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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(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
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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
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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
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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.
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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>
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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 were negatively affected by poor economic conditions
in Germany, and the Company's decision to terminate its sales force in
France. Sales within Germany were also negatively affected by a large sales
promotion supplied 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
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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.
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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
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Randy S. Kercho
Vice President and Chief Financial Officer
Date: August 16, 1996
