SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 31, 1997
FOSSIL, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-19548 75-2018505
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
2280 N. Greenville Avenue
Richardson, Texas 75082
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-2525.
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ITEM 5. OTHER EVENTS.
Ownership of the Common Stock and other securities of Fossil, Inc. (the
"Company") involves certain risks. Holders of the Company's securities and
prospective investors should carefully consider the following risk factors in
evaluating an investment in the Company's securities.
RETAIL INDUSTRY CONDITIONS
The Company's business is subject to economic cycles. Purchases of
discretionary fashion accessories, such as the Company's watches, handbags,
sunglasses and other products, tend to decline during recessionary periods, when
disposable income is low and consumers are hesitant to use available credit. Any
significant declines in general economic conditions or uncertainties regarding
future economic prospects that affect consumer spending habits could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company, like many of its competitors, sells to department stores
and other major retailers, some of whom have engaged in leveraged buyouts or
other transactions in which such retailers have incurred significant amounts of
debt. In recent years, a number of the retailers to whom the Company sells its
products have experienced financial difficulties, and some of these retailers
are currently operating under the protection of the federal bankruptcy laws or
state insolvency laws or may in the future file for relief under such laws. In
connection with bankruptcy and insolvency proceedings, amounts owed to the
Company by retailers for shipments of goods made prior to the commencement of
such proceedings may be discharged. In addition, the payment of amounts owed to
the Company for shipments of goods made after the commencement of such
proceedings may under certain circumstances be subject to the claims of pre- and
post-petition secured creditors and other administrative claimants. Accordingly,
in either case, amounts owed to the Company by retailers may not be collected in
whole or in part. It is also possible that amounts paid to the Company by
retailers prior to the commencement of bankruptcy proceedings may be subject to
recovery under bankruptcy laws relating to preferential payments. Additionally,
all or part of the operations of a retailer that seeks bankruptcy or other
debtor protection may be discontinued and sales of the Company's products to
such a retailer may be curtailed or terminated during the course of bankruptcy
or insolvency proceedings. In general, any significant increase in the financial
difficulties experienced by retailers to whom the Company sells its products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EXPANSION OF BUSINESS
During recent years, the Company has experienced rapid and
substantial growth in sales. However, the Company's business is subject to a
number of risks, any one of which could have a material adverse effect on its
business, financial condition and results of operations. These risks include the
financial difficulties experienced by a number of the retailers to whom the
Company sells its products, the uncertainties associated with changing fashion
trends and consumer preferences, and the Company's dependence on manufacturing
sources located in Hong Kong, over which China will resume sovereignty in 1997.
The Company's future operating results will also depend on a number of other
factors, including the demand for its products, the level of competition,
general economic conditions and other factors beyond the control of the Company.
Accordingly, there can be no assurance that the Company's recent growth in sales
will continue or that sales will not decline.
In view of the recent expansion of its business, the Company remains
vulnerable to a variety of business risks generally associated with young,
growing companies, as well as risks related to the diversification of its
product offerings. The Company's current expansion plans may place significant
strain on the Company's management, working capital, financial and management
control systems and staff. The failure to maintain or upgrade financial and
management control systems, to recruit additional staff or to respond
effectively to difficulties encountered during expansion could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has taken steps to ensure that its systems and
controls are adequate to address its current needs and is attempting to recruit
additional staff, there can be no assurance that the Company's systems and
controls or staff will be adequate to sustain future growth.
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A key element of the Company's business strategy is to expand the scope
of its product offerings. There can be no assurance that the expansion of the
Company's product offerings will be successful or that new products will be
profitable or generate sales comparable to those of its existing businesses.
Another element of the Company's business strategy is to place increased
emphasis on growth in selected international markets. There can be no assurance
that the Company's brand names and products will achieve a high degree of
consumer acceptance in these markets.
FASHION TRENDS
The Company's success depends upon its ability to anticipate and
respond to changing fashion trends and consumer preferences in a timely manner.
Although the Company attempts to stay abreast of emerging lifestyle and fashion
trends affecting accessories and apparel, any failure by the Company to identify
and respond to such trends could adversely affect consumer acceptance of its
existing brand names and product lines, which in turn could adversely affect the
Company's business, financial condition and results of operations. In this
regard, certain companies that have experienced rapid growth in sales of watches
and other fashion accessories have failed to sustain growth in sales or have
experienced declines in sales due to an inability to respond effectively to
changing consumer preferences. If the Company misjudges the market for its
products, it may be faced with a significant amount of unsold finished goods
inventory. Additionally, the Company has recently expanded and intends to
further expand the scope of its product offerings, and there can be no assurance
that new products introduced by the Company will achieve consumer acceptance
comparable to that of its existing product lines.
FOREIGN MANUFACTURING
The Company's products are currently manufactured to its specifications
by foreign independent contractors located in Hong Kong and China and, to a
lesser extent, Japan, Italy, Korea and Taiwan. The Company has no long-term
contracts with its manufacturing sources and competes with other companies for
production facilities. All transactions between the Company and its
manufacturing sources are conducted on the basis of purchase orders. Although
the Company believes that it has established close relationships with its
principal manufacturing sources, the Company's future success will depend upon
its ability to maintain close relationships with its current suppliers and to
develop long term relationships with other suppliers that satisfy the Company's
requirements for price and production flexibility.
The Company's businesses are subject to the risks generally associated
with doing business abroad, such as foreign governmental regulation,
fluctuations in foreign exchange rates and changes in economic conditions in the
countries in which the Company's manufacturing sources are located. The Company
cannot predict the effect that such factors will have on its business
arrangements with foreign manufacturing sources. If any such factors were to
render the conduct of business in a particular country undesirable or
impracticable, or if the Company's current foreign manufacturing sources were
for any other reason to cease doing business with the Company, such a
development could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's business is also
subject to the risks associated with the imposition of additional United States
legislation and regulations relating to imports, including quotas, duties,
tariffs or taxes, and other charges or restrictions on imports, which could
adversely affect the Company's operations and its ability to import products at
current or increased levels. The Company cannot predict whether additional
United States customs quotas, duties, tariffs, taxes or other charges or
restrictions will be imposed upon the importation of its products in the future,
or what effect such actions would have on its business, financial condition and
results of operations.
In addition, because a substantial portion of the Company's watches and
certain of its handbags, sunglasses and other products are manufactured in Hong
Kong, the Company's success will depend to a significant extent upon future
economic and social conditions existing in Hong Kong. In 1997, the People's
Republic of China will resume sovereignty over Hong Kong in accordance with the
Sino-British Joint Declaration of 1984 (the "Joint Declaration"). Although the
Joint Declaration establishes a framework for the continuation of existing
economic and social systems in Hong Kong after 1997, there can be no assurance
as to the manner in which such framework will be implemented or whether it will
be respected by the Chinese authorities. If the Company's manufacturing sources
in Hong Kong were disrupted for any reason, the Company believes that it could
arrange for the manufacture and shipment of watches by alternative sources after
a period of time. Because the establishment of new manufacturing relationships
involves numerous uncertainties, including those relating to payment terms,
costs of manufacturing, adequacy of manufacturing capacity, quality control
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and timeliness of delivery, the Company is unable to predict whether such
relationships would be on terms that the Company regards as satisfactory. Any
significant disruption in the Company's relationships with its manufacturing
sources located in Hong Kong would have a material adverse effect on the
Company's business, financial condition and results of operations.
The United States Trade Representative (the "USTR") has been directed
to designate those countries that deny adequate and effective intellectual
property rights or fair and equitable market access to United States firms that
rely on intellectual property. From the countries designated, the USTR is to
identify as "priority" foreign countries those countries where the lack of
intellectual property rights protection is most egregious and has the greatest
adverse impact on United States products. The USTR is directed to identify and
investigate as priority foreign countries only those that have not entered into
good faith negotiations or made significant progress in protecting intellectual
property. Where such an investigation does not lead to a satisfactory resolution
of such practices, through consultations or otherwise, the USTR is authorized to
take retaliatory action, including the imposition of retaliatory tariffs and
import restraints on goods from the priority foreign country.
The Company cannot predict whether any of the countries in which its
products are currently manufactured or any of the countries in which the Company
may manufacture its products in the future will be subject to an investigation
by the USTR. The Company cannot predict the likelihood, type or effect of any
trade retaliation as a result of such investigations. Trade retaliation in the
form of increased tariffs or quotas, or both, against products that are
manufactured on behalf of the Company now or in the future could increase the
cost or reduce the supply of such products available to the Company.
There have been a number of ongoing trade disputes between the United
States and China during which the United States has threatened to impose tariffs
and duties on some products imported from China and to withdraw China's "most
favored nation" status. There can be no assurance that legislation will not be
introduced in Congress seeking to place restrictions on the renewal of China's
most favored nation status or that China will continue to enjoy such status in
the future. If goods manufactured in China enter the United States without the
benefit of most favored nation treatment, such goods will be subject to
significantly higher duty rates. Any such increased duties would increase the
cost or reduce the supply of goods from China, although the Company believes
that it could replace such goods with items manufactured in other countries at
prices that would not materially affect its profit margins. Accordingly, the
Company believes that the expiration of China's most favored nation status would
not have a material adverse effect on the Company's financial condition or
results of operations.
DEPENDENCE ON KEY PERSONNEL
Since 1988, the Company has been under the management of Mr. Tom
Kartsotis, Chairman of the Board and Chief Executive Officer, and Mr. Kosta N.
Kartsotis, President and Chief Operating Officer. The future success of the
Company will be highly dependent upon the personal efforts of Messrs. Tom
Kartsotis and Kosta Kartsotis, and the loss of the services of either of them
could have a material adverse effect on the Company. The Company currently
maintains key man life insurance policies in the aggregate face amount of
$1,550,000 on the lives of Messrs. Tom Kartsotis and Kosta Kartsotis. The
Company has not entered into employment agreements with Messrs. Tom Kartsotis or
Kosta N. Kartsotis. The Company believes that its future success will also
depend upon its ability to attract and retain skilled design, marketing and
management personnel.
COMPETITION
There is intense competition in each of the businesses in which the
Company competes. The Company's watch business competes with a number of
established manufacturers, importers and distributors such as Guess? and Swatch.
In addition, the Company's leather goods and sunglass businesses compete with a
large number of established companies that have significantly greater experience
than the Company in designing, developing, marketing and distributing such
products. In all its businesses, the Company competes with numerous
manufacturers, importers and distributors who have significantly greater
financial, distribution, advertising and marketing resources than the Company.
The Company's competitors include distributors that import watches and
accessories from abroad, domestic companies that have established foreign
manufacturing relationships and companies that produce watches and accessories
domestically.
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SEASONALITY OF BUSINESS
The business of the Company is seasonal by nature. A significant
portion of the Company's net sales and operating income are generated during the
fourth quarter of its fiscal year, which includes the Christmas season. The
amount of net sales and operating income generated during the fourth quarter
depends upon the level of retail sales during the Christmas season, as well as
general economic conditions and other factors beyond the Company's control.
There can be no assurance that such factors will not adversely affect the
Company's net sales and operating income during the fourth quarter of its fiscal
year.
CONTROL BY PRINCIPAL STOCKHOLDERS
At March 31, 1997, Messrs. Tom Kartsotis and Kosta Kartsotis owned,
directly or indirectly, an aggregate of 7,800,599 shares of Common Stock of the
Company, representing 58.9% of the outstanding shares of Common Stock. As a
result, they will be in a position to control the Company through their ability
to determine the outcome of elections of the Company's directors, adopt, amend
or repeal the Bylaws and take certain other actions requiring the vote or
consent of the stockholders of the Company.
ANTI-TAKEOVER MATTERS
The Company's Certificate of Incorporation and Bylaws, as well as the
General Corporation Law of the State of Delaware (the "DGCL"), contain
provisions that may have the effect of discouraging a proposal for a takeover of
the Company. These include a provision in the Company's Certificate of
Incorporation authorizing the issuance of "blank check" preferred stock and
provisions in the Company's Bylaws establishing advance notice procedures with
respect to certain stockholder proposals and requiring that action taken by the
stockholders to remove a director without cause or to amend the Bylaws be
approved by an 80% stockholder vote. In addition, Section 203 of the DGCL limits
the ability of a Delaware corporation to engage in certain business combinations
with interested stockholders.
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SIGNATURE
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.
Dated: March 31, 1997
FOSSIL, INC.
By:/s/T.R.Tunnell
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Name: T.R. Tunnell
Title: Senior Vice President,
Development and Chief Legal Officer
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