SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 30, 1999
FOSSIL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-19548 75-2018505
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
2280 N. Greenville Avenue
Richardson, Texas 75082
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-2525.
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ITEM 5. OTHER EVENTS.
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Ownership of the Common Stock and other securities of Fossil, Inc. (the
"Company") involves certain risks. Holders of the Company's securities and
prospective investors should carefully consider the following risk factors in
evaluating an investment in the Company's securities.
Effects of Economic Cycles and Retail Industry Conditions
The Company's business is subject to economic cycles and retail
industry conditions. Purchases of discretionary fashion accessories, such as the
Company's watches, handbags, sunglasses and other products, tend to decline
during recessionary periods, when disposable income is low and consumers are
hesitant to use available credit. Any significant declines in general economic
conditions or uncertainties regarding future economic prospects that affect
consumer spending habits could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company sells its merchandise primarily to major department stores
across the United States and extends credit based on an evaluation of each
customer's financial condition, usually without requiring collateral. While in
the past few years various retailers, including some of the Company's customers,
have experienced financial difficulties, increasing the risk of extending credit
to such retailers, the Company's losses due to bad debts have been limited.
However, financial difficulties of a customer could cause the Company to curtail
business with such customers or require the Company to assume more credit risk
relating to such customers' receivables. The Company's inability to collect on
its trade accounts receivable relating to such customers could have a material
adverse effect on the Company's business and financial condition. In addition, a
decision by any such major department store, or other significant customer, to
decrease the amount of merchandise purchased from the Company or to cease
carrying the Company's products could have a material adverse effect on the
Company's financial condition and results of operations.
Fashion Trends
The Company's success depends upon its ability to anticipate and
respond to changing fashion trends and consumer preferences in a timely manner.
Although the Company attempts to stay abreast of emerging lifestyle and fashion
trends affecting accessories and apparel, any failure by the Company to identify
and respond to such trends could adversely affect consumer acceptance of its
existing brand names and product lines, which in turn could adversely affect the
Company's business, financial condition and results of operations. In this
regard, certain companies that have experienced rapid growth in sales of watches
and other fashion accessories have failed to sustain growth in sales or have
experienced declines in sales due to an inability to respond effectively to
changing consumer preferences. If the Company misjudges the market for its
products, it may be faced with a significant amount of unsold finished goods
inventory. Additionally, the Company has recently expanded and intends to
further expand the scope of its product offerings, and there can be no assurance
that new products introduced by the Company will achieve consumer acceptance
comparable to that of its existing product lines.
Management of Growth
During recent years, the Company has experienced rapid and
substantial growth in sales. However, the Company's business is subject to a
number of risks, any one of which could have a material adverse effect on its
business, financial condition and results of operations. These risks include the
financial difficulties experienced by a number of the retailers to whom the
Company sells its products, the uncertainties associated with changing fashion
trends and consumer preferences and the Company's dependence on manufacturing
sources located in Hong Kong and China. The Company's future operating results
will also depend on a number of other factors, including the demand for its
products, the level of competition, general economic conditions and other
factors beyond the control of the Company. Accordingly, there can be no
assurance that the Company's recent growth in sales will continue or that sales
will not decline. In view of the recent expansion of its business, the Company
is subject to a variety of business risks generally associated with growing
companies, as well as risks related to the diversification of its product
offerings.
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A key element of the Company's business strategy is to expand the scope
of its product offerings. There can be no assurance that the expansion of the
Company's product offerings will be successful or that new products will be
profitable or generate sales comparable to those of its existing businesses.
Another element of the Company's business strategy is to place increased
emphasis on growth in selected international markets. There can be no assurance
that the Company's brand names and products will achieve a high degree of
consumer acceptance in these markets.
Foreign Manufacturing
The Company's products are currently manufactured to its specifications
by Company-owned subsidiaries with locations in Hong Kong and China and, to a
lesser extent, by independent manufacturers in Hong Kong, China, Japan, Italy,
Korea and Taiwan. The Company has no long-term contracts with these independent
manufacturing sources and competes with other companies for production
facilities. All transactions between the Company and its independent
manufacturing sources are conducted on the basis of purchase orders. Although
the Company believes that it has established close relationships with its
principal independent manufacturing sources, the Company's future success will
depend upon its ability to maintain close relationships with its current
suppliers and to develop long-term relationships with other suppliers that
satisfy the Company's requirements for price and production flexibility.
In addition, because a substantial portion of the Company's watches and
certain of its handbags, sunglasses and other products are manufactured in Hong
Kong and China, the Company's success will depend to a significant extent upon
future economic and social conditions existing in Hong Kong and China. In 1997,
China resumed sovereignty over Hong Kong in accordance with the Sino-British
Joint Declaration of 1984 (the "Joint Declaration"). Although the Joint
Declaration established a framework for the continuation of existing economic
and social systems in Hong Kong after 1997, there can be no assurance as to the
manner in which such framework will continue to be implemented or whether it
will be respected in the future by the Chinese authorities. If the manufacturing
sources in Hong Kong and China were disrupted for any reason, the Company
believes that it could arrange for the manufacture and shipment of products by
alternative sources after a period of time. Because the establishment of new
manufacturing relationships involves numerous uncertainties, including those
relating to payment terms, costs of manufacturing, adequacy of manufacturing
capacity, quality control and timeliness of delivery, the Company is unable to
predict whether such relationships would be on terms that the Company regards as
satisfactory. Any significant disruption in the Company's relationships with its
manufacturing sources located in Hong Kong and China would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Foreign Currency Fluctuations
The Company generally purchases its products in U.S. dollars. However,
the Company sources a significant amount of its products overseas and, as such,
the cost of these products purchased by the Company's subsidiaries may be
affected by changes in the value of the relevant currencies. Changes in the
currency exchange rates may also affect the relative prices at which the Company
and foreign competitors sell their products in the same market. The Company,
from time to time, hedges certain exposures to changes in foreign currency
exchange rates arising in the ordinary course of business. There can be no
assurance that foreign currency fluctuations will not have a material adverse
impact on the Company's financial condition and results of operations.
Competition
There is intense competition in each of the businesses in which the
Company competes. The Company's watch business competes with a number of
established manufacturers, importers and distributors such as Guess?, Ann Klein
II and Swatch. In addition, the Company's leather goods and sunglass businesses
compete with a large number of established companies that have significantly
greater experience than the Company in designing, developing, marketing and
distributing such products. In all its businesses, the Company competes with
numerous manufacturers, importers and distributors who have significantly
greater financial, distribution, advertising and marketing resources than the
Company. The Company's competitors include distributors that import watches and
accessories from abroad, domestic companies that have established foreign
manufacturing relationships and companies that produce watches and accessories
domestically.
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Management and Control Systems; Year 2000 Compliance
The Company's current expansion plans may place significant strain on
the Company's management, working capital, financial and management control
systems and staff. The failure to maintain or upgrade financial and management
control systems, to recruit additional staff or to respond effectively to
difficulties encountered during expansion could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the computer systems of the Company or its vendors may not adequately
address the Year 2000 operational problems. Although the Company has taken steps
to ensure that its systems and controls are adequate to address its current
needs and is attempting to recruit additional staff, there can be no assurance
that the Company's systems and controls or staff will be adequate to sustain
future growth.
Fluctuation of Results; Seasonality of Business
The Company's quarterly results of operations have fluctuated in the
past and may continue to fluctuate as a result of a number of factors, including
seasonal cycles, the timing of new product introductions, the timing of orders
by the Company's customers and the mix of product sales demand. The business of
the Company is seasonal by nature. A significant portion of the Company's net
sales and operating income are generated during the fourth quarter of its fiscal
year, which includes the Christmas season. The amount of net sales and operating
income generated during the fourth quarter depends upon the anticipated level of
retail sales during the Christmas season, as well as general economic conditions
and other factors beyond the Company's control. In addition, the amount of net
sales and operating income generated during the first quarter depends in part
upon the actual level of retail sales during the Christmas season. There can be
no assurance that such factors will not adversely affect the Company's net sales
and operating income during the first and fourth quarter of its fiscal year.
Licensing Risks; Risks Associated with a Lack of Operational and Financial
Control Over Licensed Businesses
A portion of the Company's net income is derived from licensing revenue
received from its licensing partners. While the Company has significant control
over its licensing partners' products and advertising, it relies on its
licensing partners for, among other things, operational and financial control
over their businesses. The risks associated with the Company's own products
apply to its licensed products as well, in addition to any number of possible
risks specific to a licensing partner's business, including, for example, risks
associated with a particular licensing partner's ability to obtain capital and
manage its labor relations. Although certain of the Company's license agreements
prohibit licensing partners from entering into licensing arrangements with the
Company's competitors, generally the Company's licensing partners are not
precluded from offering, under other brands, the types of products covered by
their license agreements with the Company. A portion of sales of the Company's
products by its domestic licensing partners are also made to the Company's
largest customers. In addition, failure by the Company to maintain its existing
licensing alliances could adversely affect the Company's financial condition and
results of operations. Although the Company believes in most circumstances it
could replace existing licensing partners if necessary, its inability to do so
for any period of time could adversely affect the Company's revenues both
directly from reduced licensing revenue received and indirectly from reduced
sales of the Company's other products.
Risks Associated with Changes in Social, Political, Economic and Other
Conditions Affecting Foreign Operations and Sourcing
The Company's businesses are subject to other risks generally
associated with doing business abroad, such as foreign governmental regulation
and changes in economic conditions in the countries in which the Company's
manufacturing sources are located. The Company cannot predict the effect that
such factors will have on its business or its arrangements with foreign
manufacturing sources. If any such factors were to render the conduct of
business in a particular country undesirable or impracticable, or if the
Company's current foreign manufacturing sources were for any other reason to
cease doing business with the Company, such a development could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's business is also subject to the risks associated with
the imposition of additional United States legislation and regulations relating
to imports, including quotas, duties, tariffs or taxes, and other charges or
restrictions on imports, which could adversely affect the Company's operations
and its ability to import products at current or increased levels. The Company
cannot predict whether additional United States customs quotas, duties, tariffs,
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taxes or other charges or restrictions will be imposed upon the importation of
its products in the future, or what effect such actions would have on its
business, financial condition and results of operations.
Control by Principal Stockholders
Messrs. Tom Kartsotis and Kosta Kartsotis own, directly or indirectly,
a significant number of shares of Common Stock of the Company. As a result, they
are in a position to significantly control the Company through their ability to
determine the outcome of elections of the Company's directors, adopt, amend or
repeal the Bylaws and take certain other actions requiring the vote or consent
of the stockholders of the Company.
Dependence on Key Personnel
The Company believes that its future success will depend upon its
ability to attract and retain skilled design, marketing and management
personnel. Since 1988, the Company has been under the management of Mr. Tom
Kartsotis, Chairman of the Board and Chief Executive Officer, and Mr. Kosta
Kartsotis, President and Chief Operating Officer. The future success of the
Company will be highly dependent upon the personal efforts of Messrs. Tom
Kartsotis and Kosta Kartsotis, and the loss of the services of either of them
could have a material adverse effect on the Company. The Company has not entered
into employment agreements with Messrs. Tom Kartsotis or Kosta Kartsotis. The
Company's other executive officers have substantial experience and expertise in
the Company's business and have made significant contributions to its growth and
success.
Anti-Takeover Matters
The Company's Certificate of Incorporation and Bylaws, as well as the
General Corporation Law of the State of Delaware (the "DGCL"), contain
provisions that may have the effect of discouraging a proposal for a takeover of
the Company. These include a provision in the Company's Certificate of
Incorporation authorizing the issuance of "blank check" preferred stock and
provisions in the Company's Bylaws establishing advance notice procedures with
respect to certain stockholder proposals and requiring that action taken to
remove a director without cause be approved either by an 80% vote of the Board
of Directors or an 80% vote of the stockholders. The Company's Bylaws may be
amended by a vote of 80% of the Board of Directors, subject to repeal by a vote
of 80% of the stockholders. In addition, Section 203 of the DGCL limits the
ability of a Delaware corporation to engage in certain business combinations
with interested stockholders.
Potential Volatility of Stock Price
The Common Stock is quoted on the Nasdaq National Market. The market
price of the Common Stock could be subject to significant fluctuations in
response to operating results and other factors. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock. In
addition, the absence or discontinuance of the listing of the Common Stock on
the Nasdaq National Market could adversely affect the liquidity and price of the
Common Stock.
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SIGNATURE
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.
Dated: March 30, 1999
FOSSIL, INC.
By: /s/ T.R. Tunnell
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Name: T.R. Tunnell
Title: Senior Vice President, Development and Chief Legal
Officer
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