation of nominees is as follows:
Director Nominee For Against Abstain Withheld
- -------------------------------------------------------------------------------------------------
Tom Kartsotis 12,757,449 38,762
Kosta Kartsotis 12,757,949 38,262
Michael W. Barnes 12,757,949 38,262
Jal S. Shroff 12,757,949 38,262
Donald J. Stone 12,757,949 38,262
Kenneth W. Anderson 12,757,949 38,262
Alan J. Gold 12,757,179 39,032
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to Second Amended and Restated
Loan Agreement dated June 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
No reports on Form 8-K were filed during the period
covered by this Report.
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: August 18, 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 Fifth Amendment to Second Amended and Restated Loan Agreement
dated June 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