UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period from April 6, 1997 to July 5, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-19848 FOSSIL, INC. (Exact name of registrant as specified in its charter) Delaware 75-2018505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2280 N. Greenville, Richardson, Texas 75082 (Address of principal executive offices) (Zip Code) (972) 234-2525 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ The number of shares of Registrant's common stock, outstanding as of August 13, 1997: 13,453,238.
PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 5, December 31, 1997 1996 ---- ---- (Unaudited) ASSETS Current assets: <S> <C> <C> Cash and cash equivalents $ 10,954,366 $ 11,981,246 Accounts receivable - net 29,526,067 30,252,964 Inventories 51,707,828 49,782,555 Deferred income tax benefits 3,897,000 3,666,344 Prepaid expenses and other current assets 4,184,194 1,942,791 --------- --------- Total current assets 100,269,455 97,625,900 Property, plant and equipment - net 19,224,777 16,718,976 Intangible and other assets 5,021,355 4,633,193 --------- --------- $ 124,515,587 $ 118,978,069 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 12,116,890 $ 10,506,144 Accounts payable 6,433,868 7,476,324 Accrued expenses: Co-op advertising 7,126,691 7,857,196 Compensation 2,349,844 2,154,996 Other 5,100,337 7,931,693 Income taxes payable 3,995,102 1,838,656 --------- --------- Total current liabilities 37,122,732 37,765,009 Long-term debt 4,250,000 4,350,000 Minority interests in subsidiaries 1,033,825 2,295,026 Stockholders' equity: Common stock, shares issued and outstanding, 13,438,664 and 13,242,994, respectively 134,387 132,430 Additional paid-in capital 24,558,582 22,766,468 Retained earnings 58,923,596 52,315,069 Cumulative translation adjustment (1,507,535) (645,933) ----------- --------- Total stockholders' equity 82,109,030 74,568,034 ---------- ---------- $ 124,515,587 $ 118,978,069 ============= ============= </TABLE> See notes to condensed consolidated financial statements. 1
<TABLE> <CAPTION> FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED For the 13 For the 3 For the 26 1/2 For the 6 Weeks Ended Months Ended Weeks Ended Months Ended July 5, June 30, July 5, June 30, 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales $ 56,931,466 $ 45,238,236 $ 104,381,178 $ 88,147,304 Cost of sales 30,627,390 22,775,805 54,881,744 46,649,086 ---------- ---------- ---------- ---------- Gross profit 26,304,076 22,462,431 49,499,434 41,498,218 Operating Expenses: Selling and distribution 13,142,089 12,241,841 25,143,114 21,736,990 General and administrative 6,384,510 5,619,881 12,118,079 10,911,728 --------- --------- ---------- ---------- Total operating expenses 19,526,599 17,861,722 37,261,193 32,648,718 ---------- ---------- ---------- ---------- Operating income 6,777,477 4,600,709 12,238,241 8,849,500 Interest expense (267,166) (264,412) (496,716) (440,422) Other income (expense) - net (373,208) 128,245 (562,998) (42,572) --------- ------- --------- -------- Income before income taxes 6,137,103 4,464,542 11,178,527 8,366,506 Provision for income taxes 2,503,000 1,880,000 4,570,000 3,442,000 --------- --------- --------- --------- Net income $ 3,634,103 $ 2,584,542 $ 6,608,527 $ 4,924,506 ============ ============= ============ ============= Earnings per share $ 0.26 $ 0.19 $ 0.48 $ 0.37 ================ ================= ================ ================= Weighted average common and common equivalent shares outstanding 13,807,162 13,462,680 13,705,495 13,355,513 ========== ========== ========== ========== </TABLE> See notes to condensed consolidated financial statements. 2
<TABLE> <CAPTION> FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED For the 26 1/2 For the 6 Weeks Ended Months Ended July 5, June 30, 1997 1996 ---- ---- Operating Activities: <S> <C> <C> Net income $ 6,608,527 $ 4,924,506 Noncash item affecting net income: Minority interests in subsidiaries (178,664) 251,625 Depreciation and amortization 1,481,617 1,473,399 (Decrease) increase in allowance for doubtful accounts (291,184) 531,647 Decrease in allowance for returns - net of related inventory in transit (143,350) (1,239,963) Deferred income tax benefits (230,656) 56,808 Cumulative translation adjustment (861,602) (319,024) Cash from (used in) changes in assets and liabilities: Accounts receivable 1,495,544 (1,872,572) Inventories (2,259,386) (3,187,390) Prepaid expenses and other current assets (2,241,403) (147,610) Accounts payable (1,042,456) 1,428,387 Accrued expenses (3,367,013) (1,821,207) Income taxes payable 2,156,446 (2,127,566) --------- ----------- Net cash from (used in) operations 1,126,420 (2,048,960) Investing Activities: Net assets acquired in business combination/consolidation, net of cash received (1,315,703) 805,891 Additions to property, plant and equipment (3,867,849) (2,527,328) (Increase) decrease in intangible and other assets 224,220 (452,468) ------- --------- Net cash used in investing activities (4,959,332) (2,173,905) Financing activities: Issuance of common stock 1,794,071 73,958 (Decrease) increase in minority interests in subsidiaries (498,785) 2,294 Increase in notes payable 1,510,746 6,067,771 --------- --------- Net cash from financing activities 2,806,032 6,144,023 --------- --------- Net (decrease) increase in cash and cash equivalents (1,026,880) 1,921,158 Cash and cash equivalents: Beginning of period 11,981,246 5,980,535 ---------- --------- End of period $ 10,954,366 $ 7,901,693 ============ ============ </TABLE> See notes to condensed consolidated financial statements. 3
FOSSIL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. FINANCIAL STATEMENT POLICIES Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its majority-owned subsidiaries (the "Company"). The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the Company's financial position as of July 5, 1997 and the results of operations for the thirteen and twenty-six and one-half week periods ended July 5, 1997, respectively and the results of operations for the three- and six-month periods ended June 30, 1996, respectively. All adjustments are of a normal, recurring nature. These interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included in Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934 for the year ended December 31, 1996. Operating results for the thirteen and twenty-six and one-half week periods ended July 5, 1997 ("Second Quarter" and "Half Year Period", respectively), are not necessarily indicative of the results to be achieved for the full year. Beginning January 1, 1997, the Company changed its fiscal year to reflect the retail-based calendar (containing 4-4-5 week calendar quarters). Due to this change, the Company's first quarter ended April 5, 1997 contained an additional one-half week for the transition period. Business. The Company designs, develops, markets and distributes fashion watches and other accessories, principally under the "FOSSIL", "FSL" and "RELIC" brands names. The Company's products are sold primarily through department stores and other major retailers, both domestically and internationally. 2. INVENTORIES <TABLE> <CAPTION> Inventories consist of the following: July 5, December 31, 1997 1996 ---- ---- <S> <C> <C> Components and parts $ 2,688,817 $ 2,294,750 Work-in-process 981,146 657,125 Finished merchandise on hand 39,002,019 38,404,535 Merchandise at Company's stores 4,966,225 3,962,199 Merchandise in transit from estimated customers' returns 4,069,621 4,463,946 --------- --------- $51,707,828 $49,782,555 =========== =========== </TABLE> The Company periodically enters into forward contracts principally to hedge the expected payment of intercompany inventory transactions with its non-U.S. subsidiaries. Currency exchange gains or losses resulting from the translation of the related accounts, along with the offsetting gains or losses from the hedge, are deferred until the inventory is sold or the forward contract is completed. On July 5, 1997, the Company had hedge contracts to sell 2.0 million German Marks for approximately $1.2 million, expiring through August 1997 and 416.2 million Japanese Yen for approximately $3.6 million, expiring through December 1997. 4
FOSSIL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 3. ACQUISITIONS Effective February 1, 1997, Fossil Europe B.V. acquired the remaining 40% of the capital stock of Fossil Italia, S.R.L. from its minority stockholders in exchange for the issuance of 128,109 shares of the Company's $0.01 par value common stock ("Common Stock") valued at $1.2 million. The acquisition has been accounted for as a purchase and, in connection therewith, the Company recorded goodwill of approximately $300,000. Effective April 1997, Fossil (East) Limited acquired the remaining 35% of capital stock of Amazing Time, Ltd. from its minority stockholder in exchange for approximately $380,000 in cash. The acquisition has been accounted for as a purchase and, in connection therewith, the Company recorded goodwill of approximately $210,000. 4. DEBT Bank. In June 1997, the Company renewed its U.S. short-term revolver through June 1998. At the time of the renewal, the Company increased the funds available under the facility by $10,000,000 to $40,000,000, not subject to any borrowing base calculation. The U.S. short-term revolver is collateralized by substantially all the Company's assets and requires maintenance of specific levels of net worth, net income, working capital and financial ratios. 5
FOSSIL, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the thirteen and twenty-six and one-half week periods ended July 5, 1997 (the "Second Quarter" and "Half Year Period", respectively), as compared to the three and six-month periods ended June 30, 1996 (the "Prior Year Quarter" and "Prior Year Half Year Period", respectively). Due to a change in the Company's fiscal year to reflect the retail-based calendar (containing 4-4-5 week calendar quarters), the Company's first quarter during 1997 contained an additional one-half week for the transition period. This change had an immaterial impact on comparability to the Prior Year Quarter and Prior Year Half Year Period. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes attached hereto. General Since the Company's organization in 1984, sales growth has been principally attributable to increased sales of FOSSIL brand watches both domestically and in a growing number of international markets. Adding to the Company's sales growth has been the addition of FOSSIL brand leather goods and sunglasses, the diversification into FOSSIL outlet and retail stores and the introduction of other watch brands (RELIC and FSL). Increased sales volume has also been generated through leveraging the Company's infrastructure of sourcing, design and developmental systems for the production of its products for corporate gift programs as well as under the names of internationally recognized specialty retailers, entertainment companies and theme restaurants. The Company's products are marketed internationally, mainly through major department stores and specialty retailers. The Company maintains sales and distribution offices in the United States, Germany, Italy, Japan, the United Kingdom, Spain, France and Hong Kong. In addition to sales through the Company's offices, FOSSIL also currently distributes its products to over 50 additional countries through authorized distributors. 1997 Highlights The Company acquired effective February 1997 the remaining 40% of the capital stock of Fossil Italia, S.R.L. from its minority stockholders. The Company acquired effective April 1997 the remaining 35% of the capital stock of Amazing Time, Ltd. from its minority stockholder. During March FOSSIL brand neckwear was available through the Company's first licensing agreement of the FOSSIL brand name. The Company entered into a multi-year licensing agreement for the design, production, and marketing of FOSSIL brand underwear and lounge wear throughout the United States. The product should be available to the public for the 1997 holiday season. The Company announced in May that it had entered into a worldwide, multi-year licensing agreement with Giorgio Armani for the rights to design, produce and market a line of Emporio Armani watches. 6
Results of Operations The following table sets forth, for the periods indicated, (i) the percentages of the Company's net sales represented by certain line items from the Company's condensed consolidated statements of income and (ii) the percentage changes in these line items between the current period and the comparable period of the prior year. <TABLE> <CAPTION> Percentage of Percentage of Net Sales Net Sales --------- -------- For the For the For the 26 For the 13 Weeks 3 Months 1/2 Weeks 6 Months Ended Ended Ended Ended July 5, June 30, Percentage July 5, June 30, Percentage 1997 1996 Change 1997 1996 Change ---- ---- ------ ---- ---- ------ <S> <C> <C> <C> <C> <C> <C> Net sales 100.0% 100.0% 25.8% 100.0% 100.0% 18.4% Cost of sales 53.8 50.3 34.5 52.6 52.9 17.7 ----- ----- ----- ----- Gross profit margin 46.2 49.7 17.1 47.4 47.1 19.3 Selling and distribution expenses 23.1 27.1 7.4 24.1 24.6 15.7 General and administrative expenses 11.2 12.4 13.6 11.6 12.4 11.1 ---- ---- ---- ---- Operating income 11.9 10.2 47.3 11.7 10.1 38.3 Interest expense (0.5) (0.6) 1.0 (0.5) (0.5) 12.8 Other income (expense)- net (0.6) 0.3 (391.0) (0.5) (0.1) 1,222.5 ----- --- ----- ----- Income before income taxes 10.8 9.9 37.5 10.7 9.5 33.6 Income taxes 4.4 4.2 33.1 4.4 3.9 32.8 --- --- --- --- Net income 6.4% 5.7% 40.6% 6.3% 5.6% 34.2% ==== ==== ==== ==== </TABLE> 7
Net Sales. The following table sets forth certain components of the Company's consolidated net sales and the percentage relationship of the components to consolidated net sales for the periods indicated (in millions, except percentage data): <TABLE> <CAPTION> Amounts % of Total Amounts % of Total ------- ---------- ------- ---------- For the For the For the For the For the For the For the For the 13 Weeks 3 Months 13 Weeks 3 Months 26 1/2 6 26 1/2 6 Months Ended Ended Ended Ended Weeks Months Weeks Ended Ended Ended Ended July 5, June 30, July 5, June 30, July 5, June 30, July 5, June 30, 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- International: <S> <C> <C> <C> <C> <C> <C> <C> <C> Europe $ 9.8 $ 10.9 17% 24% $ 20.4 $ 22.4 19% 25% Other 11.6 3.3 21 7 16.4 7.4 16 8 ---- --- -- - ---- --- -- - Total 21.4 14.2 38 31 36.8 29.8 35 33 ---- ---- -- -- ---- ---- -- -- International Domestic: Watch products 22.0 18.5 39 41 40.1 35.1 38 40 Other products 9.2 9.9 16 22 20.4 19.1 20 22 --- --- -- -- ---- ---- -- -- Total 31.2 28.4 55 63 60.5 54.2 58 62 Stores 4.3 2.6 7 6 7.1 4.1 7 5 --- --- - - --- --- - - Total Domestic 35.5 31.0 62 69 67.6 58.3 65 67 ---- ---- -- -- ---- ---- -- -- Total Net Sales $ 56.9 $ 45.2 100% 100% $104.4 $ 88.1 100% 100% ====== ====== === ==== ====== ====== === === </TABLE> Sales volume increases during the Second Quarter were principally derived from a significant sale of non-branded watches used for premium incentives, domestic sales of FOSSIL branded watch and leather products and sales from additional FOSSIL outlet and retail stores opened during the second half of 1996. The Company, through its foreign subsidiaries, negotiated a sale valued at $5.9 million of non-branded premium incentive watches sold in Europe during the Second Quarter. In addition, domestic sales of FOSSIL branded watches showed strong sales gains due to the increase of metal bracelet watches in the Company's product mix and the popularity of two FOSSIL watch lines (FOSSIL Blue and FOSSIL Steel) introduced mainly after the second quarter of last year. Sales gains in the Company's leather goods during the Second Quarter were more than offset by sales declines in the Company's sunglass products. Beginning in late 1996, the number of sunglass suppliers selling into the Company's distribution channels significantly increased while the retail prices the average sunglass customer showed a willingness to pay declined. In reaction to these changes in the sunglass market place and in an attempt to increase its market share, the Company is in the process of both increasing its sunglass assortment at its opening price points and introducing a premium quality line of sunglasses during the third quarter of 1997. Internationally, sales of FOSSIL branded watches by the Company's European-based companies also increased during the Second Quarter. These increases however were more than offset by declines in sales of sunglass products and a reduction in sales derived from the Company's operations in France and the United Kingdom. Based on current market conditions, the Company has significantly curtailed its operations in France and the United Kingdom. The Company's sales increases for the Half Year Period were similar to that experienced in the Second Quarter. Gross Profit. The decrease in gross profit margins during the Second Quarter was principally a result of the low gross profit margin realized on the sale of the non-branded premium watches sold in Europe. To a lesser extent, higher markdowns taken in the leather and sunglass products and more aggressive pricing on certain of the Company's FOSSIL branded watches had a negative effect on the gross profit margins in the Second Quarter. Increased sales volumes through the Company's retail and Japan-based operations and increased production of the Company's watch 8
products through its majority-owned assembly factories had a positive influence on the Company's gross profit margins for the Second Quarter and Half Year Period as compared to the prior year. Management believes that the Company's gross profit margin for the balance of the year will increase above the Second Quarter levels to approximately the 48% range. Operating expenses. Selling, general and administrative expenses, as a percentage of net sales, decreased for the Second Quarter and Half Year Period to 34.3% and 35.7%, respectively, from 39.5% and 37.0% in the prior year comparable periods. Operating expenses increased in the aggregate primarily due to increased sales volumes and the operating costs from the Company's additional outlet and retail stores opened during 1996. For the Second Quarter and Half Year Period the Company had additional outlet or retail locations in operation in comparison to comparable periods in the previous year of approximately nine and twelve locations, respectively. The operating expense ratio derived from FOSSIL outlet and retail locations is historically higher than the consolidated average. The operating expense ratio for the Second Quarter and Half Year Period were positively impacted by leveraging expenses against higher sales volumes. Other income (expense) - net. The Company reported other expense for the Second Quarter and Half Year Period of $0.37 million and $0.56 million, respectively, as compared to other income of $0.13 million for the Prior Year Quarter and other expense of $0.04 million for the Prior Year Half Year Period. The increase in other expense during 1997 primarily reflects the minority interests in the increased profits of the Company's majority-owned assembly factories. In addition, during the Second Quarter the Company accrued $175,000 for costs to be incurred in the curtailment of operations in the United Kingdom. To a lesser extent, other expenses have increased in 1997 as a result of foreign currency losses incurred at the Company's foreign subsidiaries as the United States Dollar has significantly increased in value against the other foreign currencies the Company deals with, mainly the German Mark and Italian Lira. Liquidity and Capital Resources Historically the Company has not required substantial financing during the first several months of its fiscal year but has increased its debt needs starting in the second quarter, while typically reaching its peak borrowing needs in the September - November time frame. The additional financing needs have generally been to finance the accumulation of inventory and the build-up in accounts receivable. During 1997, the Company will additionally incur approximately $4.5 million in costs for the construction of a 138,000 sq. ft. warehouse facility which has been built adjacent to its main headquarters. Currently, the building costs are being funded through the Company's short-term credit facilities, but management intends to secure long-term financing for this facility during September 1997. Management believes the Company's financial position as of July 5, 1997 remains extremely strong with working capital of approximately $63 million and $11 million in cash. As of August 8, 1997, the Company had approximately $15 million borrowed against its combined $48 million bank credit facilities. The current bank borrowings are primarily related to financing the Company's expansion into company-owned retail locations and internationally as well as financing its facility costs in Texas. Management believes that cash flow from operations and existing credit facilities as well as financing for the Company's 1997 building project will be sufficient to satisfy its working capital expenditure requirements for at least the next twelve months. 9
Forward Looking Statements The statements contained in this Quarterly Report on Form 10-Q, including, but not limited to statements in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical facts are forward-looking statements and involve a number of uncertainties. The actual results of the future events could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are general economic conditions, competition, government regulation and possible future litigation, as well as the risks and uncertainties set forth on the Company's Current Report on Form 8-K dated March 31, 1997. 10
PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on May 22, 1997. At such meeting, the stockholders elected directors of the Company and no other matters were voted on at the meeting. A total of 12,796,211 shares were represented at the meeting. The tabulation of nominees is as follows: <TABLE> <CAPTION> Director Nominee For Against Abstain Withheld - ------------------------------------------------------------------------------------------------- <S> <C> <C> Tom Kartsotis 12,757,449 38,762 Kosta Kartsotis 12,757,949 38,262 Michael W. Barnes 12,757,949 38,262 Jal S. Shroff 12,757,949 38,262 Donald J. Stone 12,757,949 38,262 Kenneth W. Anderson 12,757,949 38,262 Alan J. Gold 12,757,179 39,032 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Fifth Amendment to Second Amended and Restated Loan Agreement dated June 1997, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust , Fossil New York, Inc., Fossil Stores I, Inc. and Fossil Stores II, Inc. (without exhibits). 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the period covered by this Report. 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOSSIL, INC. Date: August 18, 1997 /s/ Randy S. Kercho ------------------- Randy S. Kercho Executive Vice President and Chief Financial Officer (Principal financial officer duly authorized to sign on behalf of Registrant) 12
EXHIBIT INDEX Exhibit Number Document Description 10.1 Fifth Amendment to Second Amended and Restated Loan Agreement dated June 1997, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust , Fossil New York, Inc., Fossil Stores I, Inc. and Fossil Stores II, Inc. (without exhibits). 27 Financial Data Schedule