UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 3, 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
November 13, 1998: 20,939,788.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 3, January 3,
1998 1998
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27,948,730 $ 21,103,581
Accounts receivable - net 45,037,098 34,237,526
Inventories 74,606,197 51,382,160
Deferred income tax benefits 5,446,822 4,503,749
Prepaid expenses and other current assets 3,110,584 2,432,282
-------------- --------------
Total current assets 156,149,431 113,659,298
Property, plant and equipment - net 22,590,915 21,073,333
Intangible and other assets 4,755,768 4,837,259
-------------- --------------
$ 183,496,114 $ 139,569,890
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,816,150 $ 7,862,145
Accounts payable 19,165,668 9,609,805
Accrued expenses:
Co-op advertising 9,647,366 8,700,696
Compensation 3,158,251 2,665,485
Other 13,705,909 8,714,067
Income taxes payable 12,521,324 5,504,304
-------------- --------------
Total current liabilities 62,014,668 43,056,502
Minority interest in subsidiaries 1,551,093 1,250,405
Stockholders' equity:
Common stock, shares issued and outstanding,
20,932,091 and 20,308,503, respectively 209,321 203,085
Additional paid-in capital 32,522,162 26,021,255
Retained earnings 90,682,809 71,257,176
Cumulative translation adjustment (836,667) (2,218,533)
-------------- --------------
122,577,625 95,262,983
Less treasury stock, 188,500 shares, at cost (2,647,272) -
-------------- --------------
Total stockholders' equity 119,930,353 95,262,983
-------------- --------------
$ 183,496,114 $ 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 For the 39 For the 39
Weeks Weeks Weeks 1/2 Weeks
Ended Ended Ended Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 82,393,811 $ 61,012,584 $ 203,641,717 $ 165,393,762
Cost of sales 41,960,895 31,322,436 103,402,765 86,204,180
------------ ------------ ------------- -------------
Gross profit 40,432,916 29,690,148 100,238,952 79,189,582
Operating expenses:
Selling and distribution 17,870,459 13,719,495 46,816,344 38,862,609
General and administrative 6,957,065 6,155,239 20,080,476 18,273,318
------------ ------------ ------------- -------------
Total operating expenses 24,827,524 19,874,734 66,896,820 57,135,927
------------ ------------ ------------- -------------
Operating income 15,605,392 9,815,414 33,342,132 22,053,655
Interest expense (51,415) (252,573) (168,356) (749,289)
Other income (expense) - net (98,284) (259,753) (139,143) (822,751)
------------ ------------ ------------- -------------
Income before income taxes 15,455,693 9,303,088 33,034,633 20,481,615
Provision for income taxes 6,400,000 3,793,000 13,609,000 8,363,000
------------ ------------ ------------- -------------
Net income $ 9,055,693 $ 5,510,088 $ 19,425,633 $ 12,118,615
============ ============ ============= =============
Basic earnings per share $ 0.43 $ 0.27 $ 0.94 $ 0.60
============ ============ ============= =============
Diluted earnings per share $ 0.41 $ 0.26 $ 0.90 $ 0.58
============ ============ ============= =============
Weighted average shares
outstanding:
Basic 20,907,949 20,191,366 20,677,517 20,096,997
============ ============ ============= =============
Diluted 21,850,971 21,046,844 21,697,520 20,721,110
============ ============ ============= =============
See notes to condensed consolidated financial statements.
2
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the 39 For the 39 1/2
Weeks Ended Weeks Ended
October 3, October 4,
1998 1997
---- ----
Operating activities:
Net income $ 19,425,633 $ 12,118,615
Noncash item affecting net income:
Minority interest in subsidiaries 690,264 35,644
Depreciation and amortization 2,459,340 2,351,535
Increase in allowance for doubtful accounts 1,961,811 12,310
Increase in allowance for returns -
net of related inventory in transit 1,083,205 309,234
Deferred income tax benefits (943,073) (651,359)
Cash from changes in assets and liabilities:
Accounts receivable (14,785,215) (7,311,546)
Inventories (22,283,410) (8,630,565)
Prepaid expenses and other current assets (678,302) (2,223,372)
Accounts payable 10,636,298 7,159,590
Accrued expenses 6,431,277 (2,740,607)
Income taxes payable 7,017,020 4,109,402
------------ ------------
Net cash from operations 11,014,848 4,538,881
Investing activities:
Net assets acquired in business combination/consolidation,
net of cash received - (1,315,703)
Additions to property, plant and equipment (3,624,250) (6,300,014)
(Increase) decrease in intangible and other assets (132,771) 308,960
------------ ------------
Net cash used in investing activities (3,757,021) (7,306,757)
Financing activities:
Issuance of common stock 6,507,143 2,286,182
Repurchase of treasury stock (2,647,272) -
Decrease in minority interests in subsidiaries (389,576) (498,784)
(Repayments) increase in notes payable-banks (4,045,995) 1,033,936
------------ ------------
Net cash (used in) from financing activities (575,700) 2,821,334
Effect of exchange rate changes on cash and cash equivalents 163,022 (293,666)
------------ ------------
Net increase (decrease) in cash and cash equivalents 6,845,149 (240,208)
Cash and cash equivalents:
Beginning of period 21,103,581 11,981,246
------------ ------------
End of period $ 27,948,730 $ 11,741,038
============ ============
See notes to condensed consolidated financial statements.
3
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include
the accounts of Fossil, Inc., a Delaware corporation, and its majority-owned
subsidiaries (the "Company"). The condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of October 3,
1998 and the results of operations for the thirteen and thirty-nine week periods
ended October 3, 1998, respectively and the results of operations for the
thirteen and thirty-nine and one-half week periods ended October 4, 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 and thirty-nine week
periods ended October 3, 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 year to date period ended October 4, 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:
For the 13 For the 39
Weeks Ended Weeks Ended
October 3, 1998 October 3, 1998
Net income, as reported $ 9,055,693 $19,425,633
Current period change in foreign
currency translation adjustment 1,637,815 1,381,866
----------- -----------
Comprehensive income $10,693,508 $20,807,499
=========== ===========
4
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
2. INVENTORIES
Inventories consist of the following:
October 3, January 3,
1998 1998
---- ----
Components and parts $ 4,156,791 $ 2,751,719
Work-in-process 2,760,185 2,064,623
Finished merchandise on hand 54,727,783 35,707,813
Merchandise at Company's stores 6,594,464 5,484,479
Merchandise in transit from estimated
Customers' returns 6,366,974 5,373,526
------------ -----------
$ 74,606,197 $ 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 October 3,
1998, the Company had hedge contracts to sell 35.1 million German Marks for
approximately $20.4 million, expiring through December 1999, 317.4 million
Japanese Yen for approximately $2.3 million, expiring through January 1999 and
4.0 billion Italian Lira for approximately $2.4 million, expiring November 1998.
3 STOCKHOLDERS' EQUITY
On May 11, 1998, the Company completed a secondary offering of 2,150,000 shares
of Common Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to
an underwriter's over-allotment allocation) for an aggregate of 2,302,500
shares. 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.
On September 18, 1998, the Company's Board of Directors authorized management to
repurchase up to 500,000 shares of the Company's Common Stock in the open market
or privately negotiated transactions (the "Repurchase Program"). During the
third quarter 1998, the Company repurchased 188,500 shares of treasury stock
under the Repurchase Program at a cost of $2,647,272.
5
FOSSIL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the thirteen and thirty-nine week periods ended
October 3, 1998 (the "Third Quarter" and "YTD Period," respectively), as
compared to the thirteen and thirty-nine and one-half week periods ended October
4, 1997 (the "Prior Year Quarter" and "Prior Year YTD Period"). 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 YTD Period contained an
additional one-half week for the transition period. This change had an
immaterial impact on the comparability of the periods. 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 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 and FSL 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 increasing awareness of the FOSSIL
brand by entering into various license agreements for other categories of
fashion accessories and apparel, such as outerwear, under the FOSSIL brand. In
addition, the Company licenses the brands of other companies in order to further
leverage its infrastructure. For example, during 1997 the Company entered into a
multi-year license agreement with Giorgio Armani to design, manufacture,
distribute and market a line of EMPORIO ARMANI 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
o During April 1998, the Company effected a three-for-two stock split
effected in the form of a 50% stock dividend to stockholders of record at
the close of business on March 25, 1998.
o 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.
o During May 1998, the Company completed a secondary offering of 2,150,000
shares of its $0.01 par-value common stock (plus an additional 152,500
shares in June 1998 pursuant to an underwriter's over-allotment allocation)
of which the Company sold 215,000 shares.
o During September 1998, the Company's Board of Directors authorized
management to repurchase up to 500,000 shares of the Company's Common Stock
in the open market or privately negotiated transactions. Through October
1998, the Company had repurchased 188,500 shares of Common Stock.
Results of Operations
The following table sets forth, for the periods indicated, (i) the percentages
of the Company's net sales represented by certain line items from the Company's
condensed consolidated statements of income and (ii) the percentage changes in
these line items between the current period and the comparable period of the
prior year.
Percentage of
Percentage of Net Sales
Net Sales ---------
For the 13 For the For the 39
Weeks 39 Weeks 1/2 Weeks
Ended Ended Ended
October 3, October 4, Percentage October 3, October 4, Percentage
1998 1997 1997 1998 1997 Change
---- ---- ---- ---- ---- ------
Net sales 100.0% 100.0% 35.0% 100.0% 100.0% 23.1%
Costs of sales 50.9 51.3 34.0 50.8 52.1 20.0
----- ----- ----- -----
Gross profit margin 49.1 48.7 36.2 49.2 47.9 26.6
Selling and distribution
expenses 21.7 22.5 30.3 22.9 23.5 20.5
General and administrative
expenses 8.4 10.1 13.0 9.9 11.1 9.9
----- ----- ----- -----
Operating income 19.0 16.1 59.0 16.4 13.3 51.2
Interest expense (0.1) (0.4) (79.6) (0.4) (0.4) (77.5)
Other income
(expense)-net (0.1) (0.5) (62.2) (0.1) (0.5) (83.1)
----- ----- ----- -----
Income before income taxes 18.8 15.2 66.1 16.2 12.4 61.3
Income taxes 7.8 6.2 68.7 6.7 5.1 62.7
----- ----- ----- -----
1Net income 11.0% 9.0% 64.4% 9.5% 7.3% 60.3%
===== ===== ===== =====
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 39 For the For the 39
13 Weeks 13 Weeks 13 Weeks 13 Weeks 39 Weeks 1/2 Weeks 39 Weeks 1/2 Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
October 3, October 4, October 3, October 4, October 3, October 4, October 3, October 4,
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
International:
Europe $ 14.9 $ 10.3 18% 17% $ 40.9 $ 30.7 20% 18%
Other 7.9 6.2 10 10 19.7 22.6 10 14
------ ------ --- --- ------ ------ --- ---
Total International 22.8 16.5 28 27 60.6 53.3 30 32
------ ------ --- --- ------ ------ --- ---
Domestic:
Watch products 39.2 26.9 47 44 90.7 66.9 44 40
Other products 13.1 12.1 16 20 35.9 32.6 18 20
------ ------ --- --- ------ ----- ----- ---
Total 52.3 39.0 63 64 126.6 99.5 62 60
Stores 7.3 5.5 9 9 16.4 12.6 8 8
------ ------ --- --- ------ ----- ----- ---
Total Domestic 59.6 44.5 72 73 143.0 112.1 70 68
------ ------ --- --- ------ ----- ----- ---
Total Net Sales $ 82.4 $ 61.0 100% 100% $203.6 $165.4 100% 100%
====== ====== === === ====== ====== === ===
The Company reached record level net sales of $82.4 million in the Third Quarter
representing an increase of $21.4 million (35%) over the Prior Year Quarter. On
a year-to-date basis, net sales climbed to $203.6 million representing an
increase of $38.2 million (23%) over the Prior Year YTD Period. Exclusive of an
international non-branded premium watch sale of $6 million in the second quarter
of 1997, the YTD Period increase in sales would have exceeded 27%. The main
catalyst to the Company's top line growth this past quarter and on a
year-to-date basis has been the sales volume growth in FOSSIL branded watches.
Domestically alone, the increase in this category accounted for nearly one-third
of the top line growth for the quarter. Also significantly adding to the third
quarter top line growth, were sales volume increases in the private label area
which designs and produces products for third party companies. The continued
roll-out of Emporio Armani licensed line of watches also grew nicely
internationally adding $6.8 million of sales volume overall for the quarter and
bringing year-to-date sales of the line to over $15 million. The Company's
leather and sunglass accessory lines also recorded double-digit growth during
the quarter and year-to-date. Management anticipates that sales volume over the
balance of the year will increase approximately 20% over the comparable period
in 1997. 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 growth during the Company's fourth quarter.
Gross Profit. Gross profit margins were slightly higher in the Third Quarter as
compared to the Prior Year Quarter due to the positive influence of Emporio
Armani watch sales and the impact of the stronger dollar on the purchase costs
of certain watch components. Gross profit margins for the YTD Period exceeded
the prior year comparable period primarily as a result of the low gross profit
margin realized on the sale of the non-branded premium watches in the second
quarter of 1997. Management believes that the Company's gross profit margin over
the balance of the year will be in the 48% - 50% range.
Operating expenses. Selling, general and administrative expenses, as a
percentage of net sales, for the Third Quarter and the YTD Period were down in
comparison to the comparable periods in the prior year as the Company was able
to leverage its operating costs against sales volume increases. Management
believes that during the Company's 1998 fourth quarter, operating expenses, as a
percentage of net sales, will compare favorably to the prior year comparable
quarter as the Company should be able to continue to leverage down operating
expenses.
8
Other income (expense) - net. Other income (expense) compared favorably in the
1998 periods when compared to their respective 1997 periods. The favorable
comparison 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.
Year 2000 Readiness Disclosue. Computer programs that were written using two
digits rather than four digits to define the applicable year may recognize a
date using "00" as the year 1900 rather than the year 2000. This result is
commonly referred to as the "Year 2000" problem. The Year 2000 problem could
result in information system failures or miscalculations. Beginning in 1997, the
Company initiated a program to evaluate whether internally developed and/or
purchased computer software that utilize embedded date codes could experience
operational problems when the year 2000 is reached. The scope of this effort
addressed internal computer systems and supplier capabilities. The Company is
completing an extensive review of its businesses to determine whether or not
purchased and internally developed computer programs are Year 2000 compliant, as
well as the remedial action and related costs associated with any required
modifications or replacements. A significant amount of information has been
collected and analyzed as part of this review; however, the process will not be
completed until the end of 1998. The Company plans to complete all remediation
efforts for its critical systems prior to the year 2000. Based upon its
evaluation to date, management currently believes that, while the Company will
incur internal and external costs to address the Year 2000 problem, such costs
will not have a material impact on the operations, cash flows or financial
condition of the Company in future years.
Liquidity and Capital Resources.
Historically the Company has not incurred substantial cash requirements 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 cash needs have generally
been to finance the accumulation of inventory and the build-up in accounts
receivable. During 1997 and the YTD Period of 1998, the Company has
significantly increased its cash flow from operations leaving the Company with
approximately $28 million in cash as of October 3, 1998 in comparison to $12
million at the same point in the prior year. In addition, the Company had
working capital of $94 million and borrowings of only $4 million against its
combined $43 million bank credit facilities. The Company also completed a
secondary offering of its common stock during May 1998 from which the Company
received approximately $3.6 million in cash for working capital needs.
Management believes that cash on hand 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.
9
Forward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, including, but
not limited to statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not historical facts are
"forward-looking statements" and involve a number of uncertainties. The actual
results of the future events could differ materially from those stated in such
"forward-looking statements". Among the factors that could cause actual results
to differ materially are general economic conditions, competition, government
regulation and possible future litigation, as well as the risks and
uncertainties set forth on the Company's Current Report on Form 8-K dated March
31, 1997.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by
this Report.
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: November 16, 1998 /s/ Randy S. Kercho
-------------------
Randy S. Kercho
Executive Vice President and Chief Financial
Officer
(Principal financial and accounting officer duly
authorized to sign on behalf of Registrant)