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 1, 2000
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 11, 2000: 32,129,092.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
July 1, January 1,
2000 2000
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 81,849 $ 90,908
Short-term marketable investments 4,834 10,870
Accounts receivable - net 50,709 51,399
Inventories 96,554 63,029
Deferred income tax benefits 7,132 6,769
Prepaid expenses and other current assets 10,532 7,832
------ -----
Total current assets 251,610 230,807
Investment in joint venture 5,465 3,849
Property, plant and equipment - net 32,849 28,603
Intangible and other assets - net 6,249 6,105
----- -----
$ 296,173 $269,364
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,858 $ 5,043
Accounts payable 23,252 11,870
Accrued expenses:
Co-op advertising 10,893 15,191
Compensation 4,648 4,617
Other 16,169 21,493
Income taxes payable 18,096 17,395
------ ------
Total current liabilities 77,916 75,609
Minority interest in subsidiaries 3,093 2,558
Stockholders' equity:
Common stock, shares issued and
outstanding, 32,107,270 321 321
Additional paid-in capital 42,124 41,774
Retained earnings 177,122 153,569
Accumulated other comprehensive income (4,403) (3,259)
Treasury stock at cost, 59,572 shares at January 1, 2000 - (1,208)
------- -------
Total stockholders' equity 215,164 191,197
------- -------
$296,173 $269,364
======== ========
-1-
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands, except per share amounts)
For the 13 Weeks For the 13 For the 26 For the 26
Ended Weeks Ended Weeks Ended Weeks Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 113,393 $ 90,271 $ 216,962 $ 173,548
Cost of sales 56,833 45,521 106,743 86,126
------ ------ ------- ------
Gross profit 56,560 44,750 110,219 87,422
Operating expenses:
Selling and distribution 27,329 21,277 51,512 39,176
General and administrative 8,779 6,714 17,096 13,610
------ ------ ------ ------
Total operating expenses 36,108 27,991 68,608 52,786
------ ------ ------ ------
Operating income 20,452 16,759 41,611 34,636
Interest expense 18 24 45 49
Other income (expense) - net (185) (43) 88 (184)
------- ------- ------ -----
Income before income taxes 20,249 16,692 41,654 34,403
Provision for income taxes 8,301 6,826 17,078 14,106
------- ------- ------- ------
Net income $ 11,948 $ 9,866 $ 24,576 $ 20,297
Other comprehensive income:
Currency translation adjustment 841 (1,623) (1,188) (1,830)
Unrealized gain (loss) on short-term (33) (175) 44 (193)
------- ------- ------ -----
investments
Total comprehensive income $ 12,756 $ 8,068 $ 23,432 $ 18,274
========== ========= ========= =========
Earnings per share:
Basic $ 0.37 $ 0.31 $ 0.77 $ 0.64
========== ========= ========== ==========
Diluted $ 0.36 $ 0.29 $ 0.74 $ 0.61
========== ========= ========== ==========
Weighted average common shares outstanding:
Basic 32,107 31,809 32,108 31,611
====== ====== ====== ======
Diluted 33,236 33,448 33,255 33,267
====== ====== ====== ======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
FOSSIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
For the 26 Weeks For the 26 Weeks
Ended Ended
July 1, July 3,
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $24,576 $ 20,297
Noncash items affecting net income:
Minority interest in subsidiaries 1,028 1,027
Equity in losses of affiliate 385 -
Depreciation and amortization 2,936 2,593
Increase in allowance for doubtful accounts 468 501
Increase (decrease) in allowance for returns -
net of related inventory in transit (533) 636
Deferred income tax benefits (364) (921)
Changes in assets and liabilities:
Accounts receivable 70 3,203
Inventories (32,840) (17,236)
Prepaid expenses and other current assets (2,699) (2,783)
Accounts payable 11,192 (56)
Accrued expenses (9,592) 1,800
Income taxes payable 1,005 9,308
----- -----
Net cash (used in) from operating activities (4,368) 18,369
Investing activities:
Additions to property, plant and equipment (7,006) (5,786)
Sale of marketable investments 6,080 -
Investment in affiliate (2,000) -
Increase in intangible and other assets (321) (1,371)
----- -------
Net cash used in investing activities (3,247) (7,157)
Financing activities:
Issuance of common or treasury stock for stock option exercises 498 3,681
Purchase of treasury stock (267) -
Distribution of minority interest earnings (493) (790)
Repayments of notes payable-banks (185) (282)
----- -----
Net cash (used in) from financing activities (447) 2,609
Effect of exchange rate changes on cash and cash equivalents (997) (436)
----- -----
Net increase (decrease) in cash and cash equivalents (9,059) 13,385
Cash and cash equivalents:
Beginning of period 90,908 57,263
------ ------
End of period $81,849 $ 70,648
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
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 that are, in the opinion of management, necessary to
present a fair statement of the Company's financial position as of July 1, 2000,
and the results of operations for the thirteen-week periods ended July 1, 2000
and July 3, 1999. 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 1, 2000. Operating results for the thirteen-week period ended July
1, 2000, 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" and "RELIC" brands names.
The Company's products are sold primarily through department stores and other
major retailers, both domestically and in over 85 countries worldwide.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
July 1, January 1,
(In thousands) 2000 2000
---- ----
<S> <C> <C>
Components and parts $ 5,251 $ 5,568
Work-in-process 4,848 2,755
Finished merchandise on hand 68,186 38,595
Merchandise at Company stores 8,120 7,481
Merchandise in-transit from estimated
customer returns 10,149 8,630
------ -----
$96,554 $63,029
</TABLE>
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 1,
2000, the Company had hedge contracts to sell 24.9 million Euro Currency for
approximately $23.7 million, expiring through April 2001; 2.5 million British
Pound Sterling for approximately $3.7 million, expiring through January 2001;
and 143.4 million Japanese Yen for approximately $1.4 million, expiring through
December 2000.
-4-
<PAGE>
<TABLE>
<CAPTION>
3. GEOGRAPHIC INFORMATION
(In thousands)
For the 13 Weeks Ended For the 13 Weeks Ended
July 1, 2000 July 3, 1999
------------ ------------
Operating Operating
Net Sales Income Net Sales Income
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S.- exclusive of Stores:
External customers $ 62,813 $ 8,890 $ 48,530 $ 4,048
Intergeographic 13,317 - 363 -
Far East and Export:
External customers 16,354 9,361 15,040 9,342
Intergeographic 54,787 - 50,037 -
Stores 11,199 1,961 7,358 308
Europe 21,257 (17) 17,773 3,205
Japan 1,763 257 1,570 (144)
Intergeographic items (68,097) - (50,400) -
-------- --------- -------- -------
Consolidated $113,393 $20,452 $ 90,271 $16,759
======== ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the 26 Weeks Ended For the 26 Weeks Ended
July 1, 2000 July 3 , 1999
------------ -------------
Operating Operating
Net Sales Income Net Sales Income
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S.- exclusive of Stores:
External customers $128,010 $ 19,299 $ 99,746 $ 12,838
Intergeographic 30,417 - 2,259 -
Far East and Export:
External customers 24,572 17,393 21,155 15,176
Intergeographic 97,487 - 83,093 -
Stores 18,243 1,151 12,147 (289)
Europe 42,929 4,025 36,988 7,485
Japan 3,208 (257) 3,512 (574)
Intergeographic items (127,904) - (85,352) -
--------- --------- -------- --------
Consolidated $216,962 $ 41,611 $173,548 $ 34,636
======== ========= ======== ========
</TABLE>
-5-
<PAGE>
4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
<TABLE>
<CAPTION>
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 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS computation:
Numerator:
Net income $ 11,948 $ 9,866 $ 24,576 $ 20,297
-------- ------ -------- --------
Denominator:
Weighted average common
shares outstanding 32,107 31,809 32,108 31,656
Treasury stock - - - (45)
-------- ---------- --------
32,107 31,809 32,108 31,611
-------- ---------- -------- ------
Basic EPS $ 0.37 $ 0.31 $ 0.77 $ 0.64
========= ========= ======== ======
Diluted EPS computation:
Numerator:
Net income $ 11,948 $ 9,866 $ 24,576 $ 20,297
-------- -------- -------- --------
Denominator:
Weighted average common
shares outstanding 32,107 31,809 32,108 31,656
Stock option conversion 1,129 1,639 1,147 1,656
Treasury stock - - - (45)
--------- ---------- -------- -------
33,236 33,448 33,255 33,267
--------- ---------- -------- -------
Diluted EPS $ 0.36 $ 0.29 $ 0.74 $ 0.61
======== ========== ====== ======
</TABLE>
5. DEBT
In June 2000, the Company renewed its U.S. short-term revolving credit facility
for one year. 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-
<PAGE>
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 its majority owned subsidiaries (the "Company")
for the thirteen and twenty-six week periods ended July 1, 2000 (the "Second
Quarter" and "Year to Date Period," respectively), as compared to the thirteen
and twenty-six week periods ended July 3, 1999 (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 primarily a leader in the design, development, marketing and
distribution of contemporary, high quality fashion watches and accessories. The
FOSSIL brand name was developed by the Company 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 Company offering a diversified range of accessories and apparel. The Company's
current product offerings include an extensive line of fashion watches sold
under the FOSSIL and RELIC brands, complementary lines of small leather goods,
belts, handbags, sunglasses and FOSSIL brand apparel. In addition to developing
its own brands, the Company leverages its development and production expertise
by designing and manufacturing private label and licensed products for some of
the most prestigious companies in the world, including national retailers,
entertainment companies and fashion designers.
The Company's products are sold primarily to department stores and specialty
retail stores in over 85 countries worldwide through Company-owned foreign sales
subsidiaries and through a network of approximately 52 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.
Second Quarter & Company Highlights
o FOSSIL brand watch sales continued to show double-digit growth at retail.
o FOSSIL and RELIC brand leather products sales combined for net sales
increases of approximately 55% and 63% during the Second Quarter and
Year-To-Date Period, respectively. This increase was due to continued
strong retail demand for the Company's core and seasonal handbag products
as well a resurgence in the men's small leather goods business.
o RELIC brand watches, the Company-owned brand sold in leading national and
regional chain department stores, recorded sales volume growth exceeding
100% and 90% during the Second Quarter and Year-To-Date Period,
respectively.
o The Company continued to strengthen its licensed watch product line. The
DKNY brand watch line, which was launched during the first quarter of 2000,
generated sales of approximately $6.2 million and $10.6 million during the
Second Quarter and Year-To-Date Period, respectively. Additionally, sales
of EMPORIO ARMANI brand watches increased 21% over the Prior Year Quarter
to $8.5 million and increased 25% over the Prior Year YTD Period to $17.2
million.
o International sales continued to show strong growth despite the
strengthening of the U.S. dollar over the Euro. Overall sales volume growth
increased approximately 15% for both the Second Quarter
-7-
<PAGE>
and Year-To-Date Period. In a stable Euro currency environment, relative to
the Prior Year Quarter, sales volume growth would have been approximately
22%.
o The Company operated 35 outlet and 17 full-price retail stores at the end
of the Second Quarter compared to 30 outlet and 14 full-price retail stores
at the end of the Prior Year Quarter. This retail store expansion, as well
as increases in same store sales, generated sales volume growth in excess
of 50% for both the Second Quarter and Year-To-Date Period.
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 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
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
July 1, July 3, July 1, July 1, July 3, July 1,
2000 1999 2000 2000 1999 2000
---- ---- ---- ---- ---- ----
Net sales 100.0% 100.0% 25.6% 100.0% 100.0% 25.0%
Cost of sales 50.1 50.4 24.8 49.2 49.6 23.9
----- ----- ----- -----
Gross profit margin 49.9 49.6 26.4 50.8 50.4 26.1
Selling and distribution
expenses 24.1 23.6 28.4 23.7 22.6 31.5
General and administrative
expenses 7.7 7.4 30.8 7.9 7.9 25.6
----- ----- ---- ----
Operating income 18.1 18.6 22.0 19.2 19.9 20.1
Interest expense 0.0 0.0 (23.3) 0.0 0.0 (8.0)
Other income
(expense)- net (0.2) (0.1) 332.4 0.0 (0.1) (148.2)
----- ----- ---- -----
Income before income taxes 17.9 18.5 21.3 19.2 19.8 21.1
Income taxes 7.4 7.6 21.6 7.9 8.1 21.1
----- ----- ---- -----
Net income 10.5% 10.9% 21.1% 11.3% 11.7% 21.1%
========== ======= ======== =======
</TABLE>
-8-
<PAGE>
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
For the 13 Weeks Ended For the 13 Weeks Ended
---------------------- ----------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
International:
Europe $ 21.2 $ 17.1 19 % 21 %
Other 18.1 16.9 16 10
---- ---- -- --
Total International 39.3 34.0 35 31
---- ---- -- --
Domestic:
Watch products 43.6 35.8 38 44
Other products 19.2 13.1 17 16
---- ---- --- --
Total 62.8 48.9 55 60
Stores 11.3 7.3 10 9
---- --- -- --
Total Domestic 74.1 56.2 65 69
---- ---- --- --
Total Net Sales $113.4 $ 90.2 100 % 100 %
====== ====== === =====
</TABLE>
<TABLE>
<CAPTION>
Amounts % of Total
For the 26 Weeks Ended For the 26 Weeks Ended
---------------------- ----------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
International:
Europe $ 42.9 $ 36.4 20 % 21 %
Other 27.8 24.9 13 14
---- ---- -- --
Total International 70.7 61.3 33 35
---- ---- -- --
Domestic:
Watch products 85.0 72.1 39 42
Other products 43.0 28.0 20 16
---- ---- -- --
Total 128.0 100.1 59 58
Stores 18.3 12.1 8 7
---- ---- -- --
Total Domestic 146.3 112.2 67 65
----- ----- -- --
Total Net Sales $217.0 $173.5 100 % 100 %
====== ====== ===== =====
</TABLE>
Fueling top line sales growth during the Second Quarter was (a) increased sales
from the Company's European operations, including sales from its UK subsidiary
which was acquired during the third quarter of 1999, (b) Company-owned stores
expansion and same store sales increases which represented a 54% sales increase
over the Prior Year Quarter, (b) a 55% increase in the Company's domestic other
accessory product lines, primarily handbags and other FOSSIL branded leather
products, (c) continued double-digit sales increases in FOSSIL watches, (d) a
doubling of sales over the Prior Year Quarter from the Company's RELIC product
line and (e) DKNY licensed watch line sales of $6.2 million, which line was
launched during the First Quarter. Net Sales for the Year-To-Date Period were
favorably impacted from the same geographic regions and product lines that
contributed to the Second Quarter sales growth with domestic other accessories
increasing 63%, Company-owned stores increasing 50% and RELIC nearly doubling in
sales. DKNY licensed watch line sales for the Year-To-Date Period were $10.6
million. Additionally, the Second Quarter was favorably impacted by an $8.3
million international non-branded premium incentive sale, which represented a
$1.1 million increase over the comparable sale in the Prior Year Quarter. Sales
volume increases during the Second Quarter and Year-To-Date Period were
partially offset by decreases in the Company's private label watch line.
Management anticipates sales volume growth of 20% or more over the remainder of
2000 from increased sales of existing product lines and businesses as well as
new product lines scheduled to be launched.
-9-
<PAGE>
Gross Profit. Gross profit margins increased from 49.6% in the Prior Year
Quarter to 49.9% in the Second Quarter. For the Year-To-Date Period, gross
profit margins increased from 50.4% in the Prior Year YTD Period to 50.8%. The
increase, for both the Second Quarter and Year-To-Date Period, is primarily due
to the positive gross margin influence from a higher sales mix of licensed
designer watches and sales from Company-owned stores. In addition, gross profit
margins were favorably impacted from higher production levels in the Company's
foreign-based assembly facilities. These positive influences were partially
offset by the impact of the increase in sales of leather goods, which
historically generate gross profit margins below the Company's consolidated
average. Additionally, gross profit margins from the Company's European
operations decreased from the Prior Year Quarter and Prior Year YTD Period due
to the strengthening of the U.S. dollar against the Euro. In comparison to the
First Quarter's gross profit margin of 51.8%, Second Quarter and Year-To-Date
Period margins were impacted by the non-branded premium incentive sale (which
sale also took place during the Prior Year Quarter) that was sold at margins
well below margins normally achieved by the Company. Management believes the
Company's gross profit margins for the remainder of 2000 will be equal to, or
marginally above, the levels achieved during the comparable 1999 periods.
Operating Expenses. The aggregate increase in operating expenses for both the
Second Quarter and the Year-To-Date Period was due primarily to costs necessary
to support increased sales volumes. Total selling, general and administrative
expenses as a percentage of net sales, increased in the Second Quarter and
Year-To-Date Period compared to the Prior Year Quarter and Prior Year YTD
Period, respectively. These increases were primarily due to increased display
cost incurred in connection with the DKNY licensed watch line launch, the
continued roll-out of leather handbag fixtures and costs associated with the
addition of eight new Company-owned stores opened subsequent to the Prior Year
Quarter. Additionally, increased brand advertising, primarily through certain
internet portal relationships, and continued enhancement of the Company's web
site continued during the Second Quarter and added to the overall operating
expense increase. Management believes the operating expense ratio for the
remainder of 2000 will increase slightly compared to 1999 levels primarily as a
result of the Company continuing to enhance its brand advertising and continued
opening of new Company-owned store locations.
Other Income (Expense). Other income (expense) increased unfavorably by $142,000
during the Second Quarter as compared to the Prior Year Quarter. This increase
was primarily due to increases in minority interest expense generated as a
result of increased profitability from the Company's majority-owned subsidiaries
and losses associated with joint ventures. These increases in other expense were
partially offset by increased interest income generated from increased cash
levels. During the Year-To-Date Period, interest income surpassed the
aforementioned other expenses by approximately $272,000.
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 its cash holdings and short-term marketable securities to
$87 million in comparison to $71 million at the end of Prior Year Quarter.
However, the Company's cash and short-term marketable securities position
decreased by $15.1 million from the end of 1999 due to the accumulation of
inventory and the build-up in accounts receivable during the Year-To-Date
Period. The increase in inventory from the Prior Year Quarter was a result of
(a) inventories associated with a new watch assembly factory acquired during the
first quarter of 2000 (b) an increase in DKNY inventory levels to support
reorders, (c) an increase in the number of Company-owned stores, and (d)
increases associated with the Company's UK subsidiary which was acquired during
the third quarter of 1999. Accounts receivable increased approximately $12.3
million or 32% from the Prior Year Quarter on a sales increase of 26%. Accounts
receivable levels decreased from levels seen in the first quarter of 2000 by
approximately $7.5 million and days sales outstanding of 41 days for the Second
Quarter were comparable with the Prior Year Quarter. At the end of the Second
Quarter, the Company had working capital of $174 million compared to working
capital of $128 million and $155 million at the end of the Prior Year Quarter
and fiscal 1999 year-end, respectively. The Company had outstanding
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<PAGE>
borrowings of only $4.9 million against its combined $43 million bank credit
facilities at the end of the Second Quarter. 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 2000. The
actual results may differ materially from those expressed by these
forward-looking statements. Significant factors that could cause the Company's
2000 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational enterprise, the Company is exposed to changes in foreign
currency exchange rates. The Company employs a variety of practices to manage
this market risk, including its operating and financing activities and, where
deemed appropriate, the use of derivative financial instruments. Forward
contracts have been utilized by the Company to mitigate foreign currency risk.
The Company's most significant foreign currency risks relate to the Euro and the
Japanese Yen. The Company uses derivative financial instruments only for risk
management purposes and does not use them for speculation or for trading. There
were no significant changes in how the Company managed foreign currency
transactional exposures during the Second Quarter and management does not
anticipate any significant changes in such exposures or in the strategies it
employs to manage such exposures in the near future.
-11-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders (the "Meeting") on
May 24, 2000. At such Meeting, the stockholders elected three (3) Class II
directors of the Company and approved an increase in the number of authorized
shares of common stock, par value $0.01 of the Company ("Common Stock") from
50,000,000 to 100,000,000 shares. No other matters were voted on at the Meeting.
A total of 29,983,915 shares were represented at the Meeting.
The number of shares that were voted for, and that were withheld from,
each of the director nominees at the Meeting is as follows:
Director Nominee For Withheld
----------------------------------------------------
Kosta N. Kartsotis 29,834,014 149,901
Alan J. Gold 29,836,664 147,251
Michael Steinberg 29,836,164 147,751
The directors whose term of office as a director continued after the
Meeting are Tom Kartsotis, Michael W. Barnes, Jal S. Shroff, Kenneth Anderson
and Donald Stone.
The number of shares that were voted for, against and abstained from the
proposal to increase the number of authorized shares of Common Stock at the
Meeting is as follows:
For Against Abstain
------------------------------------------------------------
27,309,217 2,672,721 2,977
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of the Second Amended and
Restated Certificate of Incorporation of Fossil, Inc.
10.1 First Amendment to Fourth Amended and Restated Loan
Agreement dated June 27, 2000 by and among Wells Fargo
Bank Texas, National Association, a national banking
association formerly known as 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. (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.
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<PAGE>
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 14, 2000 /s/ Randy S. Kercho
-------------------
Randy S. Kercho
Executive Vice President
and Chief Financial Officer
(Principal financial and
accounting officer duly
authorized to sign on
behalf of Registrant)
-13-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
3.1 Certificate of Amendment of the Second Amended and Restated Certificate of
Incorporation of Fossil, Inc.
10.1 First Amendment to Fourth Amended and Restated Loan Agreement dated June
27, 2000 by and among Wells Fargo Bank Texas, National Association, a
national banking association formerly known as 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. (without exhibits).
27 Financial Data Schedule
