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: July 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
August 13, 1999: 31,926,226 (after giving effect to the 3-for-2 stock split
payable in the form of a 50% stock dividend on August 17, 1999).
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JULY 3, JANUARY 2,
1999 1999
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 70,648 $ 57,263
Accounts receivable - net 38,414 42,582
Inventories 74,359 57,295
Deferred income tax benefits 6,495 5,655
Prepaid expenses and other current assets 6,129 3,538
----- -----
Total current assets 196,045 166,333
Property, plant and equipment - net 26,567 23,117
Intangible and other assets - net 5,822 4,628
----- -----
$ 228,434 $ 194,078
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable $ 4,255 $ 4,537
Accounts payable 15,850 14,512
Accrued expenses:
Co-op advertising 13,605 13,311
Compensation 3,384 3,246
Other 12,570 11,201
Income taxes payable 18,095 10,487
------ ------
Total current liabilities 67,759 57,294
Minority interest in subsidiaries 2,102 1,864
Stockholders' equity:
Common stock, shares issued and outstanding,
31,916,700 and 31,398,136, respectively 213 209
Additional paid-in capital 38,741 34,345
Retained earnings 122,679 102,859
Accumulated other comprehensive income (3,060) (1,037)
Treasury stock at cost, none and 155,518 shares,
respectively - (1,456)
--------- ---------
Total stockholders' equity 158,573 134,920
------- -------
$ 228,434 $ 194,078
========= =========
See notes to condensed consolidated financial statements.
1
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 FOR THE 26 FOR THE 26
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 90,271 $ 64,363 $ 173,548 $ 121,248
Cost of sales 45,521 32,458 86,126 61,442
------ ------ ------ ------
Gross profit 44,750 31,905 87,422 59,806
Operating expenses:
Selling and distribution 21,277 16,258 39,176 31,075
General and administrative 6,714 5,761 13,610 10,994
----- ----- ------ ------
Total operating expenses 27,991 22,019 52,786 42,069
------ ------ ------ ------
Operating income 16,759 9,886 34,636 17,737
Interest expense (24) (59) (49) (117)
Other income (expense) - net (43) (130) (184) (41)
---- ----- ----- ----
Income before income taxes 16,692 9,697 34,403 17,579
Provision for income taxes 6,826 3,993 14,106 7,209
----- ----- ------ -----
Net income $9,866 $5,704 $20,297 $10,370
Other comprehensive income:
Currency translation adjustment (1,623) (63) (1,830) (256)
Unrealized loss on short term investments (175) - (193) -
----- ----- ------ ------
Comprehensive income $8,068 $5,641 $18,274 $10,114
====== ====== ======= =======
Net income per share:
Basic $ 0.31 $ 0.18 $ 0.64 $ 0.34
======= ======= ======= =======
Diluted $ 0.29 $ 0.17 $ 0.61 $ 0.32
======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding:
Basic 31,809 31,072 31,611 30,826
====== ====== ====== ======
Diluted 33,449 32,694 33,267 32,425
====== ====== ====== ======
See notes to condensed consolidated financial statements.
2
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
FOR THE 26 WEEKS FOR THE 26 WEEKS
ENDED ENDED
JULY 3, JULY 4,
1999 1998
---- ----
Operating activities:
Net income $ 20,297 $ 10,370
Noncash items affecting net income:
Minority interest in subsidiaries 1,027 148
Depreciation and amortization 2,593 1,701
Increase in allowance for doubtful accounts 501 697
Increase in allowance for returns -
net of related inventory in transit 636 212
Deferred income tax benefits (921) (537)
Changes in assets and liabilities:
Accounts receivable 3,203 3,542
Inventories (17,236) (9,453)
Prepaid expenses and other current assets (2,783) (534)
Accounts payable (56) 4,253
Accrued expenses 1,800 (2,795)
Income taxes payable 9,308 2,370
----- -----
Net cash from operations 18,369 9,974
Investing activities:
Additions to property, plant and equipment (5,786) (1,774)
Increase in intangible and other assets (1,371) (56)
------- ----
Net cash used in investing activities (7,157) (1,830)
Financing activities:
Issuance of common stock 2,700 6,135
Treasury stock issued for options exercised 981 -
Distribution of minority interest earnings (790) (327)
Repayments of notes payable-banks (282) (4,208)
----- -------
Net cash from financing activities 2,609 1,600
Effect of exchange rate changes on cash and cash equivalents (436) (60)
----- ----
Net increase in cash and cash equivalents 13,385 9,684
Cash and cash equivalents:
Beginning of period 57,263 21,104
------ ------
End of period $ 70,648 $ 30,788
======== ========
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 3, 1999,
and the results of operations for the thirteen-week periods ended July 3, 1999,
and July 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 July
3, 1999, are not necessarily indicative of the results to be achieved for the
full year.
On July 21, 1999, 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 to be paid on August 17, 1999 to
stockholders of record on August 3, 1999. Retroactive effect has been given to
the stock split in stockholders' equity accounts beginning as of the fiscal year
ended January 2, 1999, 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" 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.
2. INVENTORIES
Inventories consist of the following:
July 3, January 2,
(IN THOUSANDS) 1999 1999
---- ----
Components and parts $ 3,945 $ 3,402
Work-in-process 1,577 1,445
Finished merchandise on hand 54,095 40,344
Merchandise at Company stores 7,784 5,340
Merchandise in-transit from estimated
customer returns 6,958 6,764
----- -----
$74,359 $57,295
======= =======
4
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 July 3,
1999, the Company had hedge contracts to sell 12.0 million German Marks for
approximately $7.0 million, expiring through December 1999.
3. GEOGRAPHIC INFORMATION
(IN THOUSANDS)
FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED
ENDED JULY 3, 1999 JULY 4, 1998
------------------ ------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- --------- ---------
U.S.- exclusive of
Company Stores $ 56,117 $ 4,048 $ 44,494 $ 2,748
Stores 7,358 308 5,476 89
Europe 17,773 3,205 13,770 1,886
Far East 57,777 9,342 31,725 5,470
Japan 1,570 (144) 1,987 (307)
Intergeographic items (50,324) - (33,089) -
-------- -------- -------- -------
Consolidated $ 90,271 $ 16,759 $ 64,363 $ 9,886
======== ======== ======== =======
FOR THE 13 WEEKS FOR THE 13 WEEKS ENDED
ENDED JULY 3, 1999 JULY 4, 1998
------------------ ------------
OPERATING OPERATING
NET SALES INCOME NET SALES INCOME
--------- --------- --------- ---------
U.S.- exclusive of
Company Stores $115,005 $ 12,838 $ 85,130 $ 6,958
Stores 12,147 (289) 9,084 (401)
Europe 36,988 7,485 25,960 3,251
Far East 91,248 15,176 53,246 8,573
Japan 3,512 (574) 3,810 (644)
Intergeographic items (85,352) - (55,982) -
-------- -------- -------- -------
Consolidated $173,548 $ 34,636 $121,248 $17,737
======== ======== ======== =======
5
4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26
(IN THOUSANDS, EXCEPT PER SHARE DATA) WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 3, 1999 JULY 4, 1998 JULY 3, 1999 JULY 4, 1998
------------ ------------ ------------ ------------
BASIC EPS COMPUTATION:
Numerator:
Net income $ 9,866 $ 5,704 $20,297 $ 10,370
------- ------- ------- --------
Denominator:
Weighted average common
shares outstanding 21,206 20,715 21,074 20,551
Treasury stock - - (30) -
Effect of stock dividend 10,603 10,357 10,567 10,275
------- ------- ------- --------
31,809 31,072 31,611 30,826
------- ------- ------- --------
BASIC EPS $ 0.31 $ 0.18 $ 0.64 $ 0.34
======= ======= ======= ========
DILUTED EPS COMPUTATION:
Numerator:
Net income $ 9,866 $ 5,704 $20,297 $ 10,370
------- ------- ------- --------
Denominator:
Weighted average common
shares outstanding 21,206 20,715 21,074 20,551
Stock option conversion 1,093 1,081 1,104 1,066
Treasury stock - - (30) -
Effect of stock dividend 11,150 10,898 11,119 10,808
------- ------- ------- --------
33,449 32,694 33,267 32,425
------- ------- ------- --------
DILUTED EPS $ 0.29 $ 0.17 $ 0.61 $ 0.32
====== ====== ====== ======
5. DEBT
In June 1999, the Company renewed the U.S. short-term revolver for one year and
amended the interest rate the Company pays on LIBOR based borrowings. All
borrowings under the U.S. short-term revolver accrue interest at the bank's
prime rate less 0.50% or LIBOR plus 0.75% (LIBOR plus 1.00% prior to June 29,
1999). The U.S. short-term revolver is unsecured and requires the maintenance of
net worth, quarterly income, working capital and financial ratios.
6
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 Fossil, Inc. and it's majority owned subsidiaries ("the Company")
for the thirteen and twenty-six week periods ended July 3, 1999 (the "Second
Quarter" and "Year to Date", respectively), as compared to the thirteen and
twenty-six week periods ended July 4, 1998 (the "Prior Year Quarter" and "Prior
Year YTD Period", respectively). 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 brand 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.
COMPANY HIGHLIGHTS
o Sales of FOSSIL brand watches worldwide continued to represent over half of
the Company's net sales.
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.
7
COMPANY HIGHLIGHTS - CONTINUED
o FOSSIL Big Tic, a 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 represents one of the Company's best selling watch
lines in volume during the Second Quarter and Year to Date.
o FOSSIL brand handbag sales continued to record double-digit sales growth
during the Second Quarter and Year to Date in comparison to the comparable
periods in 1998.
o FOSSIL brand sunglasses gained market share as a result of the consumer
preference for quality brand name items at more moderate price levels, both
of which align with the Company's sunglass program initiatives. During the
Second Quarter, FOSSIL brand sunglass sales were down in comparison to the
Prior Year Quarter but, based on strong sales during the 1999 first
quarter, showed double-digit growth on the Year to Date comparison.
o RELIC, the Company-owned brand sold in leading national and regional chain
department stores and specialty stores, recorded sales volume growth of
approximately 50% during the Second Quarter and Year to Date. 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
FOSSIL brand product of approximately 30% in the Second Quarter and Year to
Date in comparison to the same periods in 1998.
o The Company operated 30 outlet and 14 full price stores at the end of the
Second Quarter compared to 28 outlet and 7 full price stores at the end of
the Prior Year Quarter.
o The Company holds a worldwide license 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 Second Quarter and Year to
Date periods amounted to $7.0 million and $13.7 million, respectively, in
comparison to $6.6 million and $9.7 million during the Prior Year Quarter
and Prior Year YTD Period, respectively.
o The Company entered into a license agreement with Safilo USA, Inc. and
Safilo B.V. 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.
o The Company entered into an agreement with Seiko Instruments America, Inc.
to form a joint venture company in which the Company will hold a 20% equity
interest. The joint venture company will be responsible for manufacturing,
marketing and distributing watches principally to the mass market
distribution channel produced under various proposed licensing agreements
and private label brands. The Company will perform certain design,
marketing and sourcing services for the joint venture.
o The Company's stock was added to the Standard & Poor's SmallCap 600 Index
in June 1999.
o The Company declared a 3-for-2 stock split ("the 3-for-2 Stock Dividend")
in the form of a 50% stock dividend payable on August 17, 1999.
8
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 PERCENTAGE OF PERCENTAGE
NET SALES CHANGE NET SALES CHANGE
---------- ----------
FOR THE 13 FOR THE 13 FOR THE 26 FOR THE 26
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
----------- ----------- ----------- -----------
JULY 3, JULY 4, JULY 3, JULY 3, JULY 4, JULY 3,
1999 1998 1999 1999 1998 1999
---- ---- ---- ---- ---- ----
Net sales 100.0% 100.0% 40.3% 100.0% 100.0% 43.1%
Cost of sales 50.4 50.4 40.2 49.6 50.7 40.2
----- ----- ----- -----
Gross profit margin 49.6 49.6 40.3 50.4 49.3 46.2
Selling and distribution
expenses 23.6 25.2 30.9 22.6 25.6 26.1
General and administrative
expenses 7.4 9.0 16.5 7.9 9.1 23.8
--- --- --- ---
Operating income 18.6 15.4 69.5 19.9 14.6 95.3
Interest expense (0.0) (0.1) (60.1) (0.0) (0.1) (57.8)
Other income
(expense)- net (0.0) (0.2) (67.2) (0.1) 0.0 349.5
----- ----- ----- ---
Income before income taxes 18.6 15.1 77.7 19.8 14.5 95.9
Income taxes 7.5 6.2 70.9 8.1 5.9 95.7
--- --- --- ---
Net income 10.9% 8.9% 73.0% 11.7% 8.6% 95.7%
===== ===== ===== =====
9
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
---------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
International:
Europe $ 17.1 $ 13.8 19% 21%
Other 16.9 6.2 19 10
---- --- -- --
Total International 34.0 20.0 38 31
---- ---- -- --
Domestic:
Watch products 35.8 28.2 40 44
Other products 13.1 10.6 14 16
---- ---- -- --
Total 49.9 38.8 54 60
Stores 7.3 5.5 8 9
--- --- - -
Total Domestic 56.2 44.3 62 69
---- ---- -- --
Total Net Sales $ 90.2 $ 64.3 100% 100%
====== ====== === ===
AMOUNTS % OF TOTAL
------- ----------
FOR THE 26 WEEKS ENDED FOR THE 26 WEEKS ENDED
---------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
International:
Europe $ 36.4 $ 26.0 21% 21%
Other 24.9 11.8 14 10
---- ---- -- --
Total International 61.3 37.8 35 31
---- ---- -- --
Domestic:
Watch products 72.1 51.5 42 42
Other products 28.0 22.8 16 19
---- ---- -- --
Total 100.1 74.3 58 61
Stores 12.1 9.1 7 8
---- --- - -
Total Domestic 112.2 83.4 65 69
----- ---- -- --
Total Net Sales $173.5 $121.2 100% 100%
====== ====== === ===
10
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 and (b) sales from
the newly introduced Big Tic line of watches. Net sales during the first half of
1999 were abnormally impacted by (a) refilling of certain retailer's watch
inventories after a very successful 1998 holiday season and (b) a $7.2 million
sale of non-branded premium incentive watches in the Second Quarter. Fueling top
line sales growth during the Year to Date period was double-digit sales growth
in the Company's other accessory product lines and sales increases in certain
private label and licensing watch lines. In addition, sales of the Company's
RELIC brand grew at a rate of approximately 50% during the Second Quarter and
Year to Date periods. Management believes the sales increases will average at or
above 20% during the last half of 1999.
GROSS PROFIT. In comparison to the comparable 1998 periods, gross profit margins
increased slightly to 50% during the Year to Date period while remaining even
during the Second Quarter. The gross profit margins during the Second Quarter
would have been approximately 52% without the gross margin impact of the
non-branded premium incentive sale, which sold at a low margin. The increases in
gross profit margins are partially due to the positive gross margin influence
stemming from an increase in the Company's sales mix of FOSSIL brand watches,
European-based sales and Fossil-owned retail store sales. These sales categories
generally result in higher gross profit margins than the Company's consolidated
average. In addition, gross profit margins increased based on higher production
levels in the Company's foreign-based assembly facilities. Management believes
that the Company's gross profit margins for the remainder of 1999 will be
comparable to the Year to Date period.
OPERATING EXPENSES. The aggregate increases in operating expenses were due
primarily to costs necessary to support increased sales volumes. Total operating
expenses as a percentage of net sales ("operating expense ratios") decreased to
31%, in the Second Quarter and Year to Date periods, respectively, compared to
the prior year comparable periods. Leveraging expenses against higher sales
volumes was the principal reason for this decrease. In addition, during the
Second Quarter, operating expense ratios were positively impacted by the
non-branded premium incentive sale that had relatively little associated
operating expenses. Exclusive of that sale, the operating expense ratio for the
Second Quarter would have reflected only a minor improvement over the Prior Year
Quarter. Management believes the operating expense ratio for the remainder of
1999 will be the comparable to 1998 levels as a result of planned increases in
advertising expenditures to heighten the awareness of the FOSSIL brand.
OTHER INCOME (EXPENSE). Other expense - net increased during the Year to Date
period compared to the Prior Year YTD Period. The increase in expense was
primarily due to (a) the minority interests share of increased profits generated
in the Company's assembly facilities and (b) foreign currency losses stemming
from a weaker U.S. dollar in relation to the local currencies of several of the
Company's foreign operations during the Year to Date period. Higher interest
income generated on increased cash holdings offset these increases during the
Second Quarter, and partially offset the additional expenses in the Year to Date
period.
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
11
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 $2.3
million has been expended as of the end of the Year to Date Period. 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 during
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 Second Quarter the
Company increased it's cash holdings slightly to $71 million in comparison to
$69 million as of the end of the Company's 1999 first quarter. At the end of the
second quarter, the Company had working capital of $128 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.
12
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 26, 1999. At
such meeting, the stockholders elected two (2) Class I directors of the Company
and no other matters were voted on at the meeting. A total of 20,130,083 shares
(prior to giving effect to the 3-for-2 Stock Dividend) were represented at the
meeting.
The tabulation of nominees is as follows (prior to given effect to the
3-for-2 Stock Dividend):
Director Nominee For Against Abstain Withheld
- --------------------------------------------------------------------------------
Kenneth W. Anderson 19,814,441 315,642
Michael W. Barnes 19,735,491 394,592
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fourth Amended and Restated Loan Agreement by and
among Wells Fargo Bank (Texas), National Association,
Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil Stores I,
Inc. and Fossil Stores II, Inc. dated as of June 28,
1999 (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.
13
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 16, 1999 /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)
14
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
10.1 Fourth Amended and Restated Loan Agreement by and among Wells Fargo Bank
(Texas), National Association, Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc. and Fossil Stores
II, Inc. dated as of June 28, 1999 (without exhibits).
27 Financial Data Schedule.
15