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: April 3, 1999
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 May 17,
1999: 20,969,013.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
April 3, January 2,
1999 1999
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 68,789 $ 57,263
Accounts receivable - net 41,118 42,582
Inventories 57,109 57,295
Deferred income tax benefits 5,914 5,655
Prepaid expenses and other current assets 4,973 3,538
----- -----
Total current assets 177,903 166,333
Property, plant and equipment - net 23,816 23,117
Intangible and other assets - net 4,700 4,628
----- -----
$ 206,419 $ 194,078
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable $ 4,276 $4,537
Accounts payable 11,578 14,512
Accrued expenses:
Co-op advertising 11,964 13,311
Compensation 2,945 3,246
Other 10,057 11,201
Income taxes payable 17,087 10,487
------ ------
Total current liabilities 57,907 57,294
Minority interest in subsidiaries 1,648 1,864
Stockholders' equity:
Common stock, shares issued and outstanding,
20,977,798 and 20,932,091, respectively 210 209
Additional paid-in capital 35,103 34,345
Retained earnings 112,813 102,859
Accumulated other comprehensive income (1,262) (1,037)
Treasury stock at cost, none and 103,679 shares,
respectively - (1,456)
------- -------
Total stockholders' equity 146,864 134,920
------- -------
$ 206,419 $ 194,078
========= =========
See notes to condensed consolidated financial statements.
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands, except per share amounts)
For the 13 For the 13
Weeks Ended Weeks Ended
April 3, April 4,
1999 1998
---- ----
Net sales $ 83,277 $ 56,885
Cost of sales 40,605 28,984
------ ------
Gross profit 42,672 27,901
Operating expenses:
Selling and distribution 17,899 14,817
General and administrative 6,896 5,233
----- -----
Total operating expenses 24,795 20,051
------ ------
Operating income 17,877 7,850
Interest expense (25) (57)
Other income (expense) - net (141) 89
----- --
Income before income taxes 17,711 7,882
Provision for income taxes 7,280 3,216
----- -----
Net income $10,431 $4,666
------- ------
Other comprehensive income:
Currency translation adjustment (207) (319)
Unrealized loss on short term investments (18) -
---- ----- -
Comprehensive income $10,206 $4,347
======= ======
Basic earnings per share $ 0.50 $ 0.23
======= =======
Diluted earnings per share $ 0.47 $ 0.22
======= =======
Weighted average common and common
equivalent shares outstanding:
Basic 20,941 20,386
====== ======
Diluted 22,055 21,440
====== ======
See notes to condensed consolidated financial statements.
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
For the 13 Weeks For the 13 Weeks
Ended Ended
April 3, April 4,
1999 1998
----------------- ----------------
Operating activities:
Net income $ 10,431 $ 4,666
Noncash items affecting net income:
Minority interest in subsidiaries 257 (21)
Depreciation and amortization 1,417 794
Increase in allowance for doubtful accounts 311 1,025
Increase (decrease) in allowance for returns -
net of related inventory in transit 304 (158)
Deferred income tax benefits (339) (101)
Changes in assets and liabilities:
Accounts receivable 1,311 5,361
Inventories (269) (2,850)
Prepaid expenses and other current assets (1,453) 156
Accounts payable (2,924) 951
Accrued expenses (2,792) (4,286)
Income taxes payable 6,985 2,490
----- -----
Net cash from operations 13,239 8,027
Investing activities:
Additions to property, plant and equipment (1,806) (479)
Increase in intangible and other assets (310) (51)
----- ----
Net cash used in investing activities (2,116) (530)
Financing activities:
Issuance of common stock 374 1,188
Treasury stock issued for options exercised 981 -
Distribution of minority interest earnings (473) (254)
Repayments of notes payable-banks (261) (4,053)
----- -------
Net cash from (used in) financing activities 621 (3,119)
Effect of exchange rate changes on cash and cash equivalents (218) (79)
----- ----
Net increase in cash and cash equivalents 11,526 4,299
Cash and cash equivalents:
Beginning of period 57,263 21,104
------ ------
End of period $ 68,789 $ 25,403
======== ========
See notes to condensed consolidated financial statements.
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 3,
1999, and the results of operations for the thirteen-week periods ended April 3,
1999, and April 4, 1998. 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 2, 1999. Operating results for the thirteen-week period ended
April 3, 1999, are not necessarily indicative of the results to be achieved for
the full year.
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.
Reclassifications. Reclassifications of certain 1998 amounts have been made to
conform to the 1999 presentation.
FOSSIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
2. INVENTORIES
Inventories consist of the following:
April 3, January 2,
(In thousands) 1999 1999
---- ----
Components and parts $3,977 $3,402
Work-in-process 2,162 1,445
Finished merchandise on hand 37,618 40,344
Merchandise at Company stores 6,681 5,340
Merchandise in-transit from estimated
customer returns 6,671 6,764
----- -----
$57,109 $57,295
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 April 3,
1999, the Company had hedge contracts to sell 18.6 million German Marks for
approximately $10.8 million, expiring through December 1999 and 66.2 million
Japanese Yen for approximately $0.5 million, expiring through April 1999.
3. GEOGRAPHIC INFORMATION
(In thousands)
April 3, 1999 Operating
Net Sales Income
U.S.-exclusive of
Company Stores $ 58,888 $ 8,790
Stores 4,789 (597)
Europe 19,215 4,280
Far East 33,471 5,834
Japan 1,942 (430)
Intergeographic items (35,028) -
------- -------
Consolidated $83,277 $17,877
======= =======
April 4, 1998 Operating
Net Sales Income
U.S.-exclusive of
Company Stores $ 40,636 $4,210
Stores 3,608 (490)
Europe 12,190 1,365
Far East 21,521 3,103
Japan 1,823 (338)
Intergeographic items (22,893) -
-------- ------
Consolidated $56,885 $7,850
======= ======
4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
(In thousands, except per share data) April 3, 1999 April 4, 1998
----- -----
Basic EPS computation:
Numerator:
Net income $10,431 $ 4,666
------- -------
Denominator:
Weighted average common
shares outstanding 21,001 20,386
Treasury stock (60) -
---- ---
20,941 20,386
------ ------
Basic EPS $ 0.50 $ 0.23
====== ======
Diluted EPS computation:
Numerator:
Net income $10,431 $ 4,666
------- -------
Denominator:
Weighted average common
shares outstanding 21,001 20,386
Stock option conversion 1,114 1,054
Treasury stock (60) -
---- ----
22,055 21,440
------ ------
Diluted EPS $ 0.47 $ 0.22
====== ======
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-week period ended April 3, 1999 (the
"First Quarter"), as compared to the thirteen-week period ended April 4, 1998
(the "Prior Year Quarter"). 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 FSL and RELIC 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 optical frames and underwear under the
FOSSIL brand. In addition, the Company licenses the brands of other companies,
including the EMPORIO ARMANI brand, to further leverage its infrastructure.
The Company's products are sold to department stores and specialty retail stores
in over 80 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 Asia, Australia, Canada, the
Caribbean, Europe, Central and South America and the Middle East. In addition,
the Company's products are offered at Company-owned retail locations throughout
the United States and in independently-owned, authorized FOSSIL retail stores
and kiosks located in several major airports, on cruise ships and in certain
international markets. The Company's successful expansion of its product lines
worldwide and leveraging of its infrastructure have contributed to its
increasing net sales and operating profits.
First Quarter & Company Highlights
- ----------------------------------
o FOSSIL Blue watches continue to be the Company's best selling FOSSIL brand
watch line.
o A line of stainless steel watches, FOSSIL Steel, chronograph look watches,
BLUE TEQ, and women's dress bracelet watches, F2, combined with FOSSIL Blue
continue to represent the Company's core watch assortment.
o FOSSIL Big Tic, a revolutionary part analog, part digital watch that
highlights the seconds on a backlite digital display was introduced on a
test basis in late 1998. The style was extremely well received in the
marketplace and represented the Company's fifth best selling watch line in
volume during the First Quarter.
o FOSSIL brand handbag sales recorded double-digit sales growth in 1998 and
have continued that sales trend during the First Quarter.
o FOSSIL brand sunglasses continued to gain market share as a result of the
consumer preference for quality brand name items at more moderate price
levels both of which align nicely with the Company's sunglass program
initiatives.
o RELIC, the Company-owned brand sold in leading national and regional chain
department stores and specialty stores, recorded sales volume growth
exceeding 50% during the First Quarter. As a result of increasing RELIC
brand recognition, the Company at the request of retailers began the
extension of the RELIC brand into leather products during late 1998.
o Sales momentum continued in Europe, which recorded net sales increases of
over 50% for the First Quarter in comparison to the same period in 1998.
o The Company operated 29 outlet and 11 retail stores at the end of the First
Quarter as compared to 27 outlet and 7 retail stores at the end of the
Prior Year Quarter.
o The Company holds a worldwide licensing agreement with Giorgio Armani for
the rights to design, produce and market a line of EMPORIO ARMANI watches.
Net sales volume for this line of watches during the First Quarter amounted
to $6.7 million in comparison to $3.1 million during the Prior Year
Quarter.
o The Company entered into a licensing agreement with Safilo USA, Inc. and
Safilo B.V. ("Safilo") to design, manufacture and market FOSSIL brand
optical frames in the United States, Canada and Italy as well as sunglasses
in Italy. The initial launch of the products is anticipated during fall
1999.
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 Change
Net Sales
For the 13 For the 13 Weeks
Weeks Ended Ended
April 3, April 4, April 3,
1999 1998 1999
---- ---- ----
Net sales 100.0% 100.0% 46.4%
Cost of sales 48.8 51.0 40.1
----- -----
Gross profit margin 51.2 49.0 52.9
Selling and distribution
expenses 21.5 26.0 20.8
General and administrative
expenses 8.3 9.2 31.8
--- ---
Operating income 21.4 13.8 127.7
Interest expense (0.0) (0.1) (55.4)
Other income
(expense)- net (0.2) 0.2 258.3
----- ---
Income before income taxes 21.2 13.9 124.7
Income taxes 8.7 5.7 126.4
--- ---
Net income 12.5% 8.2% 123.6%
===== ==== ======
Net Sales. The following table sets forth certain components of the Company's
consolidated net sales and the percentage relationship of the components to
consolidated net sales for the periods indicated (in millions, except percentage
data):
Amounts % of Total
For the 13 Weeks Ended For the 13 Weeks Ended
April 3, April 4, April 3, April 4,
1999 1998 1999 1998
International:
Europe $ 19.3 $ 12.2 23 21
Other 8.0 5.6 10 10
--- --- -- --
Total International 27.3 17.8 33 31
---- ---- -- --
Domestic:
Watch products 36.3 23.3 43 41
Other products 14.9 12.2 18 22
---- ---- -- --
Total 51.2 35.5 61 63
Stores 4.8 3.6 6 6
--- --- -- --
Total Domestic 56.0 39.1 67 69
---- ---- -- --
Total Net Sales $ 83.3 $ 56.9 100% 100%
====== ====== === ===
Worldwide sales volume of FOSSIL branded watches has continued to represent the
single largest factor in the Company's sales growth. Strong sales volume
increases in FOSSIL brand watches were principally a result of (a) increased
sales from the Company's core FOSSIL brand watch assortments (b) sales from the
newly introduced Big Tic line of watches and (c) from certain refilling of
retailers' watch inventories after a very successful 1998 holiday selling
season. Fueling top line sales growth during the First Quarter was double-digit
sales growth in the Company's other accessory product lines and sales increases
in certain private label and licensing watch lines. During the Company's 1999
second quarter the Company will record an international-based sale amounting to
approximately $7 million of non-branded watches used as a premium incentive.
This sale will inflate the percentage sales increase over the comparable period
in 1998, but management believes the sales increases will average closer to 20%
during the later half of 1999 as the Company anniversaries significant sales
increases achieved during the comparable period of 1998.
Gross Profit. Gross profit margins increased from 49% in the Prior Year Quarter
to 51% in the First Quarter. The increase is partially due to the positive gross
margin influence stemming from an increase in the Company's First Quarter sales
mix of FOSSIL brand watches and sunglasses and European-based sales. These sales
categories generally result in higher gross profit margins than the Company's
consolidated average. In addition, gross profit margins were elevated based on
higher production levels in the Company's foreign-based assembly facilities due
to the significant increase in watch production as compared to historical levels
during the Company's first quarter of each year. Management believes that the
Company's gross profit margins for the remainder of 1999 will approximate 1998
levels with the exception of the Company's second quarter which will be
negatively impacted by an international-based sale of non-branded watches used
as a premium incentive, similar to the sale the Company recorded in the second
quarter of 1997.
Operating Expenses. The aggregate increases in operating expenses were due
primarily to costs necessary to support increased sales volumes. Total selling,
general and administrative expenses as a percentage of net sales decreased
significantly in the First Quarter compared to the Prior Year Quarter.
Leveraging expenses against higher sales volumes positively impacted operating
expense ratios. Management believes the operating expense ratio for the
remainder of 1999 will only marginally improve over comparable 1998 levels with
the exception of the Company's second quarter which could show higher leverage
due principally to the $7 million premium incentive sale discussed above.
Other Income (Expense). Other income (expense) decreased during the First
Quarter as compared to the Prior Year Quarter. The decrease was primarily due to
(a) the minority interests share of increased profits generated in the Company's
assembly facilities during the First Quarter in comparison to a year ago and (b)
foreign currency losses stemming from a stronger Japanese Yen in relation to the
U.S. dollar than the year prior. This increase in other expenses was partially
offset by higher interest income generated on increased cash holdings.
Year 2000 Compliance
- --------------------
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 programs 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 has significantly completed an extensive
review of its businesses to determine whether or not purchased and internally
developed computer programs are Year 2000 compliant, as well as determine the
extent of any remedial action and associated costs. Management believes it has
substantially completed the review of the Company's internal computer systems
and substantially either made modifications or purchased new hardware and
software to make the Company's internal computer systems Year 2000 compliant. In
addition, the Company has significantly completed the testing phase of its main
frame computer systems and applications and while no absolute assurances can be
provided, management believes these systems and applications will function
properly in handling Year 2000 related date calculations. The Company is now
involved in finalizing the review and testing phase of its internal computer
networks and applicable non-computer related areas to determine its ability to
handle Year 2000 related date calculations. Based on the Company's evaluation to
date, management believes that the Company will incur approximately $2.4 million
in internal and external costs to address the Year 2000 problem of which $2.2
million has been expended as of the end of the First Quarter. The Company plans
to complete all remediation efforts for its critical systems prior to Year 2000.
The financial impact of the Year 2000 reviews, modifications, testing,
replacements or related purchases are not expected to have a material adverse
effect on the Company's business or its consolidated financial position, results
of operations or cash flows. The Company is also contacting its key suppliers
and customers to determine their Year 2000 readiness in order to ensure a steady
flow of goods and services to the Company and continuity with respect to
customer service. The Company has no information that indicates that a
significant vendor may be unable to sell to the Company; that a significant
customer may be unable to purchase from the Company; or that a significant
service provider may be unable to provide services to the Company. The Company
is formulating a contingency plan in the event of failure of production
operations, the inability of major suppliers to fulfill their commitments and
the inability of major customers to submit orders and receive product. The
Company expects to have the majority of its contingency plans formalized by
September 1999. Notwithstanding the above, the effect, if any, on the Company's
future results of operations, due to the Company's major suppliers and customers
not being Year 2000 compliant, cannot be reasonably estimated. Management
believes that this latter risk is mitigated somewhat by the Company's broad base
of customers and suppliers and the worldwide nature of its operations.
Liquidity and Capital Resources
- -------------------------------
The Company's general business operations historically have not required
substantial cash needs during the first several months of its fiscal year.
Generally starting in the second quarter the Company's cash needs begin to
increase, typically reaching its peak in the September-November time frame. The
additional cash needs have generally been to finance the accumulation of
inventory and the build-up in accounts receivable. During the First Quarter the
Company continued to increase it's cash holdings to $69 million in comparison to
$57 million and $25 million as of the end of the Company's 1998 year and Prior
Year Quarter, respectively. In addition, at the end of the first quarter the
Company had working capital of $120 million and borrowings of only $4 million
against its combined $43 million bank credit facilities. Management believes
that cash flow from operations combined with existing cash on hand will be
sufficient to satisfy its working capital expenditures for at least the next
eighteen months.
Forward-Looking Statements
- --------------------------
Included within management's discussion of the Company's operating results,
"forward-looking statements" were made within the meaning of the Private
Securities Litigation Reform Act of 1995 regarding expectations for 1999. The
actual results may differ materially from those expressed by these
forward-looking statements. Significant factors that could cause the Company's
1999 operating results to differ materially from management's current
expectations include, among other items, significant changes in consumer
spending patterns or preferences, competition in the Company's product areas,
international in comparison to domestic sales mix, changes in foreign currency
valuations in relation to the United States Dollar, principally the European
Union's Euro and Japanese Yen, an inability of management to control operating
expenses in relation to net sales without damaging the long-term direction of
the Company and the risks and uncertainties set forth in the Company's current
report on Form 8-K dated March 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational enterprise, the Company is exposed to changes in foreign
currency exchange rates. The Company employs a variety of practices to manage
this market risk, including its operating and financing activities and, where
deemed appropriate, the use of derivative financial instruments. Forward
contracts have been utilized by the Company to mitigate foreign currency risk.
The Company's most significant foreign currency risk relates to the Euro. The
Company uses derivative financial instruments only for risk management purposes
and does not use them for speculation or for trading. There were no significant
changes in how the Company managed foreign currency transactional exposures
during the First Quarter and management does not anticipate any significant
changes in such exposures or in the strategies it employs to manage such
exposures in the near future.
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
The following report on Form 8-K was filed during the period
covered by this Report:
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.
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 17, 1999 /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)
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
27 Financial Data Schedule