SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended: April 7, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission
file
number:0-19848
FOSSIL,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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|
75-2018505
|
(State
or other jurisdiction of incorporation
or
organization)
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|
(I.R.S.
Employer Identification No.)
|
2280
N. Greenville Avenue, 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 required 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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
The
number of shares of registrant's common stock outstanding as of July 27,
2007:
68,241,027
PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
|
FOSSIL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
UNAUDITED
AMOUNTS
IN THOUSANDS
|
|
April
7,
2007
|
|
|
January
6,
2007
|
|
|
|
|
|
|
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ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
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|
Cash
and cash equivalents
|
|
$ |
141,548
|
|
|
$ |
133,304
|
|
Securities
available for sale
|
|
|
7,199
|
|
|
|
6,894
|
|
Accounts
receivable – net of allowances of $34.3 million and $38.3 million for 2007
and 2006, respectively
|
|
|
151,886
|
|
|
|
155,236
|
|
Inventories
- net
|
|
|
235,627
|
|
|
|
228,225
|
|
Deferred
income tax assets
|
|
|
20,374
|
|
|
|
20,406
|
|
Prepaid
expenses and other current assets
|
|
|
45,439
|
|
|
|
36,923
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|
Total
current assets
|
|
|
602,073
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|
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|
580,988
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Investments
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|
11,866
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|
10,855
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Property,
plant and equipment – net of accumulated depreciation of $114,044 and
$109,183 for 2007 and 2006, respectively
|
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|
169,900
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171,499
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Goodwill
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|
44,638
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43,038
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Intangible
and other assets – net of accumulated amortization of
$4,335 and $3,990 for 2007 and 2006,
respectively
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46,468
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|
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46,217
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|
Total
assets
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$ |
874,945
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|
$ |
852,597
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
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Current
liabilities:
|
|
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|
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Short-term
debt
|
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$ |
11,474
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|
|
$ |
11,338
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|
Accounts
payable
|
|
|
46,401
|
|
|
|
53,306
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Accrued
accounts payable
|
|
|
22,525
|
|
|
|
23,562
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Compensation
|
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|
28,687
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|
28,896
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Coop
advertising
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|
8,615
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|
11,554
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|
Other
|
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|
34,734
|
|
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|
41,653
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Income
taxes payable
|
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|
36,906
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|
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|
53,071
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|
Total
current liabilities
|
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|
189,342
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|
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|
223,380
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Long-term
income taxes payable
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|
29,475
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|
-
|
|
Deferred
income tax liabilities
|
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|
15,623
|
|
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|
15,021
|
|
Other
long-term liabilities
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|
7,761
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|
7,893
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Total
long-term liabilities
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52,859
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22,914
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Minority
interest in subsidiaries
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|
3,243
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|
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|
4,102
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Stockholders’
equity:
|
|
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|
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Common
stock, 68,107 and 67,794 shares
issued, respectively
|
|
|
681
|
|
|
|
678
|
|
Additional
paid-in capital
|
|
|
56,939
|
|
|
|
53,459
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|
Retained
earnings
|
|
|
550,258
|
|
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|
529,376
|
|
Accumulated
other comprehensive income
|
|
|
23,617
|
|
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|
20,025
|
|
Treasury
stock at cost, 95 and 69 shares, respectively
|
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|
(1,994 |
) |
|
|
(1,337 |
) |
Total
stockholders’ equity
|
|
|
629,501
|
|
|
|
602,201
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|
Total
liabilities and stockholders’ equity
|
|
$ |
874,945
|
|
|
$ |
852,597
|
|
See
notes
to condensed consolidated financial statements.
FOSSIL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
AND
COMPREHENSIVE INCOME
UNAUDITED
AMOUNTS
IN THOUSANDS, EXCEPT PER SHARE DATA
|
|
For
the 13
Weeks
Ended
|
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|
For
the 14
Weeks
Ended
|
|
|
|
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Net
sales
|
|
$ |
304,825
|
|
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$ |
264,225
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Cost
of sales
|
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|
148,706
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131,211
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|
Gross
profit
|
|
|
156,119
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133,014
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Operating
expenses:
|
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Selling
and distribution
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86,367
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|
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|
84,980
|
|
General
and administrative
|
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|
37,197
|
|
|
|
31,042
|
|
Total
operating expenses
|
|
|
123,564
|
|
|
|
116,022
|
|
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|
|
|
|
|
|
|
Operating
income
|
|
|
32,555
|
|
|
|
16,992
|
|
Interest
expense
|
|
|
221
|
|
|
|
596
|
|
Other
income (expense) – net
|
|
|
1,495
|
|
|
|
(904 |
) |
Income
before income taxes
|
|
|
33,829
|
|
|
|
15,492
|
|
Provision
for income taxes
|
|
|
8,797
|
|
|
|
5,776
|
|
Net
income
|
|
$ |
25,032
|
|
|
$ |
9,716
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
Currency
translation adjustment
|
|
|
4,523
|
|
|
|
2,136
|
|
Unrealized
gain on securities available for sale
|
|
|
384
|
|
|
|
10
|
|
Forward
contracts hedging intercompany foreign currency payments – change in fair
values
|
|
|
(1,314 |
) |
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|
(783 |
) |
Total
comprehensive income
|
|
$ |
28,625
|
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|
$ |
11,079
|
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|
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|
Earnings
per share:
|
|
|
|
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Basic
|
|
$ |
0.37
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$ |
0.14
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|
Diluted
|
|
$ |
0.36
|
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|
$ |
0.14
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,576
|
|
|
|
67,258
|
|
Diluted
|
|
|
69,238
|
|
|
|
69,060
|
|
See
notes
to condensed consolidated financial statements.
FOSSIL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
AMOUNTS
IN THOUSANDS
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
For
the 14
Weeks
Ended
April
8, 2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,032
|
|
|
$ |
9,716
|
|
Noncash
items affecting net income:
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiaries
|
|
|
1,192
|
|
|
|
851
|
|
Equity
in earnings of joint venture
|
|
|
(327 |
) |
|
|
(269 |
) |
Depreciation
and amortization
|
|
|
8,031
|
|
|
|
7,805
|
|
Stock
- based compensation
|
|
|
458
|
|
|
|
387
|
|
Excess tax
benefits from stock-based compensation
|
|
|
(1,021 |
) |
|
|
(408 |
) |
Loss
(gain) on disposal of assets
|
|
|
76
|
|
|
|
(23 |
) |
Decrease
in allowance for doubtful accounts
|
|
|
(138 |
) |
|
|
(271 |
) |
Decrease
in allowance for returns - net of related inventory in
transit
|
|
|
(1,111 |
) |
|
|
(320 |
) |
Deferred
income taxes
|
|
|
(598
|
) |
|
|
(2,154 |
) |
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,400
|
|
|
|
20,578
|
|
Inventories
|
|
|
(10,203 |
) |
|
|
(11,529 |
) |
Prepaid
expenses and other current assets
|
|
|
(8,516 |
) |
|
|
(5,002 |
) |
Accounts
payable
|
|
|
(11,111 |
) |
|
|
(13,425 |
) |
Accrued
expenses
|
|
|
(11,725 |
) |
|
|
(4,938 |
) |
Income
taxes payable
|
|
|
9,524
|
|
|
|
5,908
|
|
Net
cash from operating activities
|
|
|
6,963
|
|
|
|
6,906
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Business
acquisitions, net of cash acquired
|
|
|
-
|
|
|
|
(6,075 |
) |
Additions
to property, plant and equipment
|
|
|
(4,006 |
) |
|
|
(14,764 |
) |
Purchase
of securities available for sale
|
|
|
(325 |
) |
|
|
(321 |
) |
Increase
in intangible and other assets
|
|
|
(448 |
) |
|
|
(558 |
) |
Net
cash used in investing activities
|
|
|
(4,779 |
) |
|
|
(21,718 |
) |
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
4,139
|
|
|
|
1,247
|
|
Acquisition
and retirement of common stock
|
|
|
(287 |
) |
|
|
(22,370 |
) |
Excess
tax benefits from stock - based compensation
|
|
|
1,021
|
|
|
|
408
|
|
Distribution
of minority interest earnings
|
|
|
(2,049 |
) |
|
|
(186 |
) |
Net
(payments) borrowings on short-term debt
|
|
|
(62 |
) |
|
|
38,165
|
|
Net
cash from financing activities
|
|
|
2,762
|
|
|
|
17,264
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
3,298
|
|
|
|
1,270
|
|
Net
increase in cash and cash equivalents
|
|
|
8,244
|
|
|
|
3,722
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
133,304
|
|
|
|
57,457
|
|
|
|
|
|
|
|
|
|
|
End
of period
|
|
$ |
141,548
|
|
|
$ |
61,179
|
|
See
notes
to condensed consolidated financial statements.
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
wholly and 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 April 7, 2007, and the results of operations for
the
thirteen-week period ended April 7, 2007 (“First Quarter”) and the fourteen-week
period ended April 8, 2006, (“Prior Year Quarter”), respectively. All
adjustments are of a normal, recurring nature. The Company noted that fiscal
2007 is a 52-week year as compared to a 53-week year in fiscal 2006. For
financial reporting purposes, this extra week was included in the first quarter
of fiscal year 2006.
These
interim financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the annual report
on Form
10-K filed by the Company pursuant to the Securities Exchange Act of 1934
(the
“Exchange Act”) for the year ended January 6, 2007. Operating results for the
thirteen week period ended April 7, 2007, are not necessarily indicative
of the
results to be achieved for the full year.
The
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
which require the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the periods reported.
Actual results could differ from those estimates. The Company has not made
any
changes in its significant accounting policies from those disclosed in its
most
recent annual report.
Business. The
Company is a global
design, marketing and distribution company that specializes in consumer
fashion
accessories. Its principal offerings include an extensive line
of men's and women's fashion watches and jewelry sold under proprietary and
licensed brands, handbags, small leather goods, belts, sunglasses, and
apparel.
In the watch and jewelry product category, the Company has a diverse portfolio
of globally recognized owned and licensed brand names under which its products
are marketed. The Company’s products are distributed globally through various
distribution channels including wholesale, owned-retail and direct to the
consumer at varying price points to service the needs of its customers,
whether
they are value conscious or luxury oriented. Based on its extensive range
of
accessory products, brands, distribution channels and price points, the
Company
is able to target style-conscious consumers across a wide age spectrum
on a
global basis.
Foreign
Currency Hedging Instruments. The Company’s foreign subsidiaries
periodically enter into forward contracts principally to hedge the future
payment of intercompany inventory transactions with the U.S. company. At
April
7, 2007, the Company’s foreign subsidiaries had forward contracts to sell (i)
49.6 million Euro for approximately $64.9 million, expiring through December
2007, (ii) 1.5 million British Pounds for approximately $3 million, expiring
through June 2007 and (iii) 92.5 million Yen for approximately $800,000,
expiring through April 2007. If the Company’s foreign subsidiaries were to
settle their Euro, British Pound and Yen based contracts at the reporting
date,
the net result would be a net loss of approximately $1.7 million net of taxes,
as of April 7, 2007. The net decrease in fair value for the First Quarter
and
the Prior Year Quarter of approximately $1.3 million and $800,000, respectively,
is included in other comprehensive income. The net decrease for the First
Quarter consisted of net losses from these hedges of $1.3 million offset
by
$44,000 of net losses reclassified into earnings.
Earnings
Per Share. The following table reconciles the numerators and
denominators used in the computations of both basic and diluted
EPS:
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
For
the 14
Weeks
Ended
April
8, 2006
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net
income
|
|
$ |
25,032
|
|
|
$ |
9,716
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
EPS computation:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
67,576
|
|
|
|
67,258
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
0.37
|
|
|
$ |
0.14
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS computation:
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
67,576
|
|
|
|
67,258
|
|
Dilutive
effect of stock-based compensation
|
|
|
1,662
|
|
|
|
1,802
|
|
Weighted
average common shares outstanding
|
|
|
69,238
|
|
|
|
69,060
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$ |
0.36
|
|
|
$ |
0.14
|
|
Approximately 700,000
and 1.1 million weighted average shares issuable under stock-based awards
were
not included in the diluted earnings per share calculation at the end of
the
First Quarter and the Prior Year Quarter, respectively, because they were
antidilutive. These common share equivalents may be dilutive in future earnings
per share calculations.
Goodwill.
The
changes
in the carrying amount of goodwill, which is not subject to amortization,
are as
follows:
IN
THOUSANDS
|
|
United
States
|
|
|
Europe
|
|
|
Other
International
|
|
|
Direct
to
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 6, 2007
|
|
$ |
21,799
|
|
|
$ |
17,518
|
|
|
|
3,721
|
|
|
$ |
-
|
|
|
$ |
43,038
|
|
Acquisitions
|
|
|
-
|
|
|
|
- |
|
|
|
1,326
|
|
|
|
-
|
|
|
|
1,326
|
|
Currency
|
|
|
-
|
|
|
|
297
|
|
|
|
(23 |
) |
|
|
-
|
|
|
|
274
|
|
Balance
at April 7, 2007
|
|
$ |
21,799
|
|
|
$ |
17,815
|
|
|
|
5,024
|
|
|
$ |
-
|
|
|
$ |
44,638
|
|
New
Accounting Standards.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (“SFAS 157”). This Standard provides guidance for using
fair value to measure assets and liabilities. Under SFAS 157, fair value
refers
to the price that would be received to sell an asset or paid to transfer
a
liability in an orderly transaction between market participants in the market
in
which the reporting entity transacts. SFAS 157 is effective beginning in
the
Company's fiscal year 2008. The Company is currently evaluating the effect
of
adopting SFAS 157, but does not expect it to have a material impact on its
consolidated results of operations or financial condition.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
–
Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The fair
value option permits entities to choose to measure eligible financial
instruments at fair value at specified election dates. The entity will report
unrealized gains and losses on the items on which it has elected the fair
value
option in earnings. SFAS 159 is effective beginning in the Company's fiscal
year 2008. The Company is currently evaluating the effect of adopting SFAS
159,
but does not expect it to have a material impact on its consolidated results
of
operations or financial condition.
There
are
no other recently issued accounting standards effective after April 7, 2007
that are expected to materially impact the Company.
Inventories
- net consist of the following:
Fiscal
Year
|
|
April
7,
2007
|
|
|
January
7,
2006
|
|
|
|
IN
THOUSANDS
|
|
Components
and parts
|
|
$ |
7,681
|
|
|
$ |
9,786
|
|
Work-in-process
|
|
|
1,659
|
|
|
|
1,691
|
|
Finished
merchandise on hand
|
|
|
186,488
|
|
|
|
175,519
|
|
Merchandise
at Company stores
|
|
|
33,315
|
|
|
|
31,807
|
|
Merchandise
from estimated customer returns
|
|
|
18,695
|
|
|
|
21,496
|
|
|
|
|
247,838
|
|
|
|
240,299
|
|
Inventory
reserve for obsolescence
|
|
|
(12,211 |
) |
|
|
(12,074 |
) |
Inventories
- net
|
|
$ |
235,627
|
|
|
$ |
228,225
|
|
The
provision for income taxes reflects the Company’s estimate of the effective tax
rate expected to be applicable for the full fiscal year, adjusted for any
discrete events, which are reported in the period that they
occur. This estimate is re-evaluated each quarter based upon the
Company’s estimated tax expense for the full fiscal year. The
Company’s income tax expense for the First Quarter and Prior Year Quarter was
$8.8 million and $5.8 million, respectively, resulting in an effective income
tax rate of 26% and 37.3%, respectively. The lower effective rate for
the First Quarter is the result of the release of $3.9 million in certain
income
tax contingency reserves related to our federal income tax return for 2003
that
were effectively settled during the First Quarter when the Internal Revenue
Service (“IRS”) completed its examination phase of its audit of our 2003
and 2004 federal income tax returns.
Effective
January 7, 2007, the Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109, (“FIN 48”). Under FIN 48, the Company must
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by
the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. This
interpretation also provides guidance on de-recognition of income tax assets
and
liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures. The cumulative effects of applying this interpretation have
been
recorded as a decrease of $6.1 million to retained earnings, an increase
of $1.3
million to net deferred income tax liabilities, and an increase of $4.8 million
in
the liability for uncertain tax benefits as of January 7,
2007.
The
Company has classified uncertain tax positions as long-term income taxes
payable
unless such amounts are expected to be paid in twelve months. Consistent
with its past practice, the Company recognizes interest and/or penalties
related
to income tax overpayments and underpayments in income tax expense and income
taxes payable. The total amount of accrued income tax-related interest and
penalties included in the condensed consolidated balance sheet at April 7,
2007
and at adoption was $9.5 million (net) and $9.4 million (net),
respectively.
As
of
April 7, 2007 and January 7, 2007, the total amount of unrecognized tax
benefits, including interest and penalties, was $53.2 million and $55.5
million, respectively, of which $38.6 million and $40.9 million would favorably
impact the effective tax rate in future periods, if recognized. As of
January 7, 2007, the Company was subject to an IRS examination for the 2003
and
2004 tax years. The Company is also subject to examinations in various state
and
foreign jurisdictions for the 2001-2006 tax years, none of which are
individually significant. During the First Quarter, the examination phase
of the
IRS audit for tax years 2003 and 2004 was completed. The IRS has
proposed certain adjustments and the Company has filed a protest at this
time. This protest is under review by the IRS Office of Appeals and
it is possible that it may be resolved within the next 12 months. The
Company has recorded $20.3 million of unrecognized tax benefits for positions
that could be settled within the next twelve months. At this time, an
estimate of the range of the reasonably possible outcomes cannot be
made. Audit
outcomes and the timing of audit settlements are subject to significant
uncertainty.
4.
|
STOCK-BASED
COMPENSATION PLANS
|
The
Company accounts for stock-based compensation in accordance with the provisions
of Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment (“SFAS 123R”) using the Black-Scholes option pricing model to
determine the fair value of stock options at the date of grant. The
Company’s current stock-based compensation plans include: a) stock options and
restricted stock for its international employees, b) stock options for its
non-employee directors, and c) stock appreciation rights, restricted stock
and
restricted stock units for its U.S.-based employees. Prior to 2006,
the Company’s stock based-compensation plans included stock options for its
non-employee directors and stock options and restricted stock for its employees,
including its executive officers.
Long
Term Incentive Plan. Designated employees of the Company,
including officers, are eligible to receive a) stock options, b) stock
appreciation rights, c) restricted or non-restricted stock awards, d) restricted
stock units, e) cash awards or f) any combination of the
foregoing. The current stock options, stock appreciation rights,
restricted stock and restricted stock units outstanding include an original
vesting term ranging from three to five years. All stock options,
stock appreciation rights, restricted stock and restricted stock units are
accounted for at fair value at the date of grant. All stock
appreciation rights and restricted stock units are settled in shares of company
stock.
Restricted
Stock Plan. Shares awarded under the Restricted Stock Plan
have been funded with shares contributed to the Company from a significant
stockholder. As of April 7, 2007, approximately 82,000 shares issued to
employees in prior years were forfeited and are held in the Company treasury
to
be issued as future awards are granted. The current restricted shares
outstanding include an original vesting term ranging from one to nine years.
These shares are accounted for at fair value at the date of grant.
Non-employee
Director Stock Option Plan. During the first year
individuals are elected as non-employee directors of the Company, they receive
a
grant of 5,000 non-qualified stock options. In addition, on the first day
of
each subsequent calendar year, each non-employee director automatically receives
a grant of an additional 4,000 nonqualified stock options as long as
the individual is serving as a non-employee director. Pursuant to this
plan, 50% of the options granted will become exercisable on the first
anniversary of the date of grant and in two additional installments of 25%
on
the second and third anniversaries. All stock options granted under this
plan
are accounted for at fair value at the date of grant.
The
following table summarizes stock option and stock appreciation right activity
during the First Quarter:
Options
and Stock Appreciation Rights
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
IN
THOUSANDS
|
|
|
|
|
|
|
|
|
IN
THOUSANDS
|
|
Outstanding
at January 6, 2007
|
|
|
4,924
|
|
|
$ |
14.28
|
|
|
|
5.0
|
|
|
$ |
70,324
|
|
Granted
|
|
|
110
|
|
|
$ |
23.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(319 |
) |
|
$ |
12.99
|
|
|
|
|
|
|
$ |
4,177
|
|
Forfeited
or expired
|
|
|
(50 |
) |
|
$ |
20.48
|
|
|
|
|
|
|
|
|
|
Outstanding
at April 7, 2007
|
|
|
4,665
|
|
|
$ |
14.53
|
|
|
|
5.2
|
|
|
$ |
67,794
|
|
Exercisable
at April 7, 2007
|
|
|
4,052
|
|
|
$ |
13.92
|
|
|
|
4.9
|
|
|
$ |
56,416
|
|
Nonvested
at April 7, 2007
|
|
|
613
|
|
|
$ |
18.55
|
|
|
|
7.4
|
|
|
$ |
11,378
|
|
Expected
to vest |
|
|
552 |
|
|
$ |
18.55 |
|
|
|
7.4 |
|
|
$ |
10,240 |
|
The
aggregate intrinsic value in the table above is before income taxes and is
based
on the exercise price for outstanding and exercisable options/rights at April
7,
2007 and based on the fair market value on the exercise date for options/rights
that have been exercised during the First Quarter.
Options
and Stock Appreciation Rights Outstanding and
Exercisable. The following table summarizes information with
respect to options and stock appreciation rights outstanding and exercisable
at
April 7, 2007 (not in millions):
|
|
|
Options
and Stock Appreciation Rights
Outstanding
|
|
|
Options
and Stock Appreciation Rights Exercisable
|
|
Range
of
Exercise
Prices
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Yrs.)
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00
– $3.14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
3.14
– 6.28
|
|
|
|
442.1
|
|
|
|
4.71
|
|
|
|
1.7
|
|
|
|
442.1
|
|
|
|
4.71
|
|
6.28
– 9.42
|
|
|
|
1,414.4
|
|
|
|
8.31
|
|
|
|
3.4
|
|
|
|
1,414.4
|
|
|
|
8.31
|
|
9.42
– 12.56
|
|
|
|
672.8
|
|
|
|
11.57
|
|
|
|
5.3
|
|
|
|
558.2
|
|
|
|
11.56
|
|
12.56
– 15.70
|
|
|
|
99.5
|
|
|
|
13.33
|
|
|
|
5.4
|
|
|
|
81.4
|
|
|
|
13.29
|
|
15.70
– 18.83
|
|
|
|
344.4
|
|
|
|
18.38
|
|
|
|
7.6
|
|
|
|
108.9
|
|
|
|
18.39
|
|
18.83
– 21.97
|
|
|
|
774.3
|
|
|
|
19.25
|
|
|
|
6.6
|
|
|
|
686.7
|
|
|
|
19.19
|
|
21.97
– 25.11
|
|
|
|
147.1
|
|
|
|
23.01
|
|
|
|
7.9
|
|
|
|
35.3
|
|
|
|
23.53
|
|
25.11
– 28.25
|
|
|
|
682.9
|
|
|
|
25.83
|
|
|
|
7.4
|
|
|
|
637.1
|
|
|
|
25.83
|
|
28.25
– 31.39
|
|
|
|
87.7
|
|
|
|
29.50
|
|
|
|
7.4
|
|
|
|
87.8
|
|
|
|
29.50
|
|
Total
|
|
|
|
4,665.2
|
|
|
|
14.53
|
|
|
|
5.2
|
|
|
|
4,051.9
|
|
|
|
13.92
|
|
The
Company has elected to apply the long-form method to determine the hypothetical
additional paid-in capital (“APIC”) pool provided by FSP SFAS 123(R) — 3,
(Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards). The Company had determined that a
hypothetical pool of excess tax benefits existed in APIC as of January 1,
2006,
the date of adoption of SFAS 123R, related to historical stock option
exercises. In future periods, excess tax benefits resulting from option
and stock appreciation right exercises will be recognized as additions to
APIC
in the period the benefit is realized. In the event of a shortfall (that
is, the tax benefit realized is less than the amount previously recognized
through periodic stock-based compensation expense recognition and related
deferred tax accounting), the shortfall would be charged against APIC to
the
extent of previous excess benefits, if any, including the amounts included
in
the hypothetical APIC pool, and then to tax expense.
Restricted
Stock and Restricted Stock Units. The following table summarizes
restricted stock and restricted stock unit activity during the First
Quarter:
|
|
|
|
|
Weighted
Average
|
|
Restricted
Stock and Restricted Stock Units
|
|
Shares
|
|
|
Grant-Date
Fair Value
|
|
|
|
IN
THOUSANDS
|
|
|
|
|
Nonvested
at January 6, 2007
|
|
|
435
|
|
|
$ |
18.62
|
|
Granted
|
|
|
102
|
|
|
$ |
25.27
|
|
Vested
|
|
|
(67 |
) |
|
$ |
17.62
|
|
Forfeited
|
|
|
(7 |
) |
|
$ |
18.41
|
|
Nonvested
at April 7, 2007
|
|
|
463
|
|
|
$ |
20.24
|
|
Expected
to vest |
|
|
417 |
|
|
$ |
20.24 |
|
The
total
fair value of shares/units vested during the First Quarter was $1.7
million.
The
Company manages its business primarily on a geographic basis. The Company’s
reportable operating segments are comprised of the United States, Europe,
Other
International and Direct to Consumer. The United States, Europe, and Other
International reportable segments do not include activities related to the
Direct to Consumer segment. The Europe segment primarily
includes sales to wholesale or distributor customers based in European countries
as well as the Middle East and Africa. The Other International
segment primarily includes sales to wholesale or distributor customers based
in
Australia, Canada, China (including the Company’s assembly and procurement
operations), Indonesia, Japan, Korea, Malaysia, Mexico, Singapore, South
America
and Taiwan. The direct to consumer segment includes company-owned retail
stores
and sales generated from e-commerce activities. Each reportable
operating segment provides similar products and services.
The
Company evaluates the performance of its operating segments based on net
sales
and operating income. Net sales for geographic segments are generally based
on
the location of the customers. Operating income for each segment includes
net
sales to third parties, related cost of sales and operating expenses directly
attributable to the segment. Operating income for each segment
includes the impact of intercompany profits associated with the sale of products
by one segment to another. Costs associated with various corporate
expenses and amounts related to intercompany eliminations are not allocated
to
the various segments but are included in the U.S. wholesale segment.
Intercompany sales of products between segments are referred to as intersegment
items. Corporate assets including cash, short-term investments and certain
intangible assets are included in the United States wholesale
segment. Summary information by operating segment
follows:
|
|
For
the 13 Weeks Ended
April
7, 2007
|
|
|
For
the 14 Weeks Ended
April
8, 2006
|
|
|
|
Net
Sales
|
|
|
Operating
Income
(Loss)
|
|
|
Net
Sales
|
|
|
Operating
Income
(Loss)
|
|
|
|
IN
THOUSANDS
|
|
U.S.
wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
$ |
106,635
|
|
|
$ |
(3,370 |
) |
|
$ |
106,519
|
|
|
$ |
(9,140 |
) |
Intersegment
|
|
|
32,566
|
|
|
|
-
|
|
|
|
28,287
|
|
|
|
-
|
|
Direct
to consumer
|
|
|
47,238
|
|
|
|
426
|
|
|
|
38,982
|
|
|
|
(449 |
) |
Europe
– wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
|
100,624
|
|
|
|
17,695
|
|
|
|
81,275
|
|
|
|
6,941
|
|
Intersegment
|
|
|
57,299
|
|
|
|
-
|
|
|
|
47,944
|
|
|
|
-
|
|
Other
international – wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
|
50,328
|
|
|
|
17,804
|
|
|
|
37,449
|
|
|
|
19,640
|
|
Intersegment
|
|
|
87,811
|
|
|
|
-
|
|
|
|
80,542
|
|
|
|
-
|
|
Intersegment
items
|
|
|
(177,676 |
) |
|
|
-
|
|
|
|
(156,773 |
) |
|
|
-
|
|
Consolidated
|
|
$ |
304,825
|
|
|
$ |
32,555
|
|
|
$ |
264,225
|
|
|
$ |
16,992
|
|
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 wholly and majority-owned subsidiaries for the thirteen
week period ended April 7, 2007 (the “First Quarter”), as compared to the
fourteen week period ended April 8, 2006 (the “Prior Year
Quarter”). We estimate that this extra week in the Prior Year Quarter
increased net sales and operating expenses by approximately $16 million and
$5
million, respectively. This discussion should be read in conjunction
with the Condensed Consolidated Financial Statements and the related Notes
attached hereto.
General
We
are a
global design, marketing and distribution company that specializes in consumer
fashion accessories. Our principal offerings include an extensive line
of men's and women's fashion watches and jewelry sold under proprietary and
licensed brands and handbags, small leather goods, belts, sunglasses, and
apparel. In the watch and jewelry product category, we have a diverse portfolio
of globally recognized owned and licensed brand names under which our products
are marketed. Our products are distributed globally through various distribution
channels including wholesale, export and direct to the consumer at varying
price
points to service the needs of our customers, whether they are value conscious
or luxury oriented. Based on our extensive range of accessory products, brands,
distribution channels and price points, we are able to target style-conscious
consumers across a wide age spectrum on a global basis.
Domestically,
we sell our products through a diversified distribution network that includes
department stores, specialty retail locations, specialty watch and jewelry
stores, owned retail and factory outlet stores, mass market stores, owned
and
affiliated internet sites and through our FOSSIL catalog. Our
wholesale customer base includes Neiman Marcus, Nordstrom, Macy’s, Dillard’s,
JCPenney, Kohl’s, Sears, Wal-Mart and Target. We also sell
our products in
the United States through a network of company-owned stores, which
includes 80 retail stores located in premier retail sites and 73 outlet
stores located in major outlet malls as of April 7, 2007. In
addition, we offer an extensive collection of our FOSSIL brand products
through
our catalog and at our web site, www.fossil.com
as well as proprietary and licensed watch and jewelry brands through other
managed and affiliated websites.
Internationally,
our products are sold to department stores, specialty retail stores and
specialty watch and jewelry stores in over 90 countries worldwide through
21
company-owned foreign sales subsidiaries and through a network of approximately
56 independent distributors. Our products are distributed in Africa, Asia,
Australia, Europe, Central and South America, Canada, the Caribbean, Mexico,
and
the Middle East. Our
products are offered on airlines,
cruise
ships and in
international company-owned retail stores, which included 44
accessory retail stores and
4
outlet stores in select
international markets as of April
7, 2007.
Additionally, our products
are sold through independently-owned FOSSIL retail
stores and kiosks in
certain international markets.
Significant
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to product returns, bad
debts,
inventories, long-lived asset impairment, impairment of goodwill and income
taxes. We base these estimates and judgments on historical experience and
on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe there have been no changes to the
significant accounting policies disclosed in Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in
the Form 10-K filed for the year ended January 6, 2007.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair Value Measurements (“SFAS 157”). This Standard provides
guidance for using fair value to measure assets and liabilities. Under SFAS
157,
fair value refers to the price that would be received to sell an asset or
paid
to transfer a liability in an orderly transaction between market participants
in
the market in which the reporting entity transacts. SFAS 157 is effective
beginning in our fiscal year 2008. We are currently evaluating the effect
of
adopting SFAS 157, but do not expect it to have a material impact on our
consolidated results of operations or financial condition.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
–
Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The
fair value option permits entities to choose to measure eligible financial
instruments at fair value at specified election dates. The entity will report
unrealized gains and losses on the items on which it has elected the fair
value
option in earnings. SFAS 159 is effective beginning in our fiscal year
2008. We are currently evaluating the effect of adopting SFAS 159, but do
not
expect it to have a material impact on our consolidated results of operations
or
financial condition.
Results
of Operations
The
following table sets forth, for the periods indicated, (i) the percentages
of
our net sales represented by certain line items from our condensed consolidated
statements of income and comprehensive income and (ii) the percentage changes
in
these line items. Fiscal 2007 is a 52-week year as compared to a 53-week
year in
fiscal 2006. This extra week was included in our first quarter of fiscal
year
2006. We estimate the extra week in our fiscal 2006 first quarter
increased net sales and operating expenses by approximately $16.0 million
and $5
million, respectively.
|
|
Percentage
of
Net
Sales
|
|
|
Percentage
Change
|
|
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
For
the 14
Weeks
Ended
April
8, 2006
|
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
15.4 |
% |
Cost
of sales
|
|
|
48.8
|
|
|
|
49.7
|
|
|
|
13.3
|
|
Gross
profit
|
|
|
51.2
|
|
|
|
50.3
|
|
|
|
17.4
|
|
Selling
and distribution expenses
|
|
|
28.3
|
|
|
|
32.2
|
|
|
|
1.6
|
|
General
and administrative expenses
|
|
|
12.2
|
|
|
|
11.7
|
|
|
|
19.8
|
|
Operating
income
|
|
|
10.7
|
|
|
|
6.4
|
|
|
|
91.6
|
|
Interest
expense
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(62.9 |
) |
Other
income (expense) - net
|
|
|
0.5
|
|
|
|
(0.3 |
) |
|
|
(265.4 |
) |
Income
before income taxes
|
|
|
11.1
|
|
|
|
5.9
|
|
|
|
118.4
|
|
Income
taxes
|
|
|
2.9
|
|
|
|
2.2
|
|
|
|
52.3
|
|
Net
income
|
|
|
8.2 |
% |
|
|
3.7 |
% |
|
|
157.6 |
% |
Net
Sales. The following table sets forth certain
components of our consolidated net sales and the percentage relationship
of the
components to consolidated net sales for the periods indicated (in millions,
except percentage data):
|
|
Amounts
|
|
|
%
of Total
|
|
|
|
For
the 13 Weeks Ended April 7, 2007
|
|
|
For
the 14 Weeks Ended April 8, 2006
|
|
|
For
the 13 Weeks Ended April 7, 2007
|
|
|
For
the 14 Weeks Ended April 8, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
100.6
|
|
|
$ |
81.3
|
|
|
|
33.0 |
% |
|
|
30.8 |
% |
Other
|
|
|
50.3
|
|
|
|
37.4
|
|
|
|
16.5
|
|
|
|
14.1
|
|
Total
international wholesale
|
|
|
150.9
|
|
|
|
118.7
|
|
|
|
49.5
|
|
|
|
44.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
products
|
|
|
46.5
|
|
|
|
48.6
|
|
|
|
15.3
|
|
|
|
18.4
|
|
Other
products
|
|
|
60.2
|
|
|
|
57.9
|
|
|
|
19.7
|
|
|
|
21.9
|
|
Total
domestic wholesale
|
|
|
106.7
|
|
|
|
106.5
|
|
|
|
35.0
|
|
|
|
40.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
to consumer
|
|
|
47.2
|
|
|
|
39.0
|
|
|
|
15.5
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$ |
304.8
|
|
|
$ |
264.2
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
The
following tables are intended to illustrate by factor the total of the
percentage change in sales by segment and on a consolidated
basis:
|
|
|
|
|
|
Analysis
of Percentage Change in Sales Versus Prior Year Quarter
|
|
|
|
Attributable
to Changes in the Following Factors
|
|
|
|
Exchange
Rates
|
|
|
Acquisitions
|
|
|
Organic
Growth
|
|
|
Total
Change
|
|
Europe
wholesale
|
|
|
9.1 |
% |
|
|
0.0 |
% |
|
|
14.7 |
% |
|
|
23.8 |
% |
Other
international wholesale
|
|
|
0.2 |
% |
|
|
1.4 |
% |
|
|
32.8 |
% |
|
|
34.4 |
% |
Domestic
wholesale
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Direct
to consumer
|
|
|
0.9 |
% |
|
|
0.0 |
% |
|
|
20.3 |
% |
|
|
21.2 |
% |
Total
|
|
|
3.0 |
% |
|
|
0.2 |
% |
|
|
12.2 |
% |
|
|
15.4 |
% |
Europe
Wholesale Net Sales (Excluding the impact on sales
growth attributable to foreign currency rate changes and acquisitions as
noted
in the above table). Net sales increases in Europe were primarily
the result of sales volume growth in licensed watches, FOSSIL watches and
our
jewelry business of approximately $10.4 million, $5.5 million and $2.4 million,
respectively. We attribute the increased sales in our watch
businesses to newer designs that are driving consumer preference to our
brands. We believe sales volume growth attributable to our jewelry
businesses are a result of greater penetration of the FOSSIL jewelry product
line into existing locations in Germany as well as expansion into additional
retail stores throughout Europe. Additionally, we believe our overall
business in Europe is benefiting from a stronger economy in the First Quarter
in
comparison to the Prior Year Quarter.
Other
International Wholesale Net Sales (Excluding the
impact on sales growth attributable to foreign currency rate changes and
acquisitions as noted in the above table). Other international
sales increases were driven by increased sales volume in licensed and FOSSIL
watches of approximately $6.7 million and $1.1 million,
respectively. The growth in our established licensed and FOSSIL
brands in this segment of our business is related to sales volume growth
with
existing customers primarily through expanded representation of our product
in
the retail environment. This expanded presence is a result of our
shop-in-shop concepts that generally allows us to broaden the selection of
certain brands while providing a more cohesive image of the brand within
the
retail space.
As
it
relates to the international wholesale segments as a whole, we believe we
maintain a competitive advantage as a result of our long-term relationships
and
strength of our business with retailers and distributors throughout the
international marketplace. We believe the global recognition of our branded
portfolio of watches and jewelry positions us as a significant resource to
retailers throughout the international marketplace. Our strategy is not to
force
any one brand into a specific market, but rather allow the market to dictate
which brands are important based upon consumer preference. We further believe
our global distribution network and design and marketing capabilities will
allow
us to acquire additional brands and expand our accessories product offerings,
primarily distributed in the U.S., positioning us for further penetration
of our
product offerings internationally.
Domestic
Wholesale Net Sales. Our First
Quarter wholesale shipments in the U.S., for both watches and accessories,
were
negatively impacted by a shift in the receipt plans of some of our major
customers. The end result of this shift is that certain customer
orders that would have typically fallen into our First Quarter are now being
moved into the second quarter of 2007. We do not expect this shift
will benefit any future quarters in 2007. First Quarter net sales of
our domestic watch business decreased by 4.4%, or 1.3% excluding discontinued
product sales from both the First Quarter and the Prior Year
Quarter. Our proprietary watch brands, which include FOSSIL, RELIC,
MICHELE and ZODIAC, decreased approximately 6.5%, or 0.7% excluding discontinued
product sales from both the First Quarter and the Prior Year
Quarter. Excluding discontinued product sales, FOSSIL brand watch
sales increased 0.8% when compared to the Prior Year Quarter. Sales
of licensed watches in our domestic wholesale segment increased 17.0% during
the
First Quarter as a result of sales volume growth in BURBERRY, MARC BY MARC
JACOBS and MICHAEL KORS brands. Our sell-through rates at the
department stores remain solid in our watch businesses, reflecting the strength
of the current line for FOSSIL as well as our licensed brand businesses.
Mass market watch sales declined by 18.7% during the First Quarter primarily
due
to the receipt plan shift discussed above. We expect to recover this
shortfall during the second quarter and expect our mass market watch business
to
show solid increases over the full year. First Quarter net sales from
our accessories business rose 4.0% compared to the Prior Year Quarter with
particular strength in RELIC handbags, small leather goods and
sunglasses. FOSSIL accessory wholesale shipments declined
approximately 7.9% in the quarter due primarily to the shift in department
store
orders and the impact of the additional week in the Prior Year
Quarter.
Direct To Consumer Net
Sales. (Excluding the impact on net sales growth
attributable to foreign currency rate changes as noted in the above
table). Direct to consumer net sales increased 21.2%,
compared to the Prior Year Quarter, as a result of a 24.9% increase in the
average number of stores open during the First Quarter and, on a comparable
thirteen week period for the Prior Year Quarter, comparable store
sales increases of approximately 12.3%. E-commerce net sales
increased by 7.3% to $4 million during the First Quarter compared to $3.7
million in the Prior Year Quarter. We ended the First Quarter
with 199 stores, including 122 full price stores, 42 of which
were located outside the U.S., and 77 outlet locations, including four
located outside the U.S. This compares to 177 stores at the end of
the Prior Year Quarter that included 103 full-price stores, 37
located outside the U.S. and 74 outlet locations, including one located
outside the U.S. During the First Quarter we opened five
new stores and closed four.
Gross
Profit. Gross profit of $156.1 million, or 51.2% of
nets sales, represents an increase of 17.4% over the Prior Year Quarter amount
of $133.0 million, or 50.3% of net sales. The gross profit margin
increase includes a 50 basis point improvement due to favorable currency
rates. Additionally, a shift in sales mix toward our higher gross
profit margin international and company-owned retail store sales further
benefited our reported gross profit margin for the First
Quarter. These increases were partially offset by increased RELIC
accessory sales and increased export sales from our U.S. operations, both
of
which carry lower gross profit margins than our historical consolidated gross
profit margin. We have recently experienced some pressure on our gross profit
margins as a result of certain new styles added to our global watch assortment
that are generating slightly lower gross profit margins than our historical
average for this category. However, we have an initiative in place that we
believe will result in recapturing this margin as well as further increasing
our
gross profit margins across all of our various product lines. We
expect the results of this initiative will lead to further improvement in
our
overall gross profit margin beginning in the second half of fiscal
2007.
Operating
Expenses. Operating expenses, as a percentage of net
sales, decreased to 40.5% in the First Quarter compared to 43.9% in the Prior
Year Quarter. Total First Quarter operating expenses increased by
approximately $7.6 million over the Prior Year Quarter and include approximately
$5.6 million of expenses related to legal and accounting costs incurred in
connection with the review of our equity granting practices by a Special
Committee of the Board of Directors and an additional $2.8 million as a result
of a weaker U.S. dollar. The Prior Year Quarter operating expenses
included approximately $5 million related to the impact of the extra week
during
the quarter and an approximate $4.3 million related to the Basel Watch Fair
event, which will occur in our second quarter of fiscal year
2007. Excluding the impact of these four items, operating
expenses increased by approximately 8.2% and were primarily related to increased
payroll and rent expenses. Payroll expense increases were principally related
to
retail store growth worldwide and the impact of our initiative to expand
our
international shop-in-shop program. Increases in rent expense are
primarily related to the increase in the number of company-owned retail
locations opened since the end of the Prior Year Quarter.
The
following table sets forth operating expenses on a segment basis and the
relative percentage of operating expenses to net sales for each segment of
our
business for the periods indicated (in millions, except percentage
data):
|
|
Amounts
|
|
|
%
of Net Sales
|
|
Segment
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
For
the 14
Weeks
Ended
April
8, 2006
|
|
|
For
the 13
Weeks
Ended
April
7, 2007
|
|
|
For
the 14
Weeks
Ended
April
8, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
wholesale
|
|
$ |
34.5
|
|
|
$ |
30.9
|
|
|
|
34.2 |
% |
|
|
38.0 |
% |
Other
international wholesale
|
|
|
14.6
|
|
|
|
12.5
|
|
|
|
29.0
|
|
|
|
33.5
|
|
Domestic
wholesale (1)
|
|
|
49.1
|
|
|
|
50.7
|
|
|
|
46.0
|
|
|
|
47.6
|
|
Direct
to consumer
|
|
25.4
|
|
|
|
21.9
|
|
|
|
53.8
|
|
|
|
56.2
|
|
Total
|
|
$ |
123.6
|
|
|
$ |
116.0
|
|
|
|
40.5
|
% |
|
|
43.9
|
% |
(1) Certain
corporate costs not allocated to individual operating segments for management
reporting purposes and intercompany eliminations for specific income statement
items are reflected in the domestic wholesale segment. Additionally,
for the First Quarter, the domestic wholesale segment includes approximately
$5.6 million related to legal and accounting costs incurred in connection
with
the review of our equity granting practices by a Special Committee of the
Board
of Directors.
Operating
Income. During the First Quarter the increase in gross
profit margin and leveraging of operating expenses resulted in operating
profit
margin increasing to 10.7% of net sales compared to 6.4% of net sales in
the
Prior Year Quarter. First Quarter operating income included a
favorable impact of approximately $3.6 million related to the translation
of
foreign sales and expenses into U.S. dollars.
Interest
Expense. Interest expense declined by $375,000 to
$221,000 for the First Quarter compared to $596,000 for the Prior Year
Quarter. This decrease is related to the repayment of borrowings
under our revolving lines of credit from our operating cash flows since the
end
of the Prior Year Quarter. The previous borrowings under our
revolving lines of credit were principally used to fund common stock repurchases
during the fourth quarter of fiscal year 2005 and the first quarter of fiscal
year 2006 and capital expenditures made since the end of the Prior Year
Quarter.
Other
Income (Expense) - net. First Quarter other income
(expense) increased favorable by approximately $2.4 million in comparison
to the
Prior Year Quarter. The favorable increase is related to a
$762,000 increase in interest income as a result of higher average invested
cash
balances during the First Quarter in comparison to the Prior Year Quarter,
a
$739,000 increase in currency gains over the Prior Year Quarter and gains
of
approximately $600,000 associated with the release of previously accrued
tax
penalties unrelated to income taxes.
Provision
For Income Taxes. Our
effective income tax rate for the First Quarter decreased to 26.0% compared
to
37.3% in the Prior Year Quarter. The lower effective rate for the
First Quarter is the result of the release of $3.9 million in certain income
tax
contingency reserves related to our federal income tax return for 2003 that
were
effectively settled during the First Quarter when the Internal Revenue Service
completed its examination phase of its audit of our 2003 and 2004 federal
income
tax returns.
Liquidity
and Capital Resources
Our
general business operations historically have not required substantial cash
needs during the first several months of our fiscal year. Generally, starting
in
the second quarter, our cash needs begin to increase, typically reaching
their
peak in the September-November time frame. Our cash and cash equivalents
at the
end of the First Quarter amounted to $141.5 million in comparison to $61.2
million at the end of the Prior Year Quarter and $133.3 million at the end
of
fiscal year 2006. The $8.2 million increase in cash and cash equivalents
since
the end of fiscal year 2006 is primarily the result of net cash from operating
and financing activities of $7.0 million and $2.8 million, respectively,
partially offset by cash used in investing activities of $4.8
million. The effect of exchange rate changes had a $3.3 million
favorable impact on cash balances. Net cash from operating activities was
primarily related to net income of $25.0 million and favorable non-cash
activities of $6.6 million partially offset by $24.6 million in unfavorable
changes in operating assets and liabilities. Cash from financing activities
was
principally comprised of proceeds from exercise of stock options of $4.1
million
partially offset by distribution of minority interest earnings of $2.0 million.
Cash used in investing activities consisted mainly of $4.0 million of capital
additions.
Accounts
receivable increased to $151.9 million at the end of the First Quarter compared
to $122.8 million at the end of the Prior Year Quarter. Day’s sales
outstanding increased to 45 days for the First Quarter compared to 42 days
in
the Prior Year Quarter. The increase in day’s sales outstanding is a
result of a greater mix of international net sales versus domestic net sales,
as
a percentage of our total net sales. International sales generally
have longer collection cycles in comparison to sales from our U.S. wholesale
business. Inventory at quarter-end was $235.6 million, a decrease of
7.2% compared to Prior Year Quarter inventory of $254.0 million. We
continued to make progress in our efforts to reduce our inventory balances
in
comparison to the Prior Year Quarter, even though we experienced a 15.4%
net
sales increase during the First Quarter. We expect that our inventory
balances will remain below the prior year levels throughout the remainder
of
fiscal year 2007.
At
the
end of the First Quarter, we had working capital of $412.7 million compared
to
working capital of $303.6 million at the end of the Prior Year Quarter and
approximately $11.2 million of outstanding short-term borrowings, primarily
related to our U.K. and Japanese revolving lines of
credit. Borrowings under our U.S. Credit Facility bear interest, at
our option, at (i) the lesser of (a) the prime rate (7.75% at the end of
the
First Quarter) less 1% or 3% or (b) the maximum rate allowed by law or (ii)
London Interbank Offer Rate “LIBOR” base rate (4.85% at the end of the First
Quarter) plus one-half percent. The U.S. Credit Facility is secured by 65%
of
the issued and outstanding shares of certain of our subsidiaries pursuant
to a
Stock Pledge Agreement. The U.S. Credit Facility requires the maintenance
of net
worth, quarterly income, working capital and certain financial ratios. Available
borrowings under our U.S. Credit Facility are reduced by amounts outstanding
related to open letters of credit. We intend to use the proceeds available
under
our U.S. Credit Facility for working capital needs, potential acquisitions
and
general corporate purposes, which may include additional common stock
repurchases. We also maintain a 400 million Yen short-term credit facility
in
Japan, bearing interest based upon the Euroyen rate (approximately 1.38%
at the
end of the First Quarter), and a 4 million British Pound credit facility
in the
U.K., bearing interest at the aggregate of the Margin, LIBOR and Mandatory
Lending Agreement “MLA” costs (6.17% on a combined basis at the end of the First
Quarter). Our revolving short-term credit facilities in the United States,
Japan and the U.K. renew each year in September, November and May,
respectively. At the end of the First Quarter, we had combined
available borrowings of approximately $76.2 million relating to these
facilities.
Forward-Looking
Statements
The
statements contained in this Quarterly Report on Form 10-Q and incorporated
by reference that are not historical facts, including, but not limited to,
statements regarding our expected financial position, results of operations,
business and financing plans found in this “Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Item 3.
Quantitative and Qualitative Disclosures About Market Risk,” constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve a number of risks and uncertainties.
The words “may,” “believes,” “expects,” “plans,” “intends,” “estimates,”
“anticipates” and similar expressions identify forward-looking statements. The
actual results of the future events described in such forward-looking statements
could differ materially from those stated in such forward-looking statements.
Among the factors that could cause actual results to differ materially are:
the
effect of worldwide economic conditions; significant changes in consumer
spending patterns or preferences; acts of war or acts of terrorism; changes
in
foreign currency valuations in relation to the U.S. dollar, principally the
Euro, British Pound and Swiss Franc; lowered levels of consumer spending
resulting from a general economic downturn or generally reduced shopping
activity caused by public safety or consumer confidence concerns; the
performance of our products within the prevailing retail environment; customer
acceptance of both new designs and newly-introduced product lines; financial
difficulties encountered by customers; the effects of vigorous competition
in
the markets in which we operate; the integration of the organizations and
operations of any acquired businesses into our existing organization and
operations; the termination or non-renewal of material licenses, foreign
operations and manufacturing; changes in the costs of materials, labor and
advertising; government regulation; our ability to secure and protect trademarks
and other intellectual property rights; the potential impact of the Special
Committee’s findings and recommendations with respect to the Company’s equity
granting practices and the restatement of our consolidated financial
statements; the outcome of the proceedings with NASDAQ; and the
outcome of current and possible future litigation.
In
addition to the factors listed above, our actual results may differ materially
due to the other risks and uncertainties discussed in this Quarterly Report
and
the risks and uncertainties set forth in our Annual Report on Form 10-K for
the year ended January 6, 2007. Accordingly, readers of this Quarterly Report
should consider these facts in evaluating the information and are cautioned
not
to place undue reliance on the forward-looking statements contained herein.
We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
As
a
multinational enterprise, we are exposed to changes in foreign currency exchange
rates. Our most significant foreign currency risks relate to the Euro, British
Pound and, to a lesser extent the Swiss Franc, as compared to the U.S. dollar.
Due to our vertical nature whereby a significant portion of goods are sourced
from our owned facilities, the foreign currency risks relate primarily to
the
necessary current settlement of intercompany inventory transactions. We employ
a
variety of practices to manage this market risk, including our operating
and
financing activities and, where deemed appropriate, the use of foreign currency
forward contracts. The use of these instruments allows us to offset
exposure to rate fluctuations because the gains or losses incurred on the
derivative instruments will offset, in whole or in part, losses or gains
on the
underlying foreign currency exposure. We use derivative instruments only
for
risk management purposes and do not use them for speculation or for trading.
There were no significant changes in how we managed foreign currency
transactional exposure in the First Quarter and we do not anticipate any
significant changes in such exposures or in the strategies we employ to manage
such exposure in the near future.
At
the
end of the First Quarter, we had outstanding foreign exchange contracts to
sell
49.6 million Euro for approximately $64.9 million, expiring through
December 2007, approximately 1.5 million British Pounds for approximately
$3
million, expiring through June 2007 and approximately 92.5 million Yen for
approximately $800,000, expiring through April 2007. If we were to settle
our
Euro, British Pound and Yen based contracts at the reporting date, the net
result would be a net loss of approximately $1.7 million, net of taxes.
Exclusive of these outstanding foreign exchange contracts or other operating
or
financing activities that may be employed by us, a measurement of the
unfavorable impact of a 10 percent change in the Euro, British Pound and
Swiss Franc as compared to the U.S. dollar on our operating profits and
stockholders’ equity is presented in the following paragraph.
At
the
end of the First Quarter, a 10 percent unfavorable change in the U.S.
dollar strengthening against the Euro, British Pound, and Swiss Franc involving
balance sheet transactional exposures would have reduced net pre-tax income
by
$4.7 million. The translation of the balance sheets of our European, United
Kingdom and Switzerland-based operations from their local currencies into
U.S.
dollars is also sensitive to changes in foreign currency exchange rates.
At the
end of the First Quarter, a 10 percent unfavorable change in the exchange
rate of the U.S. dollar strengthening against the Euro, British Pound and
Swiss
Franc would have reduced consolidated stockholders’ equity by approximately
$15.0 million. In our view, the risks associated with exchange rate
changes in other currencies we have exposure to are not material, and these
hypothetical losses resulting from these assumed changes in foreign currency
exchange rates are not material to our consolidated financial position, results
of operations or cash flows.
Item
4. Controls and Procedures
Background
of Restatement
Following
an internal investigation into our equity granting practices during the period
from 1993 through 2006, we and our Audit Committee concluded that our
consolidated financial statements for the thirteen and thirty-nine week periods
ended October 1, 2005, and our fiscal years ended December 31, 2005,
January 1, 2005, January 3, 2004 and January 4, 2003 should be restated to
record additional stock-based compensation expense and the related tax effects
resulting from equity grants awarded from 1993 through 2005 that were
incorrectly accounted for under generally accepted accounting
principles. The decision was based on the determination that the
actual measurement dates for determining the accounting treatment of certain
equity grants differed from the measurement dates we used in preparing our
consolidated financial statements.
Evaluation
of Disclosure Controls and Procedures
We
have
established and maintained disclosure controls and procedures that are designed
to ensure that material information relating to the Company required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our CEO and
CFO, as
appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, we recognized that any controls and procedures, no matter how
well designed and operated, can provide only a reasonable assurance of achieving
the desired control objectives, and management was necessarily required to
apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Our
management, with the participation of our CEO and CFO, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures and concluded that, because of the material weakness in our internal
controls over financial reporting relating to our equity award plan
administration and accounting for and disclosure of equity grants, our
disclosure controls and procedures were not effective as of April 7,
2007.
The
Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a
material weakness as a significant deficiency, or a combination of significant
deficiencies, that results in there being a more than remote likelihood that
a
material misstatement of the annual or interim financial statements will
not be
prevented or detected. Specifically, we did not design and implement
controls necessary to provide reasonable assurance that the grant dates we
used
for equity awards was in conformity with the measurement date as defined
in APB
No. 25. As a result, the measurement date used for
certain equity grants was not appropriate and such grants were not
accounted for in conformity with generally accepted accounting principles
in the
United States of America.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
three months ended April 7, 2007 that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
As
previously discussed in our 2006 Form 10-K, filed on August 2, 2007, we adopted
certain actions subsequent to April 7, 2007 concerning corporate governance
to enhance the process for granting equity-based compensation awards in the
future, and we have implemented and are in the process of implementing, remedial
actions to address the material weakness described above. These actions
include:
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We
will institute internal audit procedures relating to the equity-based
compensation awards approval and documentation process; engage
an
independent compensation consultant and/or independent counsel
(at least
for a transitional period) and focus on improving the Compensation
Committee approval and oversight process; designate specific members
of
in-house legal, accounting, and human resources staffs to oversee
documentation, accounting and disclosure of all equity-based compensation
awards; widely distribute and explain enhanced equity grant processes
and
documentation requirements; increase automation of the equity grant
record
keeping process; improve process and controls regarding delegated
grant
authority; and improve training and education designed to ensure
that all
relevant personnel involved in the administration of equity-based
compensation awards understand relevant policies and
requirements.
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Annual
grants will be determined in connection with annual performance
reviews of
employees, including executives. Generally, one annual grant date
will apply to all annual grants to U.S. employees, and another
annual
grant date will apply to all annual grants to employees outside
of the
United States.
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We
are
continuing to implement the recommendations of the Audit Committee and intend
to
take additional actions at a later date.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
Three
shareholder derivative lawsuits have been filed in the United States District
Court for the Northern District of Texas, Dallas Division, naming us as a
nominal defendant and naming all of our then current directors and certain
of
our current and former officers and directors as defendants. The first
suit, captioned City of Pontiac Policeman’s and Fireman’s Retirement System,
derivatively on behalf of Fossil, Inc. v. Tom Kartsotis, Kosta N. Kartsotis,
Michael L. Kovar, Michael W. Barnes, Mark D. Quick, Randy S. Kercho, Jal
S.
Shroff, Randy S. Hyne, Thomas R. Tunnel, Richard H. Gundy, Kenneth W. Anderson,
Andrea Camerana, Alan J. Gold, Michael Steinberg, Donald J. Stone and Cadence
Wang (Cause No. 3-06CV1672-P), was filed on September 13,
2006. The second suit, captioned Robert B. Minich,
derivatively on behalf of Fossil, Inc. v. Tom Karstotis, Kosta N. Kartsotis,
Michael L. Kovar, Michael W. Barnes, Mark D. Quick, Randy S. Kercho, Jal
S.
Shroff, Randy S. Hyne, Thomas R. Tunnel, Richard H. Gundy, Kenneth W. Anderson,
Andrea Camerana, Alan J. Gold, Michael Steinberg, Donald J. Stone and Cadence
Wang (Cause No. 3-06CV1977-M), was filed on October 26,
2006. The third suit, captioned Robert Neel, derivatively on
behalf of Fossil, Inc. v. Michael W. Barnes, Richard H. Gundy, Randy S. Kercho,
Mark D. Quick, Tom Kartsotis, Kosta N. Kartsotis, Jal S. Shroff, T.R. Tunnell,
Michael L. Kovar, Donald J. Stone, Kenneth W. Anderson, Alan J. Gold, Michael
Steinberg, and Fossil, Inc. (Cause No. 3-06CV2264-G), was filed on December
8, 2006. The complaints allege purported violations of federal
securities laws and state law claims for breach of fiduciary duty, abuse
of
control, constructive fraud, corporate waste, unjust enrichment and gross
mismanagement in connection with certain stock option grants made by us.
We believe that we have meritorious defenses to these claims, and we
intend to assert a vigorous defense to the litigation. The ultimate
liability with respect to these claims cannot be determined at this time;
however, we do not expect this matter to have a material impact on our financial
position, operations or liquidity.
On
November 14, 2006, we self-reported to the staff of the SEC that a Special
Committee, consisting of certain independent members of our Board of Directors,
was voluntarily reviewing our historical equity granting practices. In a
letter
dated November 28, 2006, the SEC staff advised us that it had commenced an
informal inquiry regarding our stock option grants and related
accounting. We cooperated fully with this inquiry. In a
letter dated July 20, 2007, the SEC staff has informed us that their
investigation has been completed and they do not intend to recommend any
enforcement action by the SEC.
As
a
result of the review of our historical equity granting practices, we were
delinquent in filing certain of our periodic reports with the SEC, and
consequently we were not in compliance with NASDAQ’s Marketplace
Rules. As a result, we received a total of three delisting notices
from the NASDAQ, and we underwent a review and hearing process with the NASDAQ
to determine our listing status. NASDAQ ultimately permitted our securities
to
remain listed on the NASDAQ as a result of a stay from the NASDAQ Listing
and
Hearing Review Counsel.
With
the
filing of this quarterly report on Form 10-Q and other delinquent filings,
we
believe that we will remedy our non-compliance with Marketplace Rule
4310(c)(14), subject to NASDAQ’s affirmative completion of it’s compliance
protocols and its notification of the Company accordingly. However,
if the SEC disagrees with the manner in which we have accounted for and
reported, or not reported, the financial impact of past equity grants, there
could be further delays in filing subsequent SEC reports that might result
in
delisting of our common stock from the NASDAQ Global Select Market.
There
are
no other legal proceedings to which we are a party or to which our properties
are subject, other than routine litigation incident to our business, which
is
not material to our consolidated financial condition, cash flows or results
of
operations.
Item
1A. Risk Factors
During
the First Quarter, there were no material changes to the Risk Factors disclosed
in “Part I, Item 1A” of our 2006 Annual Report on
Form 10-K.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Recent
Sales of Unregistered Securities
We
had no
sales of unregistered securities during the First Quarter.
Purchases
of Equity Securities
During
the First Quarter there were no purchases made by or on behalf of us or any
"affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act of 1934), of our common stock.
Item
5. Other Information
From
May
2, 2007 to June 22, 2007, we issued 22,540 shares of our common stock upon
the
exercise of stock options granted to our employees for an aggregate of
$444,340. These shares were issued in reliance upon the exemptions
from registration provided pursuant to Section 4(2) of the Securities Act
of
1933, as amended.
Item
6. Exhibits
31.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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31.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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32.1
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
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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.
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FOSSIL,
INC.
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Date:
August 8, 2007
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By:
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/s/
Mike L. Kovar
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Mike
L. Kovar
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Senior
Vice President, Chief Financial Officer and Treasurer
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(Principal
financial and accounting officer duly authorized to sign on behalf
of
Registrant)
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EXHIBIT
INDEX
Exhibit
Number
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Document
Description
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
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Certification
of Chief Executive Officer pursuant to Section 18 U.S.C. Section
1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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Certification
of Chief Financial Officer pursuant to Section 18 U.S.C. Section
1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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