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: JUNE 30, 1996 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number: 0-19848 ------- FOSSIL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2018505 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 2280 N. GREENVILLE AVE., DALLAS, TEXAS 75082 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 234-2525 -------------- 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, 1996: 13,189,692
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31, 1996 1995 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 7,901,693 $ 5,980,535 Accounts receivable - net 30,071,478 24,932,467 Inventories 45,601,956 42,515,468 Deferred income tax benefits 3,233,611 3,290,419 Prepaid expenses and other current assets 1,695,240 1,428,273 ------------ ------------ Total current assets 88,503,978 78,147,162 Property, plant and equipment - net 16,614,797 15,464,559 Intangible and other assets 3,831,083 3,381,806 ------------ ------------ $108,949,858 $ 96,993,527 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 16,664,141 $ 7,173,036 Accounts payable 6,778,945 5,173,792 Accrued expenses: Co-op advertising 5,750,383 6,181,063 Compensation 2,423,138 2,711,800 Other 3,959,825 4,835,474 Income taxes payable 703,893 2,820,890 ------------ ------------ Total current liabilities 36,280,325 28,896,055 Long-term debt 4,450,000 4,811,298 Minority interests in subsidiaries 2,270,635 2,016,716 Stockholders' equity: Common stock, shares issued and outstanding, 13,189,692 and 13,182,333, respectively 131,897 131,823 Additional paid-in capital 22,293,576 22,219,692 Retained earnings 43,648,468 38,723,962 Cumulative translation adjustment (125,043) 193,981 ------------ ------------ Total stockholders' equity 65,948,898 61,269,458 ------------ ------------ $108,949,858 $ 96,993,527 ------------ ------------ ------------ ------------ See notes to condensed consolidated financial statements. -1-
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED June 30, June 30, ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 45,238,236 $ 43,340,380 $ 88,147,304 $ 78,837,205 Cost of sales 22,775,805 23,368,656 46,649,086 42,191,019 ------------ ------------ ------------ ------------ Gross Profit 22,462,431 19,971,724 41,498,218 36,646,186 Operating expenses: Selling and distribution 12,241,841 10,062,554 21,736,990 17,936,204 General and administration 5,619,881 4,745,906 10,911,728 9,192,537 ------------ ------------ ------------ ------------ Total operating expenses 17,861,722 14,808,460 32,648,718 27,128,741 Operating income 4,600,709 5,163,264 8,849,500 9,517,445 Interest expense (264,412) (259,827) (440,422) (501,412) Other inc. (exp.) - net 128,245 12,941 (42,572) (172,120) ------------ ------------ ------------ ------------ Income before income taxes 4,464,542 4,916,378 8,366,506 8,843,913 Provision for income taxes 1,880,000 1,910,000 3,442,000 3,422,000 ------------ ------------ ------------ ------------ Net income $ 2,584,542 $ 3,006,378 $4,924,506 $ 5,421,913 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share $ 0.19 $ 0.23 $0.37 $0.41 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common and 13,462,680 13,330,352 13,355,513 13,320,913 common equivalent shares ------------ ------------ ------------ ------------ outstanding ------------ ------------ ------------ ------------ </TABLE> See notes to condensed consolidated financial statements. -2-
FOSSIL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30, ------- 1996 1995 ---- ---- <S> <C> <C> Operating Activities: Net income $ 4,924,506 $ 5,421,913 Noncash items affecting net income: Minority interests in subsidiaries 251,625 471,447 Depreciation and amortization 1,473,399 1,215,050 Increase in allowance for doubtful account 531,647 369,748 Decrease in allowance for returns - net of related inventory in transit (1,239,963) (1,029,113) Deferred income tax benefits 56,808 269,183 Cumulative translation adjustment (319,024) 191,420 Cash from (used for) changes in assets and liabilities: Accounts receivable (1,872,572) 3,037,515 Inventories (3,187,390) (6,159,036) Prepaid expenses and other current assets (147,610) (805,453) Accounts payable 1,428,387 849,156 Accrued expenses (1,821,207) (1,126,182) Income taxes payable (2,127,566) (94,949) ---------- ---------- Net cash (used in) from operations (2,048,960) 2,610,699 Investing Activities: Net assets acquired in business combination, net of cash received 805,891 - Additions to property, plant and equipment (2,527,328) (4,098,143) Decrease (increase) in intangible and other assets (452,468) 197,838 ---------- ---------- Net cash used in investing activites (2,173,905) (3,900,305) Financing activities: Issuance of common stock 73,958 134,094 Increase (decrease) in minority interests in subsidiaries 2,294 (26,631) Increase in notes payable 6,067,771 3,317,757 ---------- ---------- Net cash from financing activities 6,144,023 3,425,220 ---------- ---------- Net increase in cash and cash equivalents 1,921,158 2,135,614 Cash and cash equivalents: Beginning of period 5,980,535 2,316,822 ---------- ---------- End of period $ 7,901,693 $ 4,452,436 ---------- ---------- ---------- ---------- </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 consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its majority owned subsidiaries (the "Company" or "Fossil"). The 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 June 30, 1996, and the results of operations for the three- and six-month periods ended June 30, 1996 and 1995. 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, 1995. Operating results for the three- and six-month periods ended June 30, 1996, are not necessarily indicative of the results to be achieved for the full year. BUSINESS. The Company designs, develops, markets and distributes fashion watches and other accessories, principally under the "FOSSIL", "FSL" and "RELIC" brand names. The Company's products are sold primarily through department stores and other major retailers, both domestically and internationally. 2. INVENTORIES Inventories consist of the following: JUNE 30, DECEMBER 31, 1996 1995 ---- ---- Components and parts $ 2,539,525 $ 1,929,100 Work-in-process 589,747 546,917 Finished merchandise on hand 35,780,519 33,462,443 Stores 3,400,117 1,750,008 Merchandise in transit from estimated customers' returns 3,292,048 4,827,000 ----------- ----------- $45,601,956 $42,515,468 ----------- ----------- ----------- ----------- 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. At June 30, 1996, the Company had hedge contracts to sell 11,000,000 deutsche marks (DM), expiring during 1996. The average exchange rate of the DM contracts at maturity is $1 = DM 1.51. -4-
FOSSIL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 3. ACQUISITIONS Effective April 1, 1996, the Company invested approximately $700,000 in cash for an 81% partnership interest in Kabushiki Kaisha Fossil Japan, a Japanese partnership ("Fossil Japan"). Fossil Japan is the sole distributor of Fossil products within Japan and was previously 100% owned by a foreign-based entity. The acquisition has been accounted for as a purchase, and in connection therewith, the Company recorded goodwill of approximately $300,000. 4. DEBT BANK. In April 1996, the Company amended its short-term revolving credit facility ("Short-term Revolver") with its primary bank to additionally allow for Japanese Yen currency borrowings ("Yen borrowings") not to exceed $5,000,000. All outstanding Yen borrowings under the amended facility bear interest at the bank's prime rate less 0.5% or the Euroyen base rate plus 1.00% (1.50% at June 30, 1996), at the option of the Company. In May 1996, the Company renewed its Short-term Revolver through May 3, 1997. At the time of the renewal, the Company increased the funds available under the facility to the lesser of $30,000,000 or the result of a calculated borrowing base, determined principally on the Company's cash flow, as defined within the loan agreement. The credit facility is collateralized by substantially all the Company's assets and requires the maintenance of specified levels of tangible net worth, working capital and financial ratios. As of June 30, 1996 borrowings outstanding under the Short- term Revolver were $12,465,000, of which approximately $2,962,000 related to Yen borrowings. -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 three- and six-month periods ended June 30, 1996 and 1995. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes attached hereto. GENERAL Fossil, established in 1984, began operations as a designer, developer, marketer and distributor of fashion watches sold under the FOSSIL brand name. Since the Company's initial success in designing and marketing its FOSSIL brand watches, mainly through major department stores in the United States, the Company has increased its market share of the fashion watch market, diversified its product offerings and expanded its distribution channels. This has been accomplished by diversification into other watch brand names, which often target different distribution channels, expansion of the scope of the Company's product offerings to include men's and women's small leather goods, belts, handbags, and sunglasses, development and marketing of private label watch programs for several internationally recognized companies and distribution of FOSSIL products to a growing number of international markets. Fossil's product sales into the international marketplace have increased substantially over the past several years, from 8% of net sales in 1992 to 32% in 1995. Contributing significantly to the increase were sales in Germany generated through Fossil Europe GmbH ("Fossil GmbH") formed in 1993 and in Italy through Fossil Italia, S.r.l. formed in 1994. During 1995, the Company also commenced operations in France and the United Kingdom. The Company maintains an 88% equity interest in these European-based subsidiaries with the exception of Fossil Italia, S.r.l., in which the Company holds a 53% equity investment. Each of these subsidiaries is generally responsible for the sales and operations within their respective countries with the exception of Fossil GmbH which also acts as the Company's main marketing and distribution point in Europe. Fossil also currently distributes its products to more than 50 additional countries through licensed distributors. The Company also maintains international operations through Fossil (East) Limited ("Fossil East") which the Company acquired in 1992. Fossil East has acted as the Company's trading, quality and production control agent in Hong Kong since Fossil's origination. Since 1992, Fossil East has acquired equity interests in several assembly facilities in the Far East, which for the year 1995, accounted for 37.5% of Fossil's watch purchases. During April 1996, the Company acquired an 81% partnership interest in Kabushiki Kaisha Fossil Japan, a Japanese partnership ("Fossil Japan"). Fossil Japan is responsible for the sales, marketing and distribution of Fossil products within Japan. Since February 1995, the Company has opened twenty-three outlet stores in certain prime outlet centers in the United States. The Company currently plans to increase the number of outlet store locations to a total of twenty-six stores in 1996. These outlet stores provide the Company a distribution channel through which to sell discontinued products at higher gross profit margins than it presently receives for the sale of such product through traditional discounters. In June 1996, the Company opened two full price retail locations in certain prime shopping malls in the United States. The Company believes these retail locations provide both an advertising vehicle for the FOSSIL brand name and a highly visible display of all the Company's current product offerings in one area. In addition, both the retail and outlet stores provide the Company a site to test possible new product offerings. -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 for the prior year. <TABLE> <CAPTION> PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE NET SALES CHANGE FROM NET SALES CHANGE FROM --------- ----------- --------- ----------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, -------- -------- -------- -------- 1996 1995 1996 1996 1995 1996 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Net sales 100.0% 100.0% 4.4 % 100.0% 100.0% 11.8 % Cost of sales 50.3 53.9 (2.5) 52.9 53.5 10.6 ----- ----- ----- ----- Gross profit margin 49.7 46.1 12.5 47.1 46.5 13.2 Selling and 27.1 23.2 21.7 24.6 22.7 21.2 distribution expenses General and administrative 12.4 11.0 18.4 12.4 11.7 18.7 expenses ----- ----- ----- ----- Operating income 10.2 11.9 (10.9) 10.1 12.1 (7.0) Interest expense (0.6) (0.6) 1.8 (0.5) (0.7) (12.2) Other inc (exp) - net 0.3 (0.0) 891.0 (0.1) (0.2) (75.3) ----- ----- ----- ----- Income before 9.9 11.3 (9.2) 9.5 11.2 (5.4) income taxes Income taxes 4.2 4.4 (1.6) 3.9 4.3 0.6 ----- ----- ----- ----- Net income 5.7% 6.9% (14.0)% 5.6% 6.9% (9.17)% ----- ----- ----- ----- ----- ----- ----- ----- </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 ------- ----------- ------- ----------- THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, -------- -------- -------- -------- 1996 1995 1996 1995 1996 1995 1996 1996 ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> International: Europe $ 10.9 $ 10.0 24% 23% $ 22.4 $ 17.9 25% 23% Other 3.3 4.4 7 10 7.4 7.2 8 9 ------ ------ --- --- ------ ------ --- --- Total International 14.2 14.4 31 33 29.8 25.1 33 32 ------ ------ --- --- ------ ------ --- --- Domestic: Watch products 18.5 21.5 41 50 35.1 40.9 40 52 Other products 9.9 6.2 22 14 19.1 11.5 22 15 ------ ------ --- --- ------ ------ --- --- Total 28.4 27.7 63 64 54.2 52.4 62 67 Outlet Stores 2.6 1.2 6 3 4.1 1.3 5 1 ------ ------ --- --- ------ ------ --- --- Total Domestic 31.0 28.9 69 67 58.3 53.7 67 68 ------ ------ --- --- ------ ------ --- --- Total Net Sales $ 45.2 $ 43.3 100% 100% $ 88.1 $ 78.8 100% 100% ------ ------ --- --- ------ ------ --- --- ------ ------ --- --- ------ ------ --- --- </TABLE> Net sales increased 4.4% and 11.8% for the three- and six-month periods, respectively, over the comparable periods of the prior year. Sales volume increases during the most recent quarter were principally derived from FOSSIL Leather and Sunglass product lines and from the opening of an additional twelve FOSSIL outlet and two FOSSIL retail stores after June 1995. Although Fossil's European-based operations were the largest contributors to sales volume increases for the six-month period ended June 30, 1996, their net sales increases for the 1996 second quarter amounted to 9% as compared to 46% in the first quarter of the current year. International net sales in total were down 1.4% and up 18.7% for the three- and six-month periods ended June 30, 1996, respectively , as compared to the comparable periods in 1995. A decrease in domestic sales of FOSSIL branded and Licensed watches in the first half of 1996 from their sales totals during the comparable period in 1995, also negatively impacted the sales volume growth. Management believes that International net sales volumes attained during the second quarter of 1996 by poor economic conditions in Germany, and the Company's decision to terminate its sales force in France. Sales within Germany were also negatively effected by a large sales promotion by one of the Company's main competitors and the Company's decision to replace a key distributor in Germany. International export sales to distributors have slowed in the second quarter of 1996 in comparison to the comparable quarter in 1995, due mainly to a slowdown in the retail sales environment in several countries and a consumer preference shift to metal banded watches (as opposed to leather strap products which represents the majority of the Company's distributors' inventory). Efforts on the part of the Company's major domestic customers to decrease inventory levels in order to increase their inventory turnover rate, which first began in late June 1995, resulted in decreases in FOSSIL branded watch purchase order volumes in comparison to last year. Licensing product sales, under the FOSSIL label, have declined in the current year due to intentional efforts by the Company, started in the later half of 1995, to decrease Fossil's percentage of business in limited licensed products. GROSS PROFIT. Gross profit margins for the three- and six-month periods ended June 30, 1996 were 49.7% and 47.1%, respectively, as compared to 46.1% and 46.5%, respectively, for the comparable periods during 1995. The increase in gross profit margins is primarily attributable to an increase in the amount of the Company's watch -8-
products supplied by Fossil's majority owned factories and an increase in the percentage of sales mix generated by products that generally provide higher gross profit margins than the Company average, including Sunglass product sales and sales derived from Fossil-owned outlet and retail stores. In addition, based on the recent strength of the U.S. dollar over the Japanese Yen, the Company was able to decrease the purchase cost of certain of its watch products. Management believes that the Company's gross profit margins for the remainder of the year will approximate the level achieved over the full six-month period ended June 30, 1996. OPERATING EXPENSES. Selling, general and administrative expenses increased as a percentage of net sales for the three- and six-month periods ended June 30, 1996, to 39.5% and 37.0%, respectively, from 34.2% and 34.4%, for 1995, respectively. The aggregate increase in operating expenses was due principally to increased sales volumes, the operating costs of Fossil Japan, which was acquired in April 1996, and from the operations of the Company's outlet and retail stores, the majority of which commenced operations after June 1995. The Company's international operations historically operate at a higher operating expense ratio to sales than domestically due to generally higher advertising and sales-related expenses in distributing the products and in building FOSSIL brand name recognition. In addition, the operating expense ratio derived from FOSSIL outlet and retail stores is historically substantially higher than the consolidated average. During the second quarter of 1996, the shortfall in planned international sales significantly increased the operating expense percentage of net sales as fixed costs and committed advertising campaigns were not correspondingly reduced in relation to the sales shortfall. For the remainder of the year, management believes that operating expenses as a percentage of sales may decrease as increased sales levels permit the Company to more fully leverage its operating expenses. PROVISION FOR INCOME TAXES. The Company's effective tax rate increased for the three- and six-month periods ended June 30, 1996 to 42.1% and 41.1%, respectively, from 38.9% from both the respective periods in 1995. This increase resulted primarily from losses incurred in countries where the Company has recently commenced operations or such foreign locations have continued to generate losses from inception. The Company will not recognize any tax benefits in these countries until realization is assured. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1996, the Company had working capital in excess of $52 million and approximately $8 million in cash. As of August 9, 1996, the Company had approximately $22 million borrowed against its combined $38 million bank credit facilities. The current bank borrowings are primarily related to financing the growth of international operations as well as the construction and furnishing costs of the Company's main U.S. facility. In addition, the Company historically has required additional financing to accumulate inventory and finance the build-up in accounts receivable beginning in the second quarter. These financing needs have historically peaked in the September-November time frame. For the six-month period ended June 30, 1996, the Company had a net cash outflow from operations. This was primarily caused by payment of income taxes in the second quarter and an increase in the Company's trade receivable balances. Management believes that the Company will be cash flow positive from its operations for the 1996 year. The Company believes that its cash flow from operations and its existing bank credit facilities will be sufficient to satisfy its working capital and capital expenditures requirements for at least the next twelve months. -9-
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 16, 1996. At such meeting, the stockholders elected directors of the Company and no other matters were voted on at the meeting. A total of 11,931,993 shares were represented at the meeting. The tabulation of nominees is as follows: Director Nominee For Against Abstain Withheld - ---------------- --- ------- ------- -------- Kenneth W. Anderson 11,916,659 15,334 Michael W. Barnes 11,916,159 15,834 Alan J. Gold 11,914,659 17,334 Kosta N. Kartsotis 11,916,159 15,834 Tom Kartsotis 11,915,959 16,034 Alan D. Moore 11,911,159 20,834 Jal S. Shroff 11,916,459 15,534 Donald J. Stone 11,916,659 15,334 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Second Amendment to Second Amended and Restated Loan Agreement, dated May 3, 1996. Exhibit 27 (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the period ended June 30, 1996. PART III - 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. /s/ Randy S. Kercho -------------------------------------- Randy S. Kercho Vice President and Chief Financial Officer Date: August 14, 1996
INDEX TO EXHIBITS 10.1 Exhibit A Second Amendment to Second Amended and Restated Loan Agreement, dated May 3, 1996 27 Exhibit 27 Financial Data Schedule -10-