-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JZ4tLMZ/GkusZsShRNaecTRYCP8mh3JHqDDujWYyQoMt0qMjQ319fdShZr6rfUNB daQphJl+rjsnMUiuZM4qLg== 0000912057-00-015566.txt : 20000403 0000912057-00-015566.hdr.sgml : 20000403 ACCESSION NUMBER: 0000912057-00-015566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSSIL INC CENTRAL INDEX KEY: 0000883569 STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873] IRS NUMBER: 752018505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19848 FILM NUMBER: 590789 BUSINESS ADDRESS: STREET 1: 2280 NORTH GREENVILLE AVE CITY: RICHARDSON STATE: TX ZIP: 75082 BUSINESS PHONE: 9722342525 MAIL ADDRESS: STREET 1: 2280 N GREENVILLE CITY: RICHARDSON STATE: TX ZIP: 75082 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-19848 FOSSIL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2018505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2280 N. GREENVILLE AVENUE RICHARDSON, TEXAS 75082 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (972) 234-2525 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) Indicate by check mark whether the 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ The aggregate market value of Common Stock held by nonaffiliates of the registrant, based on the sale trade price of the Common Stock as reported by the Nasdaq National Market on March 29, 2000, was $410,652,945. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant. As of March 29, 2000, 32,100,646 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement in connection with the Annual Meeting of Stockholders to be held May 24, 2000, to be filed with the Commission pursuant to Regulation 14A, and the Company's Annual Report to Stockholders are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS GENERAL Fossil, Inc. (the "Company") is a leader in the design, development, marketing and distribution of contemporary, high quality fashion watches and accessories. The Company developed the FOSSIL-Registered Trademark- brand name 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 diversified company offering an extensive line of fashion watches, small leather goods, belts, handbags and sunglasses under the FOSSIL and RELIC-Registered Trademark- brands. In addition to developing its own brands, the Company leverages its development and production expertise by designing and manufacturing private label products for some of the most prestigious companies in the world, including national retailers, entertainment companies and theme restaurants. The Company's successful expansion of its product lines has contributed to its increasing net sales and operating profits. The Company has capitalized on the increasing awareness of the FOSSIL brand by entering into various license agreements for other categories of fashion accessories. The Company has entered into various license agreements to design, manufacture, distribute and market watches under the brands of other companies, including EMPORIO ARMANI-Registered Trademark- , DKNY-Registered Trademark- and DIESEL-Registered Trademark-. The Company sells its products in approximately 17,000 retail locations in the United States through a diversified distribution network that includes approximately 5,000 department store doors, such as Federated/Macy's, May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears for its RELIC brand, as well as approximately 12,000 specialty retail locations. The Company also sells its products through a network of 50 Company-owned stores within the United States, with 17 retail stores located in premier retail sites and 33 outlet stores located in major outlet malls. The Company's products are sold 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 Europe, South and Central America, the Caribbean, Canada, the Far East, Australia and the Middle East. In addition, the Company's products are offered at retail locations in major airports in the United States, on cruise ships and in independently-owned, authorized FOSSIL retail stores and kiosks in certain international markets. The Company is a Delaware corporation formed in 1991 and is the successor to a Texas corporation formed in 1984. In 1993, the Company completed an initial public offering of 2,760,000 shares of common stock, par value $.01 (the "Common Stock"). The Company conducts substantially all of its operations in the United States through Fossil Partners, L.P., a Texas limited partnership formed in 1994 of which the Company is the sole general partner. The Company also conducts operations in the United States and certain international markets through various directly and indirectly owned subsidiaries. The Company's operations in Hong Kong relating to the procurement of watches from various manufacturing sources are conducted by Fossil (East) Limited ("Fossil East"), a wholly owned subsidiary of the Company acquired in 1992. The Company's principal executive offices are located at 2280 N. Greenville Avenue, Richardson, Texas 75082, and its telephone number at such address is (972) 234-2525. -1- FORWARD-LOOKING INFORMATION The statements contained in this Annual Report on Form 10-K ("Annual Report") that are not historical facts, including, but not limited to, statements found in this "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", 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 actual results of the future events described in such forward-looking statements in the Annual Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: general economic conditions, competition, government regulation and possible future litigation, as well as the risks and uncertainties discussed in this Annual Report, including, without limitation, the portions referenced above, and the risks and uncertainties set forth on the Company's Current Report on Form 8-K dated March 30, 1999. INDUSTRY OVERVIEW WATCH PRODUCTS The Company believes that the current market for watches in the United States can be divided into four segments. One segment of the market consists of fine watches characterized by internationally known brand names such as Concord, Piaget and Rolex. Watches offered in this segment are usually made of precious metals or stainless steel and may be set with precious gems. These watches are often manufactured in Switzerland and are sold by trade jewelers and in the fine jewelry departments of better department stores and other purveyors of luxury goods at retail prices ranging from $1,500 to in excess of $20,000. A second segment of the market consists of fine premium branded and designer watches manufactured in Switzerland and the Far East such as Gucci, Rado, Raymond Weil, Seiko and Swiss Army. These watches are sold at retail prices generally ranging from $150 to $1,500. The Company's EMPORIO ARMANI line generally competes in this market segment. A third segment of the market consists of watches sold by mass marketers, which include certain watches sold under the Timex brand name as well as certain watches sold by Armitron under various brand names and labels. Retail prices in this segment range from $5 to $40. The fourth segment of the market consists of moderately priced watches characterized by contemporary fashion and well known brand names. Moderately priced watches are typically manufactured in Japan or Hong Kong and are sold by department stores and specialty stores at retail prices ranging from $40 to $150. This market segment is targeted by the Company and its principal competitors, including the companies that market watches under the Guess?, Anne Klein II, Kenneth Cole and Swatch brand names, whose products attempt to reflect emerging fashion trends in accessories and apparel. The Company's DKNY line generally competes in this segment as well. Some of the watches in this sector are manufactured under license agreements with companies that market watches under various brand names, including Guess?, Anne Klein II and Kenneth Cole. The Company believes that one reason for the growth of this sector has been that fashion-conscious consumers have increasingly come to regard branded fashion watches not only as time pieces but also as fashion accessories. This trend has resulted in consumers owning multiple watches that may differ significantly in terms of style, features and cost. FASHION ACCESSORIES The Company believes that the fashion accessories market in the United States includes products such as small leather goods, handbags, belts, eyewear, neckwear, underwear, lounge wear, costume jewelry, gloves, hats, hosiery and socks. The Company believes that one reason for the growth in this line of business -2- is that consumers are becoming more aware of accessories as fashion statements, and as a result, are purchasing brand name, quality items that complement other fashion items. These fashion accessory products are generally marketed through mass merchandisers, department stores and specialty shops, depending upon price and quality. Higher price point items include products offered by Coach, Dooney & Burke, Ralph Lauren and Donna Karan. Moderately priced fashion accessories are typically marketed in department stores and are characterized by contemporary fashion and well known brand names at reasonable price points, such as FOSSIL and RELIC. The Company currently offers small leather goods, handbags, belts, eyewear for both men and women through department stores and specialty retailers in the moderate to upper-moderate price range. Companies such as Calvin Klein, Tommy Hilfiger, Guess?, Nine West, Kenneth Cole and Liz Claiborne currently operate in this market. BUSINESS STRATEGY The Company's long-term goal is to capitalize on the strength of its growing consumer brand recognition and capture an increasing share of a growing number of markets by providing consumers with fashionable, high quality, value-driven products. In pursuit of this goal, the Company has adopted operating and growth strategies that provide the framework for the Company's future growth, while maintaining the consistency and integrity of its brands. OPERATING STRATEGY - - FASHION ORIENTATION AND DESIGN INNOVATION. The Company is able to market its products to consumers with differing tastes and lifestyles by offering a wide range of brands and product categories at a variety of price points. The Company attempts to stay abreast of emerging fashion and lifestyle trends affecting accessories and apparel and it responds to these trends by making adjustments in its product lines several times each year. The Company differentiates its products from those of its competitors principally through innovations in fashion details, including variations in the treatment of dials, crystals, cases, straps and bracelets for the Company's watches and innovative treatments and details in its other accessories. - - COORDINATED PRODUCT PROMOTION. The Company coordinates in-house product design, packaging, advertising and in-store presentations to more effectively and cohesively communicate to its target markets the themes and images associated with its brands. For example, many of the Company's FOSSIL brand products and certain of its accessory products are packaged in metal tins decorated with designs consistent with the Company's marketing strategy and product image. In addition, the Company generally markets its fashion accessory lines through the same distribution channels as its watch lines, using similar in-store presentations, graphics and packaging. - - PRODUCT VALUE. The Company's products provide value to the consumer by offering fashionable, high quality components and features at suggested retail prices generally below those of competitive products of comparable quality. The Company is able to offer its watches at a reasonable price point by manufacturing them principally in the Far East at lower cost than comparable quality watches manufactured in Switzerland. In addition, the Company is able to offer its accessories at reasonable prices because of its close relationships with manufacturers in the Far East. Unlike certain of its principal competitors, the Company does not pay royalties on most of its products, which the -3- Company believes allows it to enjoy certain cost advantages that enhance its ability to achieve attractive profit margins. - - CAPTIVE SUPPLIERS. The Company owns a majority interest in a number of watch assemblers with locations in Hong Kong and China. In addition, the Company maintains close relationships with accessory manufacturers in the Far East. The Company believes these relationships create a significant competitive advantage, as they allow the Company to produce quality products, reduce the delivery time to market and improve overall operating margins. - - ACTIVELY MANAGE RETAIL SALES. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category and style, primarily through EDI, and by assisting retailers in the conception, development and implementation of their marketing programs. As a result, the Company believes it enjoys close relationships with its principal retailers, often allowing it to influence the mix, quantity and timing of customer purchasing decisions. - - CENTRALIZED DISTRIBUTION. The Company distributes substantially all of its products sold in the United States and certain of its products sold in international markets from its warehouse and distribution center in Richardson, Texas. The Company also distributes its products to international markets from warehouse and distribution centers located in Germany, Italy, Hong Kong, the United Kingdom, Spain and Japan. The Company believes its centralized distribution capabilities enable it to reduce inventory risk, increase flexibility in meeting the delivery requirements of its customers and maintain significant cost advantages as compared to its competitors. GROWTH STRATEGY - - INTRODUCE NEW PRODUCTS AND BRANDS. The Company continually introduces new products within its existing brands and through license agreements and brand extensions to attract a wide range of consumers with differing tastes and lifestyles. For example, the Company currently offers a full line of watch and accessory products under its FOSSIL and RELIC brands, as well as watches under the EMPORIO ARMANI and DKNY brand names pursuant to license agreements. The Company will also introduce a line of watches under the DIESEL brand in 2000. The Company also leverages its brand recognition and its design and marketing expertise to expand the scope of its product offerings through the selective licensing of new product categories that complement its existing products. For example, the Company entered into a license agreement with Safilo Group to offer FOSSIL optical frames in the United States and Canada and optical frames and sunglasses in Italy. - - EXPAND INTERNATIONAL BUSINESS. The Company increased its efforts to align its FOSSIL brand watches sold internationally with its successful domestic assortments. The Company believes these efforts will increase its global brand recognition and allow it to leverage this recognition to successfully market the Company's accessory lines in international markets. The Company has recently introduced RELIC brand watches and accessories in selected international markets and believes these efforts will similarly increase the global recognition of this brand. - - EXPAND RETAIL LOCATIONS. The Company is currently expanding its Company-owned FOSSIL retail and outlet locations to further strengthen its brand image. The Company currently operates 50 retail and outlet stores and plans to open an additional 12 retail stores and two outlet stores in 2000. In 2000, the Company will beginning offering FOSSIL brand apparel products at selected Company-owned FOSSIL retail stores in the United States. The Company intends to continue to -4- offer its watch and accessory products through additional independently-owned, authorized FOSSIL retail stores in airports, on cruise ships and in international markets. - - LEVERAGE INFRASTRUCTURE. The Company believes it has the design, marketing, manufacturing and distribution infrastructure in place to allow it to manage and grow its businesses. The Company continues to develop additional products and brands and seeks additional businesses and products to complement its existing business and allow it to leverage its existing infrastructure. PRODUCTS The Company designs, develops, markets and distributes fashion watches and accessories, including sunglasses, small leather goods, belts and handbags, principally under the FOSSIL and RELIC brand names and watches bearing the brand names of certain internationally known fashion designers pursuant to license agreements. WATCH PRODUCTS The Company introduced FOSSIL watches, its flagship product, in 1986 and RELIC watches in 1990. Since 1986, the Company has also contracted with retailers and other customers for the manufacture of watches primarily for sale under private labels. Sales of the Company's watches for fiscal years 1999, 1998 and 1997 accounted for approximately 76.5%, 75.5% and 72.4%, respectively, of the Company's gross sales. The following table sets forth certain information with respect to the Company's FOSSIL and RELIC watches:
SUGGESTED PRICE DISTRIBUTION WATCH BRAND PRODUCT CATEGORIES POINT RANGE AVERAGE PRICE CHANNELS ----------- ------------------ ----------- ------------- -------- FOSSIL FOSSIL BLUE, F2, FOSSIL $45 - 100 $72 Major dept. stores (Dayton Steel, BIG TIC, FOSSIL Hudson Corp., Dillard's, Sterling, BLUE TEQ, Federated/Macy's, May Dept. DEFENDER, ARKITEKT, Limited Stores, Nordstrom, Inc. and Edition and Vintage Saks) RELIC RELIC Wet, RELIC $45 - 75 $58 Major retailers (Stage Dept. Adjust-A-Link, RELIC Stores, JCPenney, Kohl's Stainless Steel, Metal, Department Stores, Inc., Sport, Novelty, Pendant and Montgomery Ward & Co. and Pocket Sears)
The Company has entered into multi-year, worldwide license agreements for the manufacture, distribution and sale of watches bearing the brand names of certain internationally known fashion designers. The following table sets forth certain information with respect to the Company's licensed watch products: -5-
SUGGESTED PRICE AVERAGE DISTRIBUTION BRAND(S) PRODUCTS POINT RANGE PRICE TERRITORY CHANNEL(S) ------- -------- ----------- ----- --------- ---------- EMPORIO ARMANI Wrist watches and $125 - 500 $214 Worldwide Major department bands, pocket stores, specialty watches retailers, jewelry stores and Armani Boutiques DKNY, DKNY Active, Men's, women's $85 - 250 $106 Worldwide Better department DKNY Jeans & DONNA and children's stores, specialty KARAN NEW YORK watches stores, and Donna Karan Retail Stores
PRIVATE LABEL, PREMIUM AND LICENSED PRODUCTS. The Company designs, markets and arranges for the manufacture of watches on behalf of certain retailers, entertainment companies, theme restaurants and other corporate customers such as Eddie Bauer, Warner Bros. and Disney, as private label products or as premium and incentive items for use in various corporate events. Under this arrangement, the Company performs design and product development functions as well as acts as a sourcing agent for its customers by contracting for the manufacture of watches, managing the manufacturing process, inspecting the finished watches, purchasing the watches and arranging for their shipment to the United States. Participation in the private label and premium businesses provide the Company with certain advantages, including increased manufacturing volume, which may reduce the costs of manufacturing the Company's other watch products, and the strengthening of business relationships with its manufacturing sources. These lines provide income to the Company with reduced inventory risks and certain other carrying costs. The Company has also entered into a number of license agreements for the sale of collectible watches. Under these agreements, the Company designs, manufactures and markets the goods bearing the trademarks, trade names and logos of various entities through major department stores within the Company's channels of distribution, including Pink Panther, Toy Story and Ford. FASHION ACCESSORIES In order to leverage the Company's design and marketing expertise and its close relationships with its principal retail customers, the Company has developed a line of fashion accessories, including handbags, sunglasses for men and women, men's and women's belts and small leather goods. The Company's handbags are made of a variety of fine leathers and other materials that emphasize classic styles and incorporate a variety of creative designs. The sunglass line features optical quality lenses in both plastic and metal frames, with classic and fashion styling similar to other FOSSIL products. The Company's small leather goods are made of fine leathers and include items such as mini-bags, coin purses, key chains and wallets. The Company currently sells its fashion accessories through a number of its existing major department store and specialty retail store customers. The Company generally markets its fashion accessory lines through the same distribution channels as its watch business, using similar in-store presentations, graphics and packaging. These fashion accessories are typically sold in locations adjacent to watch departments, which may lead to purchases by persons who are familiar with the Company's watches. Sales of the Company's accessory lines for fiscal years 1999, 1998 and 1997 accounted for approximately 22.5%, 23.5% and 26.4%, respectively of the Company's gross sales. -6- The following table sets forth certain information with respect to the Company's fashion accessories:
SUGGESTED PRICE BRAND ACCESSORY CATEGORY POINT RANGE AVERAGE PRICE DISTRIBUTION CHANNEL - ----- ------------------ ----------- ------------- -------------------- FOSSIL Sunglasses $28 - 75 $40 Major dept. stores (Dayton Hudson Corp., Handbags $35 - 150 $78 Dillard's, Federated/Macy's, Men's and Women's Small $15 - 70 $29 May Dept. Stores, Leather Goods Nordstrom, Inc. and Saks) Men's and Women's Belts $20 - 40 $28 RELIC Sunglasses $20 - 25 $21 Major retailers (Sears, Fred Meyer, Handbags $20 - 42 $28 JCPenney, Kohl's Department Stores, Men's and Women's Small $14 - 42 $17 Inc., Montgomery Ward Leather Goods & Co.) Men's and Women's Belts $14 - 20 $18
OTHER PRODUCTS LICENSED PRODUCTS. In order to complement the Company's existing line of products and to increase consumer awareness of the FOSSIL brand, the Company has entered into license agreements for other categories of fashion accessories. These license agreements provide for royalty income to the Company based on a percentage of net sales and are subject to certain guaranteed minimum royalties. In 1999 the Company entered into a multi-year license agreement with the Safilo Group for the manufacture, marketing and sale of optical frames under the FOSSIL brand in the United States and Canada and optical frames and sunglasses in Italy. The Company also entered into a multi-year license agreement for the manufacture, marketing and sale of certain handbags, backpacks and sports bags in Germany, Austria and Switzerland under the FOSSIL brand. FUTURE PRODUCTS. The Company continually evaluates opportunities to expand its product offerings in the future to include other accessory or apparel lines that would complement its existing product. DESIGN AND DEVELOPMENT The Company's products are created and developed by its in-house design staff in cooperation with various outside sources, including its manufacturing sources and component suppliers. Product design ideas are drawn from various sources and are reviewed and modified by the design staff to ensure consistency with the Company's existing product offerings and the themes and images that it associates with its products. Senior management is actively involved in the design process. In order to respond effectively to changing consumer preferences, the Company attempts to stay abreast of emerging lifestyle and fashion trends affecting accessories and apparel. In addition, the Company attempts to take advantage of the constant flow of information from the Company's customers regarding the -7- retail performance of its products. The design staff reviews weekly sales reports provided by a substantial number of the Company's customers containing information with respect to sales and inventories by product category and style. Once a trend in the retail performance of a product category or style has been identified, the design and marketing staffs review their product design decisions to ensure that key features of successful products are incorporated into future designs. Other factors having an influence on the design process include the availability of components, the capabilities of the factories that will manufacture the products and the anticipated retail prices of and profit margins for the products. The Company differentiates its products from those of its competitors principally by incorporating into its product designs innovations in fashion details, including variations in the treatment of dials, crystals, cases and straps for the Company's watches and details and treatments of its other accessories. In certain instances, the Company believes that such innovations have allowed it to achieve significant improvements in consumer acceptance of its product offerings with only nominal increases in manufacturing costs. The Company believes that the substantial experience of its design staff will assist it in maintaining its current leadership position in watch design and in expanding the scope of its product offerings. MARKETING AND PROMOTION The Company's current FOSSIL brand advertising themes aim at evoking nostalgia for the simpler values and more optimistic outlook of the 1950s through the use of images of cars, trains, airliners and consumer products that reflect the classic American tastes of the period. These images are carefully coordinated in order to convey the flair for fun, fashion and humor that the Company associates with its products. The Company's nostalgic "America in the 1950s" tin packaging concept for many of its watch products and certain of its accessories is an example of these marketing themes. The tins have become a signature piece to the FOSSIL image and have become popular with collectors. The Company participates in cooperative advertising programs with its major retail customers, whereby it shares the cost of certain of their advertising and promotional expenses. An important aspect of the marketing process involves the use of in-store visual support and other merchandising materials, including packages, signs, posters and fixtures. Through the use of these materials, the Company attempts to differentiate the space used to sell its products from other areas of its customers' stores. In addition, the Company frequently offers promotional gifts, such as T-shirts and caps, to consumers who purchase its products. The Company also provides its customers with a large number of preprinted, customized advertising inserts and from time to time stages promotional events designed to focus public attention on its products. The Company's in-house advertising department designs, develops and implements all aspects of the packaging, advertising, marketing and sales promotion of the Company's products. The advertising staff uses computer-aided design techniques to generate the images presented on product packaging and other advertising materials. The Company believes that the use of computers encourages greater creativity and reduces the time and cost required to incorporate new themes and ideas into effective product packaging and other advertising materials. Senior management is involved in monitoring the Company's advertising and promotional activities to ensure that themes and ideas are communicated in a cohesive manner to the Company's target audience. The Company advertises, markets and promotes its products to potential consumers through a variety of media, including catalog inserts, billboards and print media. The Company has advertised from time to time with billboards and other outdoor advertisements including bus panels in major metropolitan areas. The Company periodically advertises the FOSSIL brand in certain national fashion and consumer -8- magazines such as SEVENTEEN, TEEN PEOPLE, DETAILS, JANE, POV and MEN'S HEALTH, and the RELIC brand in MADEMOISELLE, TEEN, ENTERTAINMENT WEEKLY, PEOPLE and ROLLING STONE. The Company also periodically advertises in trade publications such as WOMEN'S WEAR DAILY and DAILY NEWS RECORD. SALES AND CUSTOMERS The Company sells its products in approximately 17,000 retail locations in the United States through a diversified distribution network that includes approximately 5,000 department store doors, such as Federated/Macy's, May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears for its RELIC brand, as well as approximately 12,000 specialty retail locations. The Company also sells its product at Company-owned FOSSIL retail stores located at retail sites in the United States and sells certain of its products at Company-owned FOSSIL outlet stores located at major outlet malls throughout the United States. The Company also sells its products at retail locations in major airports in the United States, on cruise ships and in independently-owned, authorized FOSSIL retail stores and kiosks in certain international markets. The Company generally does not have long-term contracts with any of its retail customers. All transactions between the Company and its retail customers are conducted on the basis of purchase orders, which generally require payment of amounts due to the Company on a net 30-day basis. DEPARTMENT STORES. For fiscal years 1999, 1998 and 1997, domestic department stores accounted for approximately 58.8%, 60.8% and 49.0% of the Company's net sales, respectively. In addition, in the same periods, the Company's 10 largest customers represented approximately 41%, 47% and 45% of net sales, respectively. No customer accounted for more than 10% of the Company's net sales in fiscal years 1999, 1998 and 1997. Certain of the Company's customers are under common ownership. Sales to the department store group under common ownership by Federated Department Stores accounted for approximately 9.0%, 10.0% and 10.8% of the Company's net sales in fiscal years 1999, 1998 and 1997, respectively. No other customer, when considered as a group under common ownership, accounted for more than 10% of the Company's net sales in fiscal years 1999, 1998 and 1997. INTERNATIONAL SALES. The Company's products are sold 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 Europe, South and Central America, the Caribbean, Canada, the Far East, Australia and the Middle East. Foreign distributors generally purchase products at uniform prices established by the Company for all international sales and resell them to department stores and specialty retail stores. The Company generally receives payment from its foreign distributors in United States currency. During the fiscal years 1999, 1998 and 1997, international and export sales accounted for approximately 31%, 29% and 31% of net sales, respectively. COMPANY-OWNED FOSSIL STORES. In 1995, the Company commenced operations of FOSSIL outlet stores at selected major outlet malls throughout the United States. The Company operated 33 outlet stores at the end of fiscal year 1999. These stores, which operate under the FOSSIL name, enable the Company to liquidate excess inventory and increase brand awareness. The Company's products in such stores are generally sold at discounts from 25% to 50% off the suggested retail price. The Company intends to open three additional outlet stores in 2000. In 1996, the Company commenced operations of full priced FOSSIL retail stores at some of the most prestigious retail malls in the United States in order to broaden the recognition of the FOSSIL brand name. The Company currently operates 17 retail stores in leading malls and retail location throughout the United States. These stores, which operate under the FOSSIL name, carry a full assortment of FOSSIL -9- merchandise which is generally sold at the suggested retail price. In 2000, the Company will beginning offering FOSSIL brand apparel products at approximately 12 FOSSIL retail stores in the United States. The Company intends to open one additional retail store in 2000 offering accessories only. During the fiscal years 1999, 1998 and 1997, Company Store sales accounted for approximately 9%, 9% and 8% of net sales, respectively. INTERNET SALES. In November 1996, the Company established a website at www.FOSSIL.com. In September 1999, the Company's website was redesigned with a stronger emphasis on retail sales and order fulfillment. The Company offers selected FOSSIL brand watches, sunglassses, leather goods and other related products. These products are also available to consumers through a "storefront" on America Online that is connected to the Company's website. In addition to offering selected FOSSIL products, the Company also provides Company news and information on the website. During 2000, the Company plans to launch a business-to-business site that will allow the Company's specialty retail accounts access to real-time inventory, account information and automated order processing. SALES PERSONNEL. The Company utilizes an in-house sales staff and, to a lesser extent, independent sales representatives to promote the sale of the Company's products to retail accounts. As of the end of fiscal year 1999, the Company had 80 in-house sales and customer service employees and 17 independent sales representatives. The Company's in-house sales personnel receive a salary and, in some cases, a commission based on a percentage of gross sales attributable to specified accounts. Independent sales representatives generally do not sell competing product lines and are under contracts with the Company that are generally terminable by either party upon 30 days' prior notice. These independent contractors are compensated on a commission basis. CUSTOMER SERVICE. During the past several years, the retail industry has undergone significant consolidation. As a result of these developments, department stores and other major retailers have generally become more dependent on the resources and market expertise of their suppliers. The Company believes that this dependence has created opportunities for suppliers that provide superior service to their retail customers and are able to manage the retail sales process effectively. In order to take advantage of the opportunities presented by this increasing dependence, the Company has developed an approach to managing the retail sales process that involves monitoring its customers' sales and inventories by product category and style, primarily through EDI, and assisting in the conception, development and implementation of their marketing programs. For example, the Company reviews weekly selling reports prepared by certain of its principal customers and has established an active EDI program with certain of its customers. The Company also places significant emphasis on the establishment of cooperative advertising programs with its major retail customers. The Company believes that its management of the retail sales process has resulted in close relationships with its principal customers, often allowing it to influence the mix, quantity and timing of their purchasing decisions. The Company believes that its sales approach achieves high retail turnover in its products, which can result in attractive profit margins for its retail customers. The Company believes that the resulting profit margins for its retail customers encourage them to devote greater selling space to its products within their stores and enable the Company to work closely with buyers in determining the mix of products any store should carry. In addition, the Company believes that the buyers' familiarity with the Company's sales approach should facilitate the introduction of new products through its existing distribution network. The Company permits the return of damaged or defective products. In addition, although it has no obligation to do so, the Company accepts limited amounts of product returns from its customers in certain other instances. Accordingly, the Company provides allowances for the estimated amount of product -10- returns. The allowances for product returns as of the end of fiscal years 1999, 1998 and 1997 were $17.7 million, $14.0 million and $10.6 million respectively. Since 1990, the Company has not experienced any returns in excess of the aggregate allowances therefor. BACKLOG It is the practice of a substantial number of the Company's customers not to confirm orders by delivering a formal purchase order until a relatively short time prior to the shipment of goods. As a result, the amount of unfilled customer orders includes confirmed orders and orders that the Company believes will be confirmed by delivery of a formal purchase order. A majority of such amounts represent orders that have been confirmed. The remainder of such amounts represent orders that the Company believes, based on industry practice and prior experience, will be confirmed in the ordinary course of business. The Company's backlog at a particular time is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. For fiscal year 1999, the Company had unfilled customer orders of approximately $41.4 million compared to $22.2 million and $16.2 million for fiscal years 1998 and 1997, respectively. MANUFACTURING The Company's products are manufactured to its specifications by independent contractors and by companies in which the Company holds a majority interest. Substantially all of the Company's watches are manufactured by approximately 38 factories located primarily in Hong Kong and China, and to a lesser extent in Japan. The Company believes that its policy of outsourcing products allows it to achieve increased production flexibility while avoiding significant capital expenditures, build-ups of work-in-process inventory and the costs of managing a substantial production work force. The principal components used in the manufacture of the Company's watches are cases, crystals, dials, movements and straps. These components are obtained by the Company's manufacturing sources from a large number of suppliers located principally in Hong Kong, Japan, China, Taiwan, Italy and Korea. The Company estimates that the majority of the movements used in the manufacture of the Company's watches are supplied by two principal vendors. No other single component supplier accounted for more than 10% of component supplies in 1999. Although the Company does not normally engage in direct transactions with component suppliers, in some cases it actively reviews the performance of such suppliers and makes recommendations to its manufacturing sources regarding the sourcing of components. The Company does not believe that its business is materially dependent on any single component supplier. The Company believes that it has established and maintains close relationships with a number of watch manufacturers located in Hong Kong and Japan. In 1999, three separate watch manufacturers in which the Company holds a majority interest, each accounted for 10% or more of the Company's watch supplies. The loss of any one of these manufacturers could temporarily disrupt shipments of certain of the Company's watches. However, as a result of the number of suppliers from which the Company purchases its watches, the Company believes that it could arrange for the shipment of goods from alternative sources within approximately 30 days on terms that are not materially different from those currently available to the Company. Accordingly, the Company does not believe that the loss of any single supplier would have a material adverse effect on the Company's business. In general, however, the future success of the Company will depend upon its ability to maintain close relationships with its current suppliers and to develop long-term relationships with other suppliers that satisfy the Company's requirements for price and production flexibility. -11- The Company's products are manufactured according to plans that reflect management's estimates of product performance based on recent sales results, current economic conditions and prior experience with manufacturing sources. The average lead time from the commitment to purchase products through the production and shipment thereof ranges from two to three months in the case of watches, from three to six months in the case of sunglasses and from three to four months in the case of leather goods. The Company believes that the close relationships that it has established and maintains with its principal manufacturing sources constitute a significant competitive advantage and allow it to quickly and efficiently introduce innovative product designs and alter production in response to the retail performance of its products. QUALITY CONTROL The Company's quality control program attempts to ensure that its products meet the standards established by its design staff. Samples of products are inspected by the Company prior to the placement of orders with manufacturing sources to ensure compliance with its specifications. The operations of the Company's manufacturing sources located in Hong Kong are monitored on a periodic basis by Fossil (East). Substantially all of the Company's watches and certain of its other accessories are inspected by personnel of Fossil East or by the manufacturer prior to shipment to the Company. In addition, the Company performs quality control checks on its products upon receipt at the Company's facility. DISTRIBUTION Upon completion of manufacturing, the Company's products are shipped to its warehousing and distribution centers in Richardson, Texas, Italy, Japan, Hong Kong, the United Kingdom and Germany from which they are shipped to customers in selected markets. Since July 1997, the Company has owned and operated a warehouse and distribution facility in Richardson, Texas, adjacent to the Company's headquarters, to maximize the Company's inventory management and distribution capabilities. The Company's warehouse and distribution facility in Richardson, Texas is operated in a special purpose subzone established by the United States Department of Commerce Foreign Trade Zone Board. As a result of the establishment of the subzone, the Company enjoys certain economic and operational advantages: (i) the Company may not have to pay duty on imported merchandise until it leaves the subzone and enters the United States market, (ii) the Company does not pay any United States duty on merchandise if the imported merchandise is subsequently re-exported, and (iii) the Company does not pay local property tax on inventory located within the subzone. MANAGEMENT INFORMATION SYSTEMS INVENTORY CONTROL. The Company maintains inventory control systems at its facilities that enable it to track each item of merchandise from receipt from its manufacturing sources, through shipment to its customers. To facilitate this tracking, a significant number of products sold by the Company are pre-ticketed and bar coded prior to shipment to its retail customers. The Company's inventory control systems report shipping, sales and individual SKU level inventory information. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category and style, primarily through EDI. The Company believes that its distribution capabilities enable it to reduce inventory risk and increase flexibility in responding to the delivery requirements of its customers. The Company's management believes that its EDI efforts will continue to grow in the future as customers focus further on increasing operating efficiencies. In addition, the Company maintains systems that are designed to track inventory movement -12- through the FOSSIL retail and outlet stores. Detailed sales transaction records are accumulated on each store's point-of-sale system and polled nightly by the Company. WARRANTY AND REPAIR The Company's FOSSIL watch products are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase. The Company's RELIC watch products are covered by a comparable 12 year warranty. The Company's licensed watch products generally are covered by one (1) year limited warranty. The Company's sunglass line is covered by a one year limited warranty against defects in materials or workmanship. Defective products returned by consumers are processed at the Company's warehousing and distribution centers. In most cases, defective products under warranty are repaired by the Company's personnel. Products under warranty that cannot be repaired in a cost-effective manner are replaced by the Company at no cost to the customer. The Company also performs watch repair services on behalf of certain of its private label customers. GOVERNMENTAL REGULATIONS IMPORTS AND IMPORT RESTRICTIONS. Most of the Company's products are manufactured overseas. As a result, the United States and the countries in which the Company's products are manufactured or sold may from time to time modify existing or impose new quotas, duties, tariffs or other restrictions in a manner that adversely affects the Company. For example, the Company's products imported to the United States are subject to United States customs duties and, in the ordinary course of its business, the Company may from time to time be subject to claims by the United States Customs Service for duties and other charges. Factors which may influence the modification or imposition of these restrictions include the determination by the United States Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to United States firms that rely on intellectual property, trade disputes between the United States and a country that leads to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably by the government of the United States. The Company cannot predict the effect, if any, these events would have on its operations, especially in light of the concentration of its manufacturing operations in Hong Kong and China. GENERAL. The Company's sunglass products are subject to regulation by the United States Food and Drug Administration as medical devices. The Company does not believe that compliance with such regulations is material to its operations. In addition, the Company is subject to various state and federal regulations generally applicable to similar businesses. INTELLECTUAL PROPERTY TRADEMARKS: The Company has registered the FOSSIL and RELIC trademarks for use on the Company's watches, leather goods and other fashion accessories. The Company has also registered or applied for the registration of certain other marks used by the Company in conjunction with the sale and marketing of its products and services. In addition, the Company has registered certain of its trademarks, including FOSSIL and RELIC, in certain foreign countries, including a number of countries located in Europe, the Far East, the Middle East, South America and Central America. The Company also has certain trade dress rights in, and has applied for registration of, the distinctive rectangular tins in which the Company packages the majority of its FOSSIL watch products. -13- PATENTS: The Company has been granted, and has pending, various United States and international design and utility patents related to its BIG TIC watch line. The Company also has been granted, and has pending, various United States patents related to certain of its other products. The Company regards its trademarks, trade dress and patents as valuable assets and believes that they have significant value in the marketing of its products. The Company intends to protect its intellectual property rights vigorously against infringement. COMPETITION There is intense competition in each of the businesses in which the Company competes. The Company's watch business competes with a number of established manufacturers, importers and distributors such as Guess? Anne Klein II, Kenneth Cole and Swatch. In addition, the Company's leather goods and sunglass businesses compete with a large number of established companies that have significantly greater experience than the Company in designing, developing, marketing and distributing such products. In all of its businesses, the Company competes with numerous manufacturers, importers and distributors who have significantly greater financial, distribution, advertising and marketing resources than the Company. The Company's competitors include distributors that import watches and accessories from abroad, domestic companies that have established foreign manufacturing relationships and companies that produce accessories domestically. The Company competes primarily on the basis of style, price, value, quality, brand name, advertising, marketing and distribution. In addition, the Company believes that its ability to identify and respond to changing fashion trends and consumer preferences, to maintain existing relationships and develop new relationships with manufacturing sources, to deliver quality merchandise in a timely manner and to manage the retail sales process are important factors in its ability to compete. The Company considers that the risk of significant new competitors is mitigated to some extent by barriers to entry such as high startup costs and the development of long-term relationships with customers and manufacturing sources. During the past few years, it has been the Company's experience that better department stores and other major retailers have been increasingly unwilling to source products from suppliers who are not well capitalized or do not have a demonstrated ability to deliver quality merchandise in a timely manner. There can be no assurance, however, that significant new competitors will not emerge in the future. EMPLOYEES As the end of fiscal year 1999, the Company (excluding the Company's foreign subsidiaries) had 1,217 full-time employees, including 110 in executive or managerial positions and the balance in design, advertising, sales, quality control, distribution, clerical and other office positions. As of the end of fiscal year 1999, the Company's foreign operating subsidiaries had 280 full-time employees, including 36 in managerial positions. The Company has not entered into any collective bargaining agreements with its employees. The Company believes that its relations with its employees are generally good. -14- ITEM 2. PROPERTIES COMPANY FACILITIES: As of the end of fiscal year 1999, the Company owned or leased the following facilities in connection with its domestic and international operations:
LOCATION USE SQUARE FOOTAGE OWNED / LEASED - -------- --- -------------- -------------- Richardson, Texas Corporate headquarters 177,000 Owned Richardson, Texas Warehouse, distribution and general 138,000 Owned office Hong Kong Office, warehouse and assembly factory 37,600 Lease expiring in 2001 Erlstatt, Germany Office, warehouse and distribution 12,000 Lease expiring in 2002 Milton Keynes, England Office, warehouse and distribution 8,250 Lease expiring in 2002 Tokyo, Japan Office, warehouse and distribution 2,800 Lease expiring in 2002 Vicenza, Italy Office 3,100 Lease expiring in 2004 New York, New York General office and showroom 13,596 Lease expiring in 2006 Atlanta, Georgia General office and showroom 1,380 Lease expiring in 2000 Chicago, Illinois General office and showroom 2,980 Lease expiring in 2001 Los Angeles, California General office and showroom 1,675 Lease expiring in 2000
The Company's Richardson, Texas facilities are located on approximately 20 acres of land. The Company owns both facilities and the land on which each is located. RETAIL STORE FACILITIES: As of the end of fiscal year 1999, the Company had entered into 20 lease agreements for retail space at prime locations in the United States for the sale of its full assortment of products. The leases, including renewal options, expire at various times from 2004 to 2010 and provide for minimum annual rentals above specified net sales amounts and for the payment of additional rent based on a percentage of sales ranging from 4% to 9%. The Company is also required to pay its pro rata share of the common area maintenance costs at each retail mall, including, real estate taxes, insurance, maintenance expenses and utilities. OUTLET STORE FACILITIES: The Company also leases retail space at selected outlet centers throughout the United States for the sale of its products. As of the end of fiscal year 1999, the Company had entered into 37 such leases. The leases, including renewal options, expire at various times from 2000 to 2013, and provide for minimum annual rentals and for the payment of additional rent based on a percentage of sales above specified net sales amounts ranging from 3% to 7%. The Company is also required to pay its pro rata share of the common area maintenance costs at each outlet center, including, real estate taxes, insurance, maintenance expenses and utilities. The Company believes that its existing facilities are well maintained, in good operating condition and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company is a party or to which its properties are subject, other than routine litigation incident to the Company's business which is not material to the Company's consolidated financial condition or results of operations. -15- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq National Market under the symbol "FOSL." Quotation of the Company's Common Stock began on the Nasdaq National Market on April 8, 1993. The following table sets forth the range of quarterly high and low sales prices per share of the Company's Common Stock on the Nasdaq National Market for the fiscal years ended January 1, 2000 and January 2, 1999. Such prices have been adjusted to reflect a three-for-two stock split (the "3 for 2 Stock Split") of the Company's Common Stock effected as a fifty percent (50%) stock dividend declared on July 21, 1999, paid on August 17, 1999 to all stockholders of record on August 3, 1999.
HIGH LOW ---- --- Fiscal year beginning January 2, 1999: First Quarter $23.667 $17.833 Second Quarter 33.583 17.250 Third Quarter 36.583 26.333 Fourth Quarter 30.625 18.750 Fiscal year beginning January 3, 1998: First Quarter $14.444 $ 9.667 Second Quarter 18.250 11.917 Third Quarter 18.000 8.667 Fourth Quarter 20.417 8.667
As of March 29, 2000, the Company estimates that there were approximately 4,250 beneficial owners of the Company's Common Stock, represented by approximately 133 holders of record. DIVIDEND POLICY. The Company expects that it will retain all available earnings generated by its operations for the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. Any future determination as to dividend policy will be made in the discretion of the Board of Directors of the Company and will depend on a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. The Company declared a three-for-two stock on July 21, 1999, effected as a fifty percent (50%) stock dividend paid on August 17, 1999 to all stockholders of record on August 3, 1999. -16- ITEM 6. SELECTED FINANCIAL DATA The information appearing under "Financial Highlights" beginning on page 5 of the Fossil, Inc. 1999 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under "Management's Discussion and Analysis" beginning on page 11 of the Fossil, Inc. 1999 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under "Management's Discussion and Analysis" and "Financial Information" beginning on pages 11 and 26, respectively, of the Fossil, Inc. 1999 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The information appearing under "Financial Information" beginning on page 26 of the Fossil, Inc. 1999 Annual Report is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company has had no disagreements with its accountants to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. -17- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of Report. 1. FINANCIAL STATEMENTS: The Financial Statements appearing under "Financial Information" beginning on page 26 of the Fossil, Inc. 1999 Annual Report are incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULE: The following Financial Statement Schedule and related Auditor's Report are contained herein on pages S-1 and S-2 of this Report. Schedule II - Valuation and Qualifying Accounts 3. EXHIBITS: 3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, registration no.33-45357, filed with the Securities and Exchange Commission). 3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.4 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.4(2) Description of Bonus Program (incorporated herein by reference to Exhibit 10.4 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). -18- 10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit 10.12 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992 between Fossil, Inc. and Fossil East Ltd. (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the principal amount of $5,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994 (incorporated by reference to Exhibit 10.7 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners, L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.8 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.10 Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.11 Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to Exhibit 10.13 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 Services and Operations Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil Stores I, Inc. dated December 1, 1994 (incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995 by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.17 Joint Development Agreement entered into on December 25, 1995 by and between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). -19- 10.18 Joint Venture Agreement entered into on December 22, 1994 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18, 1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick (incorporated by reference to Exhibit 10.32 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1996). 10.21 Stock Purchase Agreement dated February 1, 1997, by and between Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the transition period from January 1, 1997 to April 5, 1997). 10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.24(2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan (incoporated by reference to Exhibit 10.24 of the Company's Report on Form 10-K for the year-ended January 2, 1999). 10.25(2) Fossil, Inc. and Affiliates Deferred Compensation Plan (incoporated by reference to Exhibit 10.25 of the Company's Report on Form 10-K for the year-ended January 2, 1999). 10.26 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.27 Fourth Amended and Restated Loan Agreement by and among 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. dated as of June 28, 1999 (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 3, 1999) 10.28 Joint Venture Agreement between Fossil, Inc. and Seiko Instruments America, Inc. dated June 1, 1999 (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999) 10.29 Service Agreement between SII Marketing International, Inc. and Fossil Partners, L.P. dated August 9, 1999 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999). 10.30 Asset Purchase Agreement by and between Junghans UK Limited and Fossil (UK) Ltd. dated August 1999 (without schedules) (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999) 13(1) Fossil, Inc. 1999 Annual Report to Stockholders. 21.1(1) Subsidiaries of Fossil, Inc. -20- 23.1(1) Consent of Independent Auditors. 27 (1) Financial Data Schedule. (1) Filed herewith. (2) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The Company did not file any report on Form 8-K during the last quarter of the period covered by this Report. -21- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Richardson, State of Texas, on March 30, 2000. FOSSIL, INC. /s/ Tom Kartsotis --------------------------------------- TOM KARTSOTIS, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE /s/ Tom Kartsotis - -------------------------------------------- Chairman of the Board, Chief Executive March 30, 2000 TOM KARTSOTIS Officer and Director (Principal Executive Officer) /s/ Kosta N. Kartsotis - -------------------------------------------- President and Chief Operating Officer March 30, 2000 KOSTA N. KARTSOTIS and Director /s/ Randy S. Kercho - -------------------------------------------- Executive Vice President, Chief Financial March 30, 2000 RANDY S. KERCHO Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Michael W. Barnes - -------------------------------------------- Executive Vice President and Director March 30, 2000 MICHAEL W. BARNES /s/ Jal S. Shroff - -------------------------------------------- Director March 30, 2000 JAL S. SHROFF /s/ Kenneth W. Anderson - -------------------------------------------- Director March 30, 2000 KENNETH W. ANDERSON /s/ Alan J. Gold - -------------------------------------------- Director March 30, 2000 ALAN J. GOLD /s/ Michael Steinberg - -------------------------------------------- Director March 30, 2000 MICHAEL STEINBERG /s/ Donald J. Stone - -------------------------------------------- Director March 30, 2000 DONALD J. STONE
-22- INDEPENDENT AUDITORS' REPORT To the Directors of Fossil, Inc.: We have audited the consolidated financial statements of Fossil, Inc. and subsidiaries as of January 1, 2000 and January 2, 1999 and for each of the three years in the period ended January 1, 2000, and have issued our report thereon dated February 18, 2000, which report expressed an unqualified opinion; such consolidated financial statements and report are included in your 1999 Annual Report to Stockholders and are incorporated herein by reference. Our audit also included the consolidated financial statement schedule of Fossil, Inc. and subsidiaries listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Dallas, Texas February 18, 2000 S-1 SCHEDULE II FOSSIL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Fiscal Years 1997, 1998, and 1999 (in thousands)
ADDITIONS --------- CHARGED DEDUCTIONS BALANCE AT (CREDITED) TO -------------- BEGINNING OF COSTS AND ACTUAL RETURNS BALANCE AT END OF CLASSIFICATION PERIOD EXPENSES OR WRITEOFFS PERIOD - -------------- ------ -------- ------------- ------ Fiscal Year 1997: Accounts receivable allowances: Sales returns 8,854 17,399 (15,677) 10,576 Bad debts 4,292 2,025 (1,617) 4,700 Cash discounts 214 205 (230) 189 Inventory in transit for estimated customer returns (4,464) (9,716) 8,485 (5,695) Fiscal Year 1998: Accounts receivable allowances: Sales returns 10,576 22,967 (19,577) 13,966 Bad debts 4,700 4,005 (1,841) 6,864 Cash discounts 189 249 (210) 228 Inventory in transit for estimated customer returns (5,695) (12,595) 10,805 (7,485) Fiscal Year 1999: Accounts receivable allowances: Sales returns 13,966 23,667 (19,933) 17,700 Bad debts 6,864 2,573 (1,480) 7,957 Cash discounts 228 219 (274) 173 Inventory in transit for estimated customer returns (7,485) (10,732) 8,754 (9,463)
S-2 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 3.5 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.6 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.4(2) Description of Bonus Program (incorporated herein by reference to Exhibit 10.4 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit 10.12 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992 between Fossil, Inc. and Fossil East Ltd. (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the principal amount of $5,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994 (incorporated by reference to Exhibit 10.7 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners, L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.8 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.10 Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.11 Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to Exhibit 10.13 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 Services and Operations Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil Stores I, Inc. dated December 1, 1994 (incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995 by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.17 Joint Development Agreement entered into on December 25, 1995 by and between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.18 Joint Venture Agreement entered into on December 22, 1994 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18, 1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick (incorporated by reference to Exhibit 10.32 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1996). 10.22 Stock Purchase Agreement dated February 1, 1997, by and between Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the transition period from January 1, 1997 to April 5, 1997). 10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.24(2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan (incoporated by reference to Exhibit 10.24 of the Company's Report on Form 10-K for the year-ended January 2, 1999). 10.25(2) Fossil, Inc. and Affiliates Deferred Compensation Plan (incoporated by reference to Exhibit 10.25 of the Company's Report on Form 10-K for the year-ended January 2, 1999). 10.27 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.27 Fourth Amended and Restated Loan Agreement by and among 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. dated as of June 28, 1999 (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 3, 1999) 10.28 Joint Venture Agreement between Fossil, Inc. and Seiko Instruments America, Inc. dated June 1, 1999 (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999) 10.29 Service Agreement between SII Marketing International, Inc. and Fossil Partners, L.P. dated August 9, 1999 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999). 10.30 Asset Purchase Agreement by and between Junghans UK Limited and Fossil (UK) Ltd. dated August 1999 (without schedules) (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended October 2, 1999) 13(1) Fossil, Inc. 1999 Annual Report to Stockholders. 21.1(1) Subsidiaries of Fossil, Inc. 23.1(1) Consent of Independent Auditors. 27 (1) Financial Data Schedule. (1) Filed herewith. (2) Management contract or compensatory plan or arrangement. EX-13 2 EXHIBIT 13 FOSSIL 1999 ANNUAL REPORT COMPANY PROFILE ...................................................4 FINANCIAL HIGHLIGHTS...............................................5 LETTER TO THE STOCKHOLDERS.........................................6 COMPANY OVERVIEW...................................................8 MANAGEMENT'S DISCUSSION AND ANALYSIS......................................................11 FINANCIAL INFORMATION.............................................26 CORPORATE INFORMATION.............................................44 1 [Graphic Images] 2 [Graphic Images] 3 COMPANY PROFILE Fossil is a design, development, marketing and distribution company that specializes in consumer products predicated on fashion and value. The Company's principle offerings include an extensive line of fashion watches sold under the FOSSIL and RELIC brands as well as complementary lines of small leather goods, belts, handbags and sunglasses. The Company's products are sold in department stores and specialty retail stores in over 85 countries around the world, in addition to the Company's e-commerce website at www.Fossil.com. The Company differentiates its products from those of its competitors principally through innovations in fashion details, including variations in the treatment of watch dials, crystals, cases, straps and bracelets for the Company's watches and innovative treatments and details in its other accessories. An in-house creative services team coordinates product design, packaging, advertising and in-store presentations to more effectively and cohesively communicate to its target markets the themes and images associated with its brands. Brand name development is further enhanced through Company-owned stores as well as the Company's website. Utilizing several majority-owned watch assembly facilities and centralized distribution points enables the Company to reduce its inventory risk, increase flexibility in meeting the delivery requirements of its customers and maintain significant cost advantages compared to its competitors. To further leverage the Company's infrastructure, including design, development and production expertise, the Company has entered into license agreements to manufacture, market and sell watches bearing internationally recognized brands of other companies as well as design and develop private label products for some of the most distinguished companies in the world. OPERATING NET SALES [GRAPH] INCOME [GRAPH] (in Millions of Dollars) (in Millions of Dollars) NET INCOME [GRAPH] STOCKHOLDERS' EQUITY [GRAPH] (in Millions of Dollars) (in Millions of Dollars) 4
FINANCIAL HIGHLIGHTS FISCAL YEAR 1999 1998 1997 1996 1995 IN THOUSANDS, EXCEPT PER SHARE DATA Net sales ........................................... $418,762 $304,743 $244,798 $ 205,899 $ 181,114 Gross profit ........................................ 212,887 150,504 117,528 98,038 82,900 Operating income .................................... 87,449 55,370 34,610 24,373 20,463 Income before income taxes .......................... 87,841 54,729 32,151 23,040 20,142 Net income .......................................... 51,826 32,161 18,942 13,591 12,057 Basic earnings per share (1) ........................ 1.63 1.04 0.63 0.46 0.41 Diluted earnings per share (1) ...................... 1.55 0.99 0.61 0.45 0.40 Weighted average common shares outstanding: Basic shares (1) ................................ 31,900 31,054 30,203 29,675 29,642 Diluted shares (1) .............................. 33,428 32,586 31,250 30,101 29,910 Working capital ..................................... $155,198 $109,040 $ 70,603 $ 59,861 $ 49,251 Total assets ........................................ 269,364 194,078 139,570 118,978 96,994 Long-term debt ...................................... -- -- -- 4,350 4,811 Stockholders' equity ................................ 191,197 134,919 95,263 74,568 61,269 Return on average stockholders' equity .............. 32.2% 29.3% 23.1% 20.3% 22.0%
(1) All share and per share data has been adjusted to reflect a three-for-two stock split effected in the form of a stock dividend paid August 17,1999. STOCK INFORMATION Fossil's common stock prices are published daily in The Wall Street Journal and other publications under the Nasdaq National Market Listing. The stock is traded under the ticker symbol "FOSL." The following are the high and low sale prices of the Company's stock per the Nasdaq National Market. All share data has been adjusted to reflect the three-for-two stock splits effected in the form of a stock dividend paid on April 8, 1998 and August 17, 1999. Stock prices have been adjusted in certain cases to the nearest traded amount.
1999 1998 High Low High Low First quarter....... $ 23.667 $ 17.833 $ 14.444 $ 9.667 Second quarter...... 33.583 17.250 18.250 11.917 Third quarter....... 36.583 26.333 18.000 8.667 Fourth quarter...... 30.625 18.750 20.417 8.667
5 LETTER TO THE STOCKHOLDERS FOSSIL management is pleased to have delivered a solid financial performance in 1999 having once again achieved record levels of sales and earnings. Now our focus is squarely on the future and how the Company is positioned to address the challenges ahead. Our focus for the future includes: - - Capitalizing on the fact that markets are becoming increasingly global. - - Continuing to expand within existing distribution channels. - - Maximizing both commercial and operating benefits brought on by the advancement of the Internet. - - Positioning our brands to attract an increasingly influential younger consumer while still appealing to a wider customer base. - - Building and retaining a strong management team that will enable us to effectively respond to these challenges. The following more specifically outlines each of the above mentioned focuses. GLOBAL MARKETS FOSSIL has continued to impact international markets by establishing sales and distribution points throughout the world. Our global infrastructure includes wholly owned subsidiaries, joint venture partnerships and third party distribution relationships that cover more than 85 countries. Our global business is profitable and has a tremendous opportunity for further expansion. CHANNELS OF DISTRIBUTION Our Company has the advantage of operating across several unique distribution channels that can grow independently of each other. Domestically, the FOSSIL brand has established itself as a leading brand name in the accessory departments of major department stores. The power of the FOSSIL brand and our ability to attract a young, hip customer has also enabled us to increase our market presence within specialty stores and watch-specific retailers. In addition, our expansion of company-owned FOSSIL Stores will continue to serve as showcases for our brand and products while at the same time, continuing to drive revenue and earnings. Sales of RELIC brand watches grew in excess of 80% last year. There is tremendous room for future growth as RELIC watches continue to turn faster at retail than competitors in the national and chain department store channel of distribution. Retailers are expanding the importance of RELIC within their watch assortments and are open to the expansion of the brand into other non-watch categories. The mass-market channel of distribution also represents an opportunity for the Company through a strategic alliance with Seiko Instruments America, Inc. INTERNET The Company's product lines are a natural fit for commerce over the Internet. We established FOSSIL.COM five years ago and were one of the first retailers selling product over AOL's shopping channel. Today our presence on the web has grown to include alliances with several portals and affiliate sites drawing three million unique visitors to our site during 1999. This year we are also launching our own business-to-business site that will offer broader and more timely service to smaller specialty stores that do not yet have all the electronic capabilities of their department store counterparts. Our next challenge is to develop communication lines utilizing the web to tie our suppliers into our Company in order to reduce inventory lead times and dollars invested in inventory at any point in time. 6 TARGET AUDIENCE Today's young consumers are influencing the marketplace to a magnitude that has not been experienced previously. Many companies rush to market with products that appeal to these consumers only to discover that what is "in" today is "out" tomorrow. Our Company has been successful in attracting this younger consumer--while still managing to appeal to a much wider customer base, both male and female. We have accomplished this by becoming a true "Left Brain/Right Brain" company. We believe our creative design and product development groups (Left Brain) are unparalleled in our industry. We have also developed sophisticated internal systems that enable us to rapidly track and adjust to changes in consumer preferences (Right Brain). This combination of art and science creates a strategic advantage that keeps our products in the mainstream of consumer preferences and our inventory levels (plus markdown exposure) under control. MANAGEMENT TEAM The majority of our management team has a retail background. They have lived through and adapted to the constant change inherent in retail businesses. Over the past seven years as a public company, our management team has demonstrated a consistent ability to respond to the demands of a dynamic marketplace. This team has implemented systems and built a Company that has grown stronger each quarter, both financially and from an infrastructure perspective. They have developed Company-owned brands that have consistently increased in recognition and have significant momentum as we enter the new decade. It is important to remember that FOSSIL's growth has come almost entirely through internal growth as opposed to growth by acquisition. In closing, we'd like to thank our dedicated employees all over the world for the hard work and ingenuity that they demonstrate every day in building this Company. We hope that you, as our stockholders, are pleased with the financial performance that has been delivered in 1999 and are as excited as we are about the significant opportunities that lie ahead for this Company. Sincerely, /s/ Tom Kartsotis /s/ Kosta Kartsotis Tom Kartsotis Kosta Kartsotis Chairman of the Board President 7 COMPANY OVERVIEW The Company's long-term goal is to capitalize on the strength of the growing consumer recognition of the FOSSIL and RELIC brands and to capture an increasing share of a growing number of markets by providing consumers with fashionable, high quality, value-driven products. The FOSSIL brand continued to be one of the leading fashion watch brands in 1999, while continuing to gain momentum in sales of non-watch products and increase brand presence globally. FOSSIL PRODUCTS WATCHES: The FOSSIL brand continued to build market share in department stores in 1999. New product introductions under the Company's three core watch lines, FOSSIL BLUE, FOSSIL STEEL and F2, represented the majority of the Company's FOSSIL brand watch sales. The introduction of FOSSIL BIG TIC in the fall of 1998 was highly successful and contributed positively to sales growth throughout 1999. The Company recently introduced new products featuring titanium and aluminum, as well as watches incorporating digital technology. LEATHERS: The leather division continued to exhibit strong sales and earnings growth in 1999 with significant increases in sales across nearly all of the FOSSIL brand leather product lines. Handbags continued to increase market share in 1999 further enhancing the visibility and sales of other accessory categories. Strong growth should continue in the leather product category during 2000. SUNGLASSES/OPTICAL FRAMES/LICENSED PRODUCTS: FOSSIL sunwear continued to show double-digit growth in 1999 as a result of the wider breadth of price points and design changes introduced in 1997. The overall success of the division was spurred by significant growth in optical and specialty stores such as Lenscrafters and Sunglass Hut. The Company also introduced FOSSIL brand optical frames to optical stores in the United States during 1999 under a license agreement with the Safilo Group. The Company continues to test new products bearing the FOSSIL mark by utilizing license agreements with select partners. The Company is careful to limit the size and penetration of these product categories to be sure that the products are consistent with the brand image and desirable to end consumers. The Company will continue to evaluate additional license arrangements as a mechanism for product expansion as suitable products and partners are identified. APPAREL: In 2000, the Company announced plans to introduce a line of FOSSIL brand apparel products. The apparel line will consist of casual wear and jeans wear and will be available at approximately 12 new FOSSIL retail stores opening in the third quarter of 2000. 8 RELIC PRODUCTS: RELIC brand watches continued to gain momentum in leading national and regional chain department stores nearly doubling its sales volumes over 1998. New RELIC visual presentations, fixtures and logo designs first introduced in 1998 have assisted in increasing brand name recognition allowing the Company to begin extending the RELIC brand to other accessory categories, including handbags, small leather goods and men's and women's belts. INTERNATIONAL SALES: Increasing demand for FOSSIL products worldwide, coupled with the expansion of the EMPORIO ARMANI licensed line of watches, helped broaden the Company's business tremendously across the globe. The FOSSIL brand is available in over 85 countries around the world through the Company's subsidiary operations, joint ventures and network of approximately 52 independent distributors. International distribution will continue to offer excellent growth opportunities for the Company in 2000. LICENSED BRANDS: The Company has a worldwide, multi-year licensing agreement with Giorgio Armani for EMPORIO ARMANI OROLOGI, a line of watches featuring distinctive interpretations of retro and modern design. Available in Emporio Armani Boutiques, better department stores, specialty stores and select jewelry stores, the line continues to grow in sales and distribution worldwide. The Company also entered into worldwide, multi-year licensing agreements in 1999 to manufacture, market and distribute fashion watches under the DKNY and DIESEL brand names. The DKNY watch line was introduced in early 2000, with the DIESEL launch scheduled for mid-year 2000. FOSSIL STORES: The Company operated 17 retail stores at the end of 1999, adding eight new locations during the year, including the Company's first retail store in New York City. The FOSSIL stores continue to provide an exciting and profitable format in which to display the Company's increasing product assortments and to convey the FOSSIL brand image. The Company plans on opening approximately 12 larger format retail stores in 2000 to accommodate the launch of FOSSIL brand apparel. The Company also operated 33 outlet stores coast-to-coast at the end of 1999. These stores allow the Company to control the timely liquidation of discontinued styles while maintaining the integrity of the FOSSIL brand. PRIVATE LABEL AND PREMIUMS: In addition to building its own brand, the Company also designs and manufactures private label products for some of the most prestigious companies in the world, including national retailers, entertainment companies and theme restaurants. The Company continues to expand its core private label watch business as well as integrate other product categories such as leather goods and eyewear. The Company's premium/incentive division utilizes its sourcing, design, and development expertise to translate many corporate themes, events, or promotions into a comprehensive custom product program. 9 [Graphics of Fossil Retail Store] 10 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company is 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. The Company's current product offerings include an extensive line of fashion watches sold under its FOSSIL and RELIC brands as well as complementary lines of small leather goods, belts, handbags and sunglasses. 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 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 and leveraging of its infrastructure has contributed to its increasing net sales and operating profits. COMPANY HIGHLIGHTS OVERALL - - Net sales and operating income have grown at an average compounded growth rate of in excess of 30% and 58%, respectively, for the last two fiscal years and 21% and 27%, respectively, over the last five fiscal years. - - For the past 14 consecutive fiscal quarters ended January 1, 2000, the Company has achieved increases in net income of not less than 26% and averaging 55% in comparison to the previous year's comparable period. - - The Company declared a three-for-two stock split of the Company's $0.01 par-value common stock ("Common Stock") effected in the form of a 50% stock dividend during each of the past two fiscal years. - - A secondary offering of 2,302,500 shares of the Company's Common Stock was completed mid-year 1998, in which the Company sold 215,000 shares. - - The Company's Common Stock was added to the Standard & Poor's Small Cap 600 Index during June 1999. - - Effective September 1999, the Company acquired certain assets of its distributor in the United Kingdom, leaving the Company as the sole distributor of its products in that region. - - In 1997, the Company acquired the remaining 40% of the capital stock of its distribution company covering Italy and the remaining 35% of the capital stock of one of the Company's three main watch assembly factories. PRODUCTS - - The Company continued to introduce new products under its three principal watch lines consisting of FOSSIL BLUE (a line of mainly metal-bracelet, water resistant sport watches), FOSSIL STEEL (a line of stainless steel watches) and F2 (ladies metal-bracelet watches). These three watch lines continue to represent the majority of FOSSIL brand watch sales. - - FOSSIL BIG TIC, a revolutionary part analog, part digital watch that highlights the seconds on a backlite digital display was introduced on a test basis late in 1998. This line was extremely well received at retail and contributed positively to sales growth throughout 1999. - - The Company has continued to design and introduce new watch products utilizing various technologies and metal treatments to stay abreast of fashions trends. These introductions have included various watches utilizing digital technology as well as watches incorporating titanium and aluminum. 11 - - RELIC brand watches, the Company-owned brand sold in leading national and regional chain department stores and specialty stores, continued to gain momentum in 1999 almost doubling its sales volume over the prior fiscal year. The increasing brand name recognition of RELIC allowed the Company to begin extending the RELC brand into various leather accessory categories in late 1998. - - Net Sales of the Company's Leather products category increased over 40% in 1999 compared to 1998 fueled by significant increases in sales in nearly all of the FOSSIL branded product lines as well as growth stemming from the continued roll-out of RELIC brand goods. - - Sales of FOSSIL brand sunglasses continued to show double-digit growth the past two fiscal years, reflecting positively on the wider breadth of price points and designs the Company introduced into the line during 1997. - - In order to complement the Company's existing line of products and to increase consumer awareness of the FOSSIL brand, the Company has entered into license agreements for other categories of fashion accessories and apparel. RETAIL LOCATION EXPANSION - - The Company operated 17 FOSSIL retail stores at the end of 1999, selling principally FOSSIL brand products. The retail stores, generally located in high volume, international destination-type malls, allow the Company to test new product introductions and enhance the FOSSIL brand name. The Company opened eight and three retail stores in 1999 and 1998, respectively. - - The Company has announced plans to open approximately 12 larger format retail stores during the Company's fiscal 2000 third quarter to accommodate the launch of FOSSIL branded apparel. These stores will average 3,500 square feet compared to a current average of 2,300 square feet. The apparel line will consist of casual wear and jeans wear. - - The Company operated 33 FOSSIL outlet stores at the end of 1999. The Company opened an additional five outlet stores in 1999 and one store in 1998. LEVERAGING INFRASTRUCTURE - - The Company has entered into various worldwide, multi-year licensing agreements to design, produce and market certain designer brand watches. These agreements include licenses for the EMPORIO ARMANI, DKNY, DONNA KARAN NEW YORK and DIESEL brands. The Company launched EMPORIO ARMANI brand watches in September 1997, and will launch DKNY and DIESEL brand watches worldwide in 2000. - - The Company entered into a joint venture agreement with Seiko Instruments America, Inc. in August 1999, in which the Company acquired a 20% equity interest. The joint venture company ("SMI") is responsible for designing, manufacturing, marketing and distributing watches principally to the mass-market distribution channel. The Company performs product design services for SMI for which it will receive additional revenues through a design services agreement. - - The Company signed a five-year agreement with Eddie Bauer, Inc. appointing the Company as the exclusive supplier of Eddie Bauer watches effective January 1998. 12 [Graphic of FOSSIL products and images] 13 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 consolidated statements of income and (ii) the percentage changes in these line items between the years indicated.
PERCENTAGE PERCENTAGE CHANGE CHANGE FROM FROM FISCAL YEAR 1999 1998 1998 1997 1997 ------ ------ ------ ------ ------ Net sales ....................... 100.0% 37.4% 100.0% 24.5% 100.0% Cost of sales ................... 49.2 33.5 50.6 21.2 52.0 ------ ------ ------ Gross profit .................... 50.8 41.4 49.4 28.1 48.0 Operating expenses .............. 29.9 31.9 31.2 14.7 33.9 ------ ------ ------ Operating income ................ 20.9 57.9 18.2 60.0 14.1 Interest expense ................ -- (44.5) 0.1 (78.0) 0.4 Other income (expense)--net ..... 0.1 218.5 (0.1) 71.4 (0.6) ------ ------ ------ Income before income taxes ...... 21.0 60.5 18.0 70.2 13.1 Income taxes .................... 8.6 59.6 7.4 70.9 5.4 ------ ------ ------ Net income ...................... 12.4% 61.1% 10.6% 69.8% 7.7% ------ ------ ------
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 fiscal years indicated:
Amount in millions Percent of total -------------------- ------------------ FISCAL YEAR 1999 1998 1997 1999 1998 1997 ------- ------- -------- ------ ------- ------- International: Europe .......................... $ 86.7 $ 62.7 $ 45.2 20.7% 20.6% 18.4% Other ........................... 41.6 26.9 30.8 9.9 8.8 12.6 ------- ------- -------- ------ ------- ------- Total international ............. 128.3 89.6 76.0 30.6 29.4 31.0 Domestic: Watch products .................. 180.7 137.0 101.2 43.2% 45.0% 41.3% Other products .................. 72.1 52.0 47.6 17.2 17.0 19.5 ------- ------- -------- ------ ------- ------- Total ....................... 252.8 189.0 148.8 60.4 62.0 60.8 Stores .......................... 37.7 26.1 20.0 9.0 8.6 8.2 ------- ------- -------- ------ ------- ------- Total domestic .................. 290.5 215.1 168.8 69.4 70.6 69.0 ------- ------- -------- ------ ------- ------- Total net sales ................. $ 418.8 $ 304.7 $ 244.8 100.0% 100.0% 100.0% ------- ------- -------- ------ ------- -------
14 [Graphic of various FOSSIL watches] 15 FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES. Net sales growth resulted from sales volume increases across nearly all the Company's product lines and worldwide sales regions. Watch sales were fueled by increased market penetration in department and specialty stores of the Company's three core FOSSIL brand assortments in addition to sales from its Big Tic watch line. Watch sales were also slightly amplified during the first half of 1999 from (a) refilling of certain retailer's watch inventories after a very successful 1998 holiday season and (b) a $7.2 million international-based sale of non-branded premium incentive watches. Increased sales volumes in the Company's leather and eyewear product offerings were generated through market share increases in existing locations as well as through new points of sale. Company-owned retail store expansion in both the Company's retail and outlet stores, as well as increases in same store sales, also positively impacted sales. Management anticipates continued sales volume growth during 2000 from nearly all product lines and geographic areas from both existing products and new product lines scheduled to be launched during the year. GROSS PROFIT. Gross profit margins increased during 1999 primarily as a result of an increase in the Company's sales mix of FOSSIL brand watches, European-based sales, licensed designer brand watch sales and Company-owned store sales. These sales categories generally result in higher gross profit margins than the Company's consolidated average. Management believes gross profit margins during fiscal 2000 will exceed 1999 levels slightly based on an anticipated higher sales mix of licensed designer brand watch and Company-owned store sales. 16 OPERATING EXPENSE. Operating expense increases were primarily to support increased sales volumes. As a percentage of net sales, total selling, general and administrative expenses decreased as a result of leveraging expenses against higher net sales. Management anticipates operating expenses, as a percentage of net sales, in fiscal 2000 to approximate 1999 levels. Management intends to spend any additional earnings that would have generally resulted from leveraging operating expenses against projected higher sales volumes on the long-term growth of the Company. These initiatives include increased brand advertising, web site development and advertising, new business development and the continued investment in the Company's operational infrastructure. OTHER INCOME (EXPENSE). Other income (expense)-net typically reflects interest income from cash investments and the minority interests in the profit/loss of the Company's majority-owned operations. The change in other income/expense was favorable in 1999 as increases in interest income and royalty revenues from licensing the FOSSIL brand offset increases in the minority interest share of profits and additional foreign currency losses, due mainly to the strength of the U.S. dollar. 17 FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES. Sales volume increases of FOSSIL branded watches accounted for the majority of net sales growth worldwide fueled by the continued growth in the Company's FOSSIL BLUE and F2 watch lines. In addition, FOSSIL STEEL, a watch line introduced in mid-1997, positively impacted sales volume growth as the line developed into a core offering. Internationally, the process of aligning the Company's watch collection offered in Europe with the Company's best selling styles in the U.S., which the Company began mid-1997, resulted in significant increases in the European sales momentum. "International Other" sales as denoted in the above table, were negatively impacted in 1998 as a result of declining sales in the Company's Asian-based operations, due primarily to the region's economic problems, and an approximate $6 million sale during 1997 of non-branded watches used as a premium incentive. Worldwide sales generated from the continued roll-out of the Company's Emporio Armani licensed brand watches also positively impacted watch sales during 1998. Leather and sunglass product sales, which comprise the majority of the "Domestic Other" sales line in the above table, each contributed double-digit growth to overall net sales increases in 1998. Continued expansion of Company-owned stores, as well as increases in same store sales, has also added to sales volume growth. GROSS PROFIT. Gross profit margin increases are primarily attributable to the increased strength of the U.S. dollar over the Japanese Yen, an increased mix of the Company's watch products supplied by its majority-owned assembly facilities and increased sales through Company-owned retail locations. The Company's cost of certain watch components declined as the U.S. dollar strengthened in relation to the Japanese Yen. OPERATING EXPENSE. Operating expense increases were due primarily to costs necessary to support increased sales volumes, new ventures and new Company-owned stores. As a percentage of net sales, total selling, general and administrative expenses decreased as a result of leveraging expenses against higher sales volumes. OTHER INCOME (EXPENSE). The change in other income/expense was favorable in 1998 primarily due to an increase in interest income from investing a higher level of cash holdings and the non-recurrence of $0.7 million in legal settlements incurred in 1997. These favorable changes were mitigated by an increase in the minority interests in the profit/loss of the Company's majority-owned operations. EFFECTS OF INFLATION Management does not believe that inflation has had a material impact on results of operations for the periods presented. Substantial increases in costs, however, could have an impact on the Company and the industry. Management believes that, to the extent inflation affects its costs in the future, the Company could generally offset inflation by increasing prices if competitive conditions permit. 18 FOREIGN CURRENCY 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 risk relates to the Euro and 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 1999 and management does not anticipate any significant changes in such exposures or in the strategies it employs to manage such exposure in the near future. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs have been, and are expected to remain, primarily a function of its seasonal working capital requirements. Generally, starting in the second quarter of each fiscal year, the Company's cash needs begin to increase to finance the accumulation of inventory and the build-up of accounts receivable. The Company's cash requirements typically peak in the September-November time frame. Operating cash flow has generally funded the Company's cash requirements and capital expenditures over the past few years. The Company's primary capital requirements are for working capital, investing activities associated with the expansion of its office and distribution facilities, international growth, systems development and Company-owned store development. During 1997, capital expenditures included the construction of a 138,000 square foot warehouse and distribution facility. The construction costs of the facility were approximately $4.4 million. Long-term financing of $5.0 million was obtained in 1994 to cover building projects of which approximately $4.4 million was outstanding at 1997 year-end. During January 1998, the Company paid this long-term credit facility in full with available cash. Capital expenditures during 1998 and 1999 were influenced by expenditures on computer system hardware and software to address the potential Year 2000 issues, the construction costs for additional Company-owned stores and the construction of additional office space. During 1998, the Company completed a secondary offering of 2,302,500 shares of Common Stock in order to increase the liquidity of its Common Stock and to fund working capital needs. Based on the Company's adequate cash levels on hand at the time, only a small portion of the offering related to new Common Stock issued by the Company from which it received approximately $3.6 million in cash proceeds for working capital needs. The Company's Board of Directors during 1998, authorized management to repurchase up to 500,000 shares of Common Stock in open market purchases and in privately negotiated transactions. During fiscal 1998 and 1999, the Company repurchased 188,500 and 90,500 shares of Common Stock, respectively, at a cost of approximately $2.6 million and $2.0 million, respectively. 19 [Graphic of RELIC brand products and images] 20 Management believes the Company's financial position remains extremely strong. Working capital of $155.2 million and net cash balances (defined as cash and cash equivalents plus short-term investments less current notes payable) of $96.7 million existed at the end of fiscal 1999 compared to working capital of $109.0 million and net cash balances of $52.7 million as of year-end 1998. During fiscal year 2000, management believes capital expenditures may exceed 1999 levels to support the Company's planned opening of approximately 15 store locations and further improvements of certain sales and distribution facilities. As of fiscal year-end 1999, the Company had less than $1 million in capital expenditure commitments. Short-term credit facilities totaling $43.0 million are available to the Company for general working capital needs of which $5.0 million was outstanding at the end of 1999. Management believes that cash flow from operations and existing credit facilities will be sufficient to satisfy its capital expenditure requirements. FORWARD-LOOKING STATEMENTS Included within management's discussion and analysis of the Company's operating results and this annual report, "forward-looking statements" were made within the meaning of the Private Securities Litigation Reform Act of 1995 regarding expectations for fiscal 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 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. SELECTED QUARTERLY FINANCIAL DATA The table below sets forth selected quarterly financial information. The information is derived from unaudited consolidated financial statements of the Company and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair statement of results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period. 21
FISCAL YEAR 1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA Net sales ........................................ $83,277 $90,271 $104,831 $140,383 Gross profit ..................................... 42,672 44,750 52,638 72,827 Operating expenses ............................... 24,795 27,991 30,324 42,328 Operating income ................................. 17,877 16,759 22,314 30,499 Income before income taxes ....................... 17,711 16,692 22,256 31,182 Provision for income taxes ....................... 7,280 6,826 9,125 12,784 Net income ....................................... 10,431 9,866 13,131 18,398 Basic earnings per share ......................... 0.34 0.31 0.41 0.57 Diluted earnings per share ....................... 0.32 0.29 0.39 0.55 Gross profit as a percentage of net sales ........ 51.2% 49.6% 50.2% 51.9% Operating expenses as a percentage of net sales .. 29.8% 31.0% 28.9% 30.2% Operating income as a percentage of net sales .... 21.5% 18.6% 21.3% 21.7% FISCAL YEAR 1998 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA Net sales ........................................ $56,885 $64,363 $82,393 $101,102 Gross profit ..................................... 27,901 31,905 40,433 50,265 Operating expenses ............................... 20,051 22,019 24,828 28,236 Operating income ................................. 7,850 9,886 15,605 22,029 Income before income taxes ....................... 7,882 9,697 15,456 21,694 Provision for income taxes ....................... 3,216 3,993 6,400 8,959 Net income ....................................... 4,666 5,704 9,056 12,735 Basic earnings per share ......................... 0.15 0.19 0.29 0.41 Diluted earnings per share ....................... 0.15 0.17 0.28 0.39 Gross profit as a percentage of net sales ........ 49.0% 49.6% 49.1% 49.7% Operating expenses as a percentage of net sales .. 35.2% 34.2% 30.1% 27.9% Operating income as a percentage of net sales .... 13.8% 15.4% 18.9% 21.8%
While the majority of the Company's products are not seasonal in nature, a significant portion of the Company's net sales and operating income are generally derived in the second half of the year. The Company's fourth quarter, which includes the Christmas season, on average generates in excess of 35% of the Company's annual operating income. The amount of net sales and operating income generated during the first quarter is affected by the levels of inventory held by retailers at the end of Christmas season, as well as general economic conditions and other factors beyond the Company's control. In general, lower levels of inventory at the end of the Christmas season may have a positive effect on net sales and operating income in the first quarter as a result of higher levels of restocking orders placed by retailers. Management currently believes that the Company's inventory levels at its major customers as of the end of 1999 were below targeted levels, and therefore could result in higher order levels in the first quarter of fiscal 2000. Management believes the imbalance in inventory levels may be slightly less significant than it was at the end of fiscal 1998. As the Company increases the number of Company-owned outlet and retail stores, it would generally amplify the Company's seasonality by decreasing the Company's operating income in the first quarter and increasing the operating income in the fourth quarter. In addition, new product line launches would generally augment the sales levels in the quarter the product line launch takes place. The results of operations for a particular quarter may also vary due to a number of factors, including retail, economic and monetary conditions, timing of orders or holidays and the mix of the products sold by the Company. During the fourth quarter of 1999, operating expenses, as a percentage of net sales, increased over the prior year comparable period. This increase was primarily a result of increased levels of brand advertising, web development and advertising and the continued investment in the Company's infrastructure. 22 [Graphic of Various Licensed Brands] 23 [Graphic of Fossil watches and images] 24 [Graphic of Fossil watches and images] 25 FINANCIAL INFORMATION INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS AND STOCKHOLDERS OF FOSSIL, INC.: We have audited the accompanying consolidated balance sheets of Fossil, Inc. and subsidiaries as of January 1, 2000 and January 2, 1999 and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended January 1, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fossil, Inc. and subsidiaries at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Dallas, Texas February 18, 2000 REPORT OF MANAGEMENT The accompanying consolidated financial statements and other information contained in this Annual Report have been prepared by management. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based upon our best estimates and judgements. To help assure that financial information is reliable and that assets are safeguarded, management maintains a system of internal controls and procedures which it believes is effective in accomplishing these objectives. These controls and procedures are designed to provide reasonable assurance, at appropriate costs, that transactions are executed and recorded in accordance with management's authorization. The consolidated financial statements and related notes thereto have been audited by Deloitte & Touche LLP, independent auditors. The accompanying auditors' report expresses an independent professional opinion on the fairness of presentation of management's financial statements. The Audit Committee of the Board of Directors is composed of the Company's outside directors, and is responsible for selecting the independent auditing firm to be retained for the coming year. The Audit Committee meets periodically with the independent auditors, as well as with management, to review internal accounting controls and financial reporting matters. The independent auditors also meet privately on occasion with the Audit Committee, to discuss the scope and results of their audits and any recommendations regarding the system of internal accounting controls. /s/ Tom Kartsotis /s/ Randy S. Kercho Tom Kartsotis Randy S. Kercho Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer 26 CONSOLIDATED BALANCE SHEETS
January 1, January 2, 2000 1999 DOLLARS IN THOUSANDS Assets Current assets: Cash and cash equivalents ............................................ $ 90,908 $ 57,263 Short-term marketable investments .................................... 10,870 -- Accounts receivable-net .............................................. 51,399 42,582 Inventories .......................................................... 63,029 57,295 Deferred income tax benefits ......................................... 6,769 5,655 Prepaid expenses and other current assets ............................ 7,832 3,538 --------------------------- Total current assets .............................................. 230,807 166,333 Investment in joint venture .............................................. 3,849 -- Property, plant and equipment-net ........................................ 28,603 23,117 Intangible and other assets .............................................. 6,105 4, 628 --------------------------- Total assets ...................................................... $ 269,364 $194,078 --------------------------- Liabilities and Stockholders' Equity Current liabilities: Notes payable ........................................................ $ 5,043 $ 4,537 Accounts payable ..................................................... 11,870 14,512 Accrued expenses: Co-op advertising ................................................. 15,191 13,311 Compensation ...................................................... 4,617 3,246 Other ............................................................. 21,493 11,201 Income taxes payable ................................................. 17,395 10,487 --------------------------- Total current liabilities ......................................... 75,609 57,294 --------------------------- Commitments (Note 10) Minority interest in subsidiaries ........................................ 2,558 1,865 Stockholders' equity: Common stock, 32,107,270 and 20,932,091 shares issued, respectively ....................................... 321 209 Additional paid-in capital ........................................... 41,774 34,345 Retained earnings .................................................... 153,569 102,858 Accumulated other comprehensive income ............................... (3,259) (1,037) Treasury stock at cost, 59,572 and 103,679 shares, respectively ...... (1,208) (1,456) --------------------------- Total stockholders' equity ........................................ 191,197 134,919 --------------------------- Total liabilities and stockholders' equity ........................ $ 269,364 $194,078 ---------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FISCAL YEAR 1999 1998 1997 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA Net sales ........................................... $ 418,762 $ 304,743 $ 244,798 Cost of sales ....................................... 205,875 154,239 127,270 -------------------------------------------- Gross profit ........................................ 212,887 150,504 117,528 Operating expenses: Selling and distribution ........................ 95,349 71,720 65,101 General and administrative ...................... 30,089 23,414 17,817 -------------------------------------------- Total operating expenses ..................... 125,438 95,134 82,918 -------------------------------------------- Operating income .................................... 87,449 55,370 34,610 -------------------------------------------- Interest expense .................................... 117 211 956 Other income (expense)--net ......................... 509 (430) (1,503) -------------------------------------------- Income before income taxes .......................... 87,841 54,729 32,151 Provision for income taxes .......................... 36,015 22,568 13,209 -------------------------------------------- Net income ...................................... $ 51,826 $ 32,161 $ 18,942 -------------------------------------------- Other comprehensive income: Currency translation adjustment ................. (1,658) 1,181 (1,572) Unrealized loss on marketable investments ....... (564) -- -- -------------------------------------------- Total comprehensive income ................... $ 49,604 $ 33,342 $ 17,370 -------------------------------------------- Earnings per share: Basic ........................................... $ 1.63 $ 1.04 $ 0.63 -------------------------------------------- Diluted ......................................... $ 1.55 $ 0.99 $ 0.61 -------------------------------------------- Weighted average common shares outstanding: Basic ........................................... 31,900,024 31,054,041 30,203,310 -------------------------------------------- Diluted ......................................... 33,428,153 32,586,096 31,250,147 --------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DOLLARS IN THOUSANDS
COMMON STOCK ADDITIONAL PAR PAID-IN RETAINED SHARES VALUE CAPITAL EARNINGS -------- ------- ---------- ---------- Balance, December 31, 1996......... 13,242,994 $ 132 $22,766 $ 52,315 Common stock issued upon exercise of stock options...... 167,899 2 1,623 -- Tax benefit derived from exercise of stock options...... -- -- 464 -- Common stock issued for purchase of additional Italy ownership................ 128,109 1 1,236 -- Three-for-two split................ 6,769,501 68 (68) -- Net income......................... -- -- -- 18,942 Currency translation adjustment..................... -- -- -- -- --------------------------------------------------------------- Balance, January 3, 1998........... 20,308,503 203 26,021 71,257 Common stock issued upon exercise of stock options...... 408,588 4 2,877 -- Tax benefit derived from exercise of stock options...... -- -- 1,495 -- Secondary offering, net of offering costs.......... 215,000 2 3,611 -- Purchase of treasury shares........ -- -- -- -- Reissuance of treasury stock upon exercise of stock options. -- -- -- (560) Net income......................... -- -- -- 32,161 Currency translation adjustment.... -- -- -- -- Other.............................. -- -- 341 -- --------------------------------------------------------------- Balance, January 2, 1999........... 20,932,091 209 34,345 102,858 Common stock issued upon exercise of stock options...... 709,133 7 3,632 -- Tax benefit derived from exercise of stock options...... -- -- 3,902 -- Purchase of treasury shares........ -- -- -- -- Reissuance of treasury stock upon exercise of stock options. -- -- -- (1,115) Three-for-two-stock split.......... 10,466,046 105 (105) -- Net income......................... -- -- -- 51,826 Unrealized loss on marketable investments......... -- -- -- -- Currency translation adjustment.... -- -- -- -- --------------------------------------------------------------- Balance, January 1, 2000........... 32,107,270 $ 321 $41,774 $153,569 --------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME TREASURY STOCK CUMULATIVE UNREALIZED LOSS TOTAL TRANSLATION ON MARKETABLE SHARE STOCKHOLDERS' ADJUSTMENT INVESTMENTS SHARES COST EQUITY ------------ ------------ ------- -------- ---------- Balance, December 31,1996 ......... $ (646) $ -- -- $ -- $ 74,567 Common stock issued upon exercise of stock options ..... -- -- -- -- 1,625 Tax benefit derived from exercise of stock options ..... -- -- -- -- 464 Common stock issued for purchase of additional Italy ownership ............... -- -- -- -- 1,237 Three-for-two split ............... -- -- -- -- -- Net income ........................ -- -- -- -- 18,942 Currency translation adjustment .................... (1,572) -- -- -- (1,572) ------------------------------------------------------------------------ Balance, January 3, 1998 .......... (2,218) -- -- -- 95,263 Common stock issued upon exercise of stock options ..... -- -- -- -- 2,881 Tax benefit derived from exercise of stock options ..... -- -- -- -- 1,495 Secondary offering, net of offering costs ......... -- -- -- -- 3,613 Purchase of treasury shares ....... -- -- (188,500) (2,647) (2,647) Reissuance of treasury stock upon exercise of stock options -- -- 84,821 1,191 631 Net income ........................ -- -- -- -- 32,161 Currency translation adjustment ... 1,181 -- -- -- 1,181 Other ............................. -- -- -- -- 341 ------------------------------------------------------------------------ Balance, January 2, 1999 .......... (1,037) -- (103,679) (1,456) 134,919 Common stock issued upon exercise of stock options ..... -- -- -- -- 3,639 Tax benefit derived from exercise of stock options ..... -- -- -- -- 3,902 Purchase of treasury shares ....... -- -- (90,500) (1,994) (1,994) Reissuance of treasury stock upon exercise of stock options -- -- 134,607 2,242 1,127 Three-for-two-stock split ......... -- -- -- -- -- Net income ........................ -- -- -- -- 51,826 Unrealized loss on marketable investments ........ -- (564) -- -- (564) Currency translation adjustment ... (1,658) -- -- -- (1,658) ------------------------------------------------------------------------ Balance, January 1, 2000 .......... $ (2,695) $ (564) (59,572) $(1,208) $191,197 ------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR 1999 1998 1997 DOLLARS IN THOUSANDS Operating Activities: Net income ............................................ $ 51,826 $ 32,161 $ 18,942 Noncash items affecting net income: Minority interest in subsidiaries ................. 1,635 1,004 344 Depreciation and amortization ..................... 5,889 4,395 3,047 Increase in allowance for doubtful accounts ....... 1,044 2,165 408 Increase in allowance for returns-net of related inventory in transit ........................... 2,098 2,053 784 Deferred income tax benefits ...................... (1,114) (1,151) (837) Changes in assets and liabilities: Accounts receivable ............................... (11,355) (13,899) (6,114) Inventories ....................................... (3,014) (4,575) (662) Prepaid expenses and other current assets ......... (4,733) (1,106) (489) Accounts payable .................................. (5,056) 5,831 1,393 Accrued expenses .................................. 13,544 7,675 2,135 Income taxes payable .............................. 10,811 6,478 4,130 -------------------------------------------- Net cash from operating activities ................ 61,575 41,031 23,081 Investing Activities: Net assets acquired in business combination ....... (2,732) -- (385) Additions to property, plant and equipment ........ (10,568) (6,307) (7,363) Purchase of marketable investments ................ (10,870) -- -- Investment in joint venture ....................... (4,000) -- -- Sale of property and equipment .................... 78 264 -- Decrease (increase) in intangible and other assets. (1,505) (70) 272 -------------------------------------------- Net cash used in investing activities ............. (29,597) (6,113) (7,476) Financing Activities: Issuance of common or treasury stock: Exercise of stock options ...................... 4,766 3,512 1, 624 Secondary offering ............................. -- 3,613 -- Net purchase of treasury stock .................... (1,994) (2,647) -- Distribution of minority interest earnings ........ (790) (390) (499) Repayment of notes payable-affiliates ............. -- -- (1,001) Increase (repayments) of notes payable-banks ...... 505 (3,325) (5,992) Other ............................................. -- 341 -- -------------------------------------------- Net cash from (used in) financing activities ...... 2,487 1,104 (5,868) Effect of exchange rate changes on cash and cash equivalents .............................. (820) 137 (614) -------------------------------------------- Net increase in cash and cash equivalents ............. 33,645 36,159 9,123 Cash and cash equivalents: Beginning of year ................................. 57,263 21,104 11,981 -------------------------------------------- End of year ....................................... $ 90,908 $ 57,263 $ 21,104 --------------------------------------------
30 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATED FINANCIAL STATEMENTS include the accounts of Fossil, Inc., a Delaware corporation, and its subsidiaries (the "Company"). The Company reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). The Company changed to the retail-based calendar effective January 1, 1997. Due to this change, the first quarter of fiscal 1997 contained an additional one-half week for the transition period. This change had an immaterial impact on comparability. Significant intercompany balances and transactions are eliminated in consolidation. The Company is primarily engaged in the design, development and distribution of fashion watches and other accessories, principally under the "FOSSIL" and "RELIC" brand names. The Company's products are sold primarily through department stores and other major retailers, both domestically and internationally. The preparation of financial statements in conformity with generally accepted accounting principles requires management 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. Actual results could differ from those estimates. CASH EQUIVALENTS are considered all highly liquid investments with original maturities of three months or less. SHORT-TERM MARKETABLE INVESTMENTS consist of liquid investments with original maturities exceeding three months and mutual fund investments. By policy, the Company invests primarily in high-grade marketable securities. At January 1, 2000, securities of $4.7 million are classified as available for sale and stated at fair value, with unrealized gains and losses included in accumulated other comprehensive income/loss as a component of stockholders' equity, and securities of $6.2 million are classified as held-to-maturity and are stated at amortized cost. ACCOUNTS RECEIVABLE are stated net of allowances of approximately $17.7 million and $14.0 million for estimated customer returns and approximately $8.0 million and $6.9 million for doubtful accounts at the close of fiscal year 1999 and 1998, respectively. INVENTORIES are stated at the lower of average cost, including any applicable duty and freight charges, or market. PROPERTY, PLANT AND EQUIPMENT are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets of three to ten years for equipment and thirty years for buildings. Leasehold improvements are amortized over the shorter of the lease term or the asset's useful life. INTANGIBLE AND OTHER ASSETS include the cost in excess of tangible assets acquired, noncompete agreements and trademarks, which are amortized using the straight-line method over the estimated useful lives of generally twenty, three and five years, respectively. CUMULATIVE TRANSLATION ADJUSTMENT is included in accumulated other compensive income/loss as a component of stockholders' equity and reflects the unrealized adjustments resulting from translating the financial statements of foreign subsidiaries. The functional currency of the Company's foreign subsidiaries is the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates prevailing during the year. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net income. The Company incurred net foreign currency transaction losses of approximately $1.2 million, $0.4 million and $0.7 million for fiscal years 1999, 1998 and 1997, respectively, which have been included in other income (expense). 31 FORWARD CONTACTS are entered into by the Company 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 January 1, 2000, the Company had hedge contracts to sell (i) 177,000,000 Japanese Yen for approximately $1.8 million, expiring through December 2000, and (ii) 1,753,415,017 Italian Lira for approximately $0.9 million, expiring through March 2000. REVENUES are recognized as sales when merchandise is shipped and title transfers to the customer. The Company permits the return of damaged or defective products and accepts limited amounts of product returns in certain other instances. Accordingly, the Company provides allowances for the estimated amounts of these returns at the time of revenue recognition. ADVERTISING COSTS for in-store and media advertising as well as co-op advertising and promotional allowances are expensed as incurred. Advertising expenses for fiscal years 1999, 1998 and 1997 were approximately $27.1 million, $17.0 million and $14.3 million, respectively. NEW ACCOUNTING STANDARDS. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued which establishes new accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. This pronouncement will require such reporting effective beginning in fiscal year 2001. The Company is currently analyzing the effect of the standard and does not expect it to have a material effect on the Company's consolidated financial statements. MINORITY INTEREST IN SUBSIDIARIES, included within other income/expense represents the minority stockholders' share of the net income/loss of various consolidated subsidiaries and investments in affiliated companies. The minority interest in the consolidated balance sheets reflects the proportionate interest in the equity of the various consolidated subsidiaries. EARNINGS PER SHARE ("EPS"). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS includes the effects of dilutive stock options outstanding during each period using the treasury stock method. 32 The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
FISCAL YEAR END 1999 1998 1997 Numerator: Net income ......................................... $ 51,826,000 $ 32,161,000 $ 18,942,000 --------------------------------------------------- Denominator: Basic EPS computation: Weighted average common shares outstanding ......... 21,462,121 20,747,242 13,423,693 Three-for-two stock split effected April 1998 ...... -- -- 6,711,847 Three-for-two stock split effected August 1999 ..... 10,466,046 10,351,347 10,067,770 Treasury stock purchases, net ...................... (28,143) (44, 548) -- --------------------------------------------------- 31,900,024 31,054,041 30,203,310 --------------------------------------------------- Basic EPS $ 1.63 $ 1.04 $ 0.63 --------------------------------------------------- Diluted EPS computation: Weighted average common shares outstanding ......... 21,462,121 20,747,242 13,423,693 Stock option conversion ............................ 1,528,129 1,021,370 465,261 Three-for-two stock split effected April 1998 ...... -- -- 6,944,477 Three-for-two stock split effected August 1999 ..... 10,466,046 10,862,032 10,416,716 Treasury stock purchases, net ...................... (28,143) (44,548) -- --------------------------------------------------- 33,428,153 32,586,096 31,250,147 --------------------------------------------------- Diluted EPS $ 1.55 $ 0.99 $ 0.61 ---------------------------------------------------
COMMON SHARE AND PER SHARE DATA in these notes to consolidated financial statements has been presented on a retroactive basis for all stock splits. DEFERRED INCOME TAXES are provided for under the asset and liability method for temporary differences in the recognition of certain revenues and expenses for tax and financial reporting purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS are estimated to approximate the related book values unless otherwise indicated, based on market information available to the Company. RECLASSIFICATION of certain 1997 and 1998 amounts have been made to conform to the 1999 presentation. 2. ACQUISITIONS Effective April 1997, Fossil (East) Limited acquired the remaining 35% of capital stock of Amazing Time, Ltd. from its minority stockholder in exchange for approximately $0.4 million in cash. The acquisition of this Hong Kong-based watch assembly factory has been accounted for as a purchase and, in connection therewith, the Company recorded goodwill of approximately $0.2 million. In February 1997, Fossil Europe B.V. ("Fossil B.V.") acquired the remaining 40% of Fossil Italia, S.r.l.'s outstanding common stock from minority stockholders for 288,246 shares of the Company's $0.01 par value common stock ("Common Stock"), of which approximately $0.3 million was recorded as goodwill. Effective September 1999, Fossil U.K., Ltd. acquired certain assets of Junghans U.K., Ltd. ("Junghans UK") for approximately $2.7 million in cash. Junghans UK was the Company's primary distributor in the United Kingdom and Ireland. The acquisition was accounted for as a purchase and, in connection therewith, the Company recorded goodwill of approximately $0.6 million. The results of these acquired operations are included in the accompanying consolidated financial statements since the dates of their acquisition. The proforma effects as if these acquisitions had occurred at the beginning of the years presented are not significant. 33 3. INVESTMENT IN JOINT VENTURE During August 1999, the Company invested $4.0 million in cash to acquire a 20% interest in SII Marketing International, Inc. ("SMI"). SMI, a joint venture between the Company and Seiko Instruments America, Inc, was formed to design, market and distribute watches in the mass-market distribution channel. The investment is carried on the equity basis, which approximates the Company's equity in SMI's underlying net book value. The Company's equity in SMI's net loss to the fiscal year end is included in other income/expenses. In connection with the formation of the joint venture, the Company signed a multi-year Service Agreement with SMI to perform certain marketing, design and merchandising functions. The compensation the Company receives under the Service Agreement is based on a percentage of SMI's net sales, subject to certain adjustments. 4. INVENTORIES Inventories consist of the following:
FISCAL YEAR END 1999 1998 IN THOUSANDS Components and parts ................................................. $ 5,568 $ 3,402 Work-in-process ...................................................... 2,755 1,445 Finished merchandise on hand ......................................... 38,595 40,344 Merchandise at Company stores ........................................ 7,481 5,340 Merchandise in-transit from customer returns ......................... 8,630 6,764 ------------------------------ $ 63,029 $ 57,295 ------------------------------
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
FISCAL YEAR END 1999 1998 IN THOUSANDS Land ................................................................. $ 2,535 $ 2,535 Building ............................................................. 11,459 9,913 Furniture and fixtures ............................................... 16,843 11,292 Equipment ............................................................ 6,434 5,486 Computer software .................................................... 3,087 2,518 Leasehold improvements ............................................... 6,755 5,035 ------------------------------ 47,113 36,779 Less accumulated depreciation and amortization ....................... 18,510 13,662 ------------------------------ $ 28,603 $23,117 ------------------------------
6. INTANGIBLE AND OTHER ASSETS Intangibles and other assets consist of the following:
FISCAL YEAR END 1999 1998 IN THOUSANDS Costs in excess of tangible net assets acquired ...................... $ 5,200 $ 4,545 Noncompete agreement ................................................. 475 475 Trademarks ........................................................... 946 555 Deposits ............................................................. 844 479 Cash surrender value of life insurance ............................... 714 -- Other ................................................................ 250 218 ------------------------------ 8,429 6,272 Less accumulated amortization ........................................ 2,324 1,644 ------------------------------ $ 6,105 $ 4,628 ------------------------------
34 7. DEBT BANK: U.S.-BASED. In May 1997, the Company extended the maturity date of its Short-term Revolving credit facility with its primary bank ("U.S. Short-term Revolver"). In June 1997, the Company renewed the U.S. Short-term Revolver and amended it to increase the funds available under the facility to $40 million, an increase of $10 million over the previous facility, not subject to any borrowing base calculation. The facility was also amended to eliminate Japanese Yen currency borrowings and replace them with a stand-by letter of credit for 540 million Japanese Yen (approximately $5.0 million) as collateral for Company borrowings from any Japan-based bank. In both June 1998 and 1999, the Company renewed the U.S. Short-term Revolver for one year and negotiated a reduction in the interest rate the Company pays on London Interbank Offered Rate ("LIBOR") based borrowings. All borrowings under the U.S. Short-term Revolver accrue interest at the bank's prime rate less 0.5% or LIBOR plus 0.75% (LIBOR plus 1.25% and 1.00% prior to June 29, 1998 and 1999 respectively). The U.S. Short-term Revolver is unsecured and requires the maintenance of net worth, quarterly income, working capital and financial ratios. There were no borrowings under the U.S. Short-term Revolver as of fiscal year end 1999 or 1998. In August 1994, the Company signed a $5.0 million financing agreement with its primary bank ("Long-term Revolver") to partially finance the Company's facilities construction costs and for other general corporate purposes. The financing agreement was for a ten-year revolving term loan with quarterly payments equal to 1% of the stated principal amount of the facility. The interest rate was the lender's prime rate (8.5% at January 3, 1998) and was payable quarterly with an unused fee of 0.5% per annum. The financing agreement additionally allowed for interest to be calculated at LIBOR (5.82 % at January 3, 1998), plus 1.25%. The amount outstanding under this facility was $4.35 million at the end of fiscal year 1997. The Company paid the Long-term Revolver in full in January 1998. Interest expense under these credit facilities was $5,630 and approximately $0.8 million for fiscal years 1998 and 1997, respectively, and none for 1999. At fiscal year-end 1999, 1998 and 1997, the Company had outstanding letters of credit of approximately $4.7 million, $3.2 million and $1.2 million, respectively, to vendors for the purchase of merchandise. BANKS: FOREIGN BASED. Fossil GmbH has short-term credit facilities with two Germany-based banks with combined borrowing capacity of 5,000,000 deutsche marks (approximately $2.5 million as of fiscal year-end 1999). No borrowings were outstanding under the combined credit facilities at the end of fiscal year 1999 or 1998. Outstanding borrowings under the facilities bear interest at approximately 6% and are collateralized by substantially all of Fossil GmbH's assets. During August 1997, Fossil Japan restructured its short-term credit facility with a Japan-based bank allowing borrowings of up to 540 million Japanese Yen. All outstanding borrowings under the facility bore interest at the Euroyen rate plus 1.8%. In connection with the financing agreement, Fossil Japan agreed to pay an origination fee equal to 0.12% of the amount available under the facility and an unused fee of 0.5% per annum. In September 1999, Fossil Japan restructured its short-term credit facility with a Japan-based bank allowing borrowings of up to 600 million Japanese Yen (approximately $5.6 million as of fiscal year 1999). All outstanding borrowings under the facility bore interest at the Euroyen rate (0.23% at January 1, 2000) plus 1%. In connection with the financing agreement, Fossil Japan agreed to pay a quarterly fee of 0.5% per annum on any undrawn portion of the loan. The facility is collateralized by a stand-by letter of credit issued by the Company's primary U.S. bank. Japan-based borrowings, in U.S. dollars, under the facilities were approximately $5.0 million and $4.5 million as of fiscal year-end 1999 and 1998, respectively. Interest expense under these credit facilities was $0.1 million in both 1999 and 1998, and $21,000 in 1997. 35 8. OTHER INCOME (EXPENSE) - NET Other income (expense)-net consists of the following:
FISCAL YEAR 1999 1998 1997 IN THOUSANDS Interest income ................................. $ 2,650 $ 1,160 $ 336 Minority interest in subsidiaries and affiliates (1,635) (1,004) (344) Currency loss ................................... (1,181) (427) (733) Legal settlements ............................... (16) (267) (661) Non-taxable investment income ................... 221 -- -- Royalty income .................................. 353 45 106 Insurance proceeds above book value ............. 52 93 -- Loss on sale of fixed assets .................... (19) (84) -- Other income (expense) .......................... 84 54 (207) ------------------------------------------------- $ 509 $ (430) $ (1,503) -------------------------------------------------
9. INCOME TAXES Deferred income tax benefits reflect the net tax effects of deductible temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred tax benefits, consist of the following:
FISCAL YEAR END 1999 1998 IN THOUSANDS Deferred tax assets: Bad debt allowance ................................................ $ 2,534 $ 2,193 Returns allowance ................................................. 5,646 4,283 263(A) capitalization of inventory ................................ 504 503 Miscellaneous tax asset items ..................................... 1,178 1,006 Deferred tax liabilities: In-transit returns inventory ...................................... (3,093) (2,330) --------------------------- Net current deferred tax benefits .................................... $ 6,769 $ 5,655 ---------------------------
Management believes that no valuation allowance against net deferred tax benefits is necessary. The resulting provision for income taxes consists of the following:
FISCAL YEAR 1999 1998 1997 IN THOUSANDS Current provision: United States .................................. $ 18,448 $ 10,278 $ 8,562 Foreign ........................................ 14,779 11,946 5,020 Deferred provision - United States ................ (1,114) (1,151) (837) Tax equivalent related to exercise of stock options (credited to additional paid-in capital) ....... 3,902 1,495 464 --------------------------------------------- Provision for income taxes ........................ $ 36,015 $ 22,568 $ 13,209 ---------------------------------------------
36 A reconciliation of income tax computed at the U.S. federal statutory income tax rate of 35% to the provision for income taxes is as follows:
FISCAL YEAR 1999 1998 1997 IN THOUSANDS Tax at statutory rate ........................... $ 30,744 $ 19,155 $ 11,253 State, net of federal tax benefit ............... 975 364 378 Other ........................................... 4,296 3,049 1,578 ------------------------------------------- Provision for income taxes ...................... $ 36,015 $ 22,568 $ 13,209 -------------------------------------------
Deferred U.S. federal income taxes are not provided on certain undistributed earnings of foreign subsidiaries as management plans to continue reinvesting these earnings outside the United States. Determination of such tax amounts is not practical because potential offset by U.S. foreign tax credits would be available under various assumptions involving the tax calculation. 10. COMMITMENTS LICENSE AGREEMENTS. The Company has various license agreements to market watches bearing certain trademarks owned by various entities. In accordance with these agreements, the Company incurred royalty expense of approximately $3.8 million, $3.5 million and $1.7 million in fiscal years 1999, 1998 and 1997, respectively. These amounts are included in the Company's cost of sales and selling expenses. The Company had several agreements in effect at the end of fiscal year 1999 which expire on various dates from March 2000 and require the Company to pay royalties ranging from 5% to 15.5% of defined net sales. Future minimum royalty commitments under such license agreements at the close of fiscal year 1999 are as follows (amounts in thousands): 2000 ................................................. $ 6,978 2001 ................................................. 7,565 2002 ................................................. 8,770 2003 ................................................. 3,969 2004 ................................................. 4,577 --------------- $ 31,859 ---------------
LEASES. The Company leases its retail and outlet store facilities as well as certain of its office facilities and equipment under non-cancelable operating leases. Most of the retail store leases provide for contingent rental based on operating results and require the payment of taxes, insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Rent expense under these agreements was approximately $6.8 million, $5.1 million, and $4.4 million for fiscal years 1999, 1998 and 1997, respectively. Contingent rent expense has been minimal in each of the last three fiscal years. Future minimum rental commitments under such leases at the close of fiscal year 1999, are as follows (amounts in thousands): 2000 .................................................... $ 6,801 2001 .................................................... 6,779 2002 .................................................... 4,746 2003 .................................................... 5,424 2004 .................................................... 4,959 Thereafter .............................................. 18,211 ----------- $ 46,920 -----------
37 11. STOCKHOLDERS' EQUITY AND BENEFIT PLANS COMMON AND PREFERRED STOCK. On March 4, 1998, the Board of Directors declared a 3-for-2 stock split ("1998 Stock Split") of the Company's Common Stock which was effected in the form of a stock dividend payable on April 8,1998 to stockholders of record on March 25, 1998. On July 21, 1999, the Board of Directors of the Company declared a 3-for-2 stock split ("1999 Stock Split") of the Company's Common Stock which was effected in the form of a stock dividend which was paid on August 17, 1999 to stockholders of record on August 3, 1999. Retroactive effect has been given to these stock splits in all share and per share data in these notes to financial statements. The Company has 50,000,000 shares of authorized Common Stock, with 32,107,270 and 31,398,137 shares issued and outstanding at the close of fiscal year 1999 and 1998, respectively. The Company has 1,000,000 shares of authorized $0.01 par value preferred stock with none issued or outstanding. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance. TREASURY STOCK. On September 18, 1998, the Company's Board of Directors authorized management to repurchase up to 500,000 shares of the Company's Common Stock in the open market or privately negotiated transactions (the "Repurchase Program"). During fiscal year 1999 and 1998, the Company repurchased 90,500 shares of treasury stock and 188,500 shares of treasury stock (282,750 shares after giving effect to the 1999 stock split) respectively, under the Repurchase Program at a cost of approximately $2.0 million and $2.6 million, respectively. During fiscal year 1999 and 1998, 134,607 shares of treasury stock and 84,821 shares of treasury stock (127,232 shares after giving effect to the 1999 stock split) were reissued, respectively, in connection with the Company's 1993 Long-Term Incentive Stock Option Plan ("Incentive Plan"). DEFERRED COMPENSATION AND SAVINGS PLANS. The Company has a savings plan in the form of a defined contribution plan (the "401(k) plan") for substantially all full-time employees of the Company. Employees are eligible to participate in the 401(k) plan after one year of service. The Company matches 50% of employee contributions up to 3% of their compensation and 25% of the employee contributions between 3% and 6% of their compensation. The Company also has the right to make certain additional matching contributions not to exceed 15% of employee compensation. The Company's Common Stock is one of several investment alternatives available under the 401(k) plan. Matching contributions made by the Company to the 401(k) plan totaled approximately $0.2 million for each of the fiscal years 1999, 1998 and 1997. In December 1998, the Company adopted the Fossil, Inc. and Affiliates Deferred Compensation Plan (the "Deferred Plan"). Eligible participant may elect to defer up to 50% of their salary pursuant to the terms and conditions of the Deferred Plan. Eligible participants include certain officers and other highly compensated employees designated by the Deferred Plan's administrative committee. In addition, the Company may make employer contributions to participants under the Deferred Plan from time to time. During 1999, the Company charged $0.5 million to expense for the Deferred Plan. No expense was charged in either 1998 or 1997. 38 LONG-TERM INCENTIVE PLAN. An aggregate of 2,587,500 shares of Common Stock were reserved for issuance pursuant to the Incentive Plan, adopted April 1993. An additional 1,350,000 shares were reserved in each of 1995 and 1998 for issuance under the Incentive Plan. Designated employees of the Company, including officers and directors, are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) cash awards or (v) any combination of the foregoing. The Incentive Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"). Each option issued under the Incentive Plan terminates at the time designated by the Compensation Committee, not to exceed ten years. The current options outstanding predominately vest over a period ranging from three to five years and were priced at not less than the fair market value of the Company's Common Stock at the date of grant. The weighted average fair value of the stock options granted during fiscal years 1999, 1998 and 1997 was $12.01, $6.27 and $3.57, respectively. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. An aggregate of 225,000 shares of Common Stock were reserved for issuance pursuant to this nonqualified stock option plan, adopted April 1993. During the first year an individual was elected as a nonemployee director of the Company, they received a grant of 5,000 nonqualified stock options. In addition, on the first day of each subsequent calendar year, each non-employee director automatically received a grant of an additional 3,000 nonqualified stock options as long as the person is serving as a nonemployee 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. The exercise prices of options granted under this plan were not less than the fair market value of the Common Stock at the date of grant. The weighted average fair value of the stock options granted during fiscal years 1999, 1998 and 1997 was $14.25, $11.93 and $5.30, respectively. 39 The fair value of options granted under the Company's stock option plans during fiscal years 1999, 1998 and 1997 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of approximately 63% to 65%, risk free interest rate of 4.75% to 6.00%, and expected life of 5 to 6 years. The following tables summarize the Company's stock option activity: INCENTIVE PLAN
EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICE EXERCISE PRICE EXERCISE PRICE AVAILABLE PER SHARE PER SHARE OUTSTANDING PER SHARE EXERCISABLE FOR GRANT ---------- ----------- ---------- ---------- ----------- ----------- Balance, Fiscal 1996 ............... $ 2.945 -$11.445 $ 4.347 2,185,351 $ 4.635 927,571 1,600,286 Granted ........................ $ 5.556 -$11.195 $ 5.767 759,881 -- -- (759,881) Exercised ...................... $ 2.945 -$ 7.945 $ 4.229 (365,956) -- -- -- Canceled ....................... $ 2.945 -$ 9.833 $ 5.228 (82,136) -- -- 82,136 Exercisable .................... $ 2.945 -$12.667 -- -- -- 386,699 -- ----------- ------------------------- Balance, Fiscal 1997 ............... $ 2.945 -$12.667 $ 4.782 2,497,140 $ 4.650 1,314,270 922,541 Granted ........................ $ 8.667 -$19.833 $ 10.078 633,461 -- -- (633,461) Shares designated for grant through the plan ............ -- -- -- -- -- 1,350,000 Exercised ...................... $ 2.945 -$ 8.611 $ 4.701 (740,114) -- -- -- Canceled ....................... $ 2.945 -$14.833 $ 7.509 (76,699) -- -- 76,699 Exercisable .................... $ 2.945 -$12.667 -- -- -- (173,819) -- ----------- ------------------------- Balance, Fiscal 1998 ............... $ 2.945 -$19.833 $ 6.187 2,313,788 $ 4.767 1,140,451 1,715,779 Granted ........................ $ 17.875 -$33.187 $ 19.483 542,671 -- -- (542,671) Exercised ...................... $ 2.945 -$18.167 $ 5.319 (895,580) -- -- -- Canceled ....................... $ 3.528 -$29.875 $ 13.176 (53,426) -- -- 53,426 Exercisable .................... $ 2.945 -$19.833 -- -- -- (199,643) -- ----------- ------------------------- Balance, Fiscal 1999 ............... $ 2.945 -$33.187 $ 10.193 1,907,453 $ 5.831 940,808 1,226,534 ----------- -------------------------
40 NONEMPLOYEE DIRECTOR PLAN
EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICE EXERCISE PRICE EXERCISE PRICE AVAILABLE PER SHARE PER SHARE OUTSTANDING PER SHARE EXERCISABLE FOR GRANT ------------ ----------- ------------ ----------- ----------- ---------- Balance, Fiscal 1996 .......... $ 3.333 -$ 8.445 $ 5.225 112,500 $ 5.297 64,687 112,500 Granted ................... $ 6.000 -$11.111 $ 8.555 40,500 -- -- (40,500) Exercised ................. $ 3.722 -$ 7.611 $ 6.500 (11,813) -- -- Canceled .................. $ 3.722 -$ 7.611 $ 5.490 (6,187) -- -- 6,187 Exercisable ............... $ 3.333 -$ 8.445 -- -- -- 34,875 -- ----------- --------------------------- Balance, Fiscal 1997 .......... $ 3.333 -$11.111 $ 6.100 135,000 $ 5.212 99,562 78,187 Granted ................... $ 19.167 $ 19.167 13,500 -- -- (13,500) Exercised ................. $ -- $ -- -- -- -- -- Canceled .................. $ -- $ -- -- -- -- -- Exercisable ............... $ 3.333 -$11.111 -- -- -- 20,250 -- ----------- --------------------------- Balance, Fiscal 1998 .......... $ 3.333 -$19.167 $ 7.288 $148,500 $ 5.681 119,812 64,687 Granted ................... $ 23.125 $ 23.125 9,000 -- -- (9,000) Exercised ................. $ -- $ -- -- -- -- -- Canceled .................. $ -- $ -- -- -- -- -- Exercisable ............... $ 3.333 -$19.167 -- -- -- 16,874 -- ----------- --------------------------- Balance, Fiscal 1999 .......... $ 3.333 -$23.125 $ 8.193 157,500 $ 6.560 136,686 55,687 ----------- ---------------------------
Additional weighted average information for options outstanding and exercisable as of fiscal year end 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF EXERCISE AVERAGE EXERCISE EXERCISE NUMBER OF PRICE REMAINING NUMBER OF PRICE OFFICE SHARES PER SHARE CONTRACTUAL LIFE SHARES PER SHARE ---------- --------- ----------- ---------------- -------- ----------- Long-Term Incentive Plan: ................ $ 2.945 -$ 6.000 866,124 $ 4.881 6.2 years 718,853 $ 4.743 $ 6.010 -$18.000 516,170 $ 9.663 7.7 years 220,343 $ 9.289 $ 18.010 -$33.187 525,159 $ 19.476 9.2 years 1,612 $ 18.554 --------- -------- 1,907,453 940,808 $ 5.831 --------- -------- Nonemployee Director Plan: ................. $ 3.333 -$ 6.000 94,500 $ 4.524 5.0 years 94,500 $ 4.524 $ 6.010 -$18.000 40,500 $ 9.778 6.0 years 35,436 $ 9.587 $ 18.010 -$23.125 22,500 $ 20.750 9.4 years 6,750 $ 19.167 --------- -------- 157,500 136,686 $ 6.560 --------- --------
41 The Company applies Accounting Principles Board Opinion No.25 and related Interpretations in accounting for its stock option plans. No compensation cost has been recognized for the Company's stock option plans because the quoted market price of the Common Stock at the date of the grant was not in excess of the amount an employee must pay to acquire the Common Stock. SFAS No. 123, "Accounting for Stock-Based Compensation," issued by the Financial Accounting Standards Board in 1995, prescribes a method to record compensation cost for stock-based employee compensation plans at fair value. Pro forma disclosures as if the Company had adopted the cost recognition requirements under SFAS No.123 in fiscal years 1999, 1998 and 1997 are presented below.
FISCAL YEAR 1999 1998 1997 IN THOUSANDS, EXCEPT PER SHARE DATA Net income: As reported ................................. $ 51,826 $ 32,161 $ 18,942 Proforma .................................... $ 49,707 $ 30,048 $ 17,178 Basic earnings per share: As reported ................................. $ 1.63 $ 1.04 $ 0.63 Proforma .................................... $ 1.56 $ 0.97 $ 0.57 Diluted earnings per share: As reported ................................. $ 1.55 $ 0.99 $ 0.61 Proforma .................................... $ 1.49 $ 0.92 $ 0.55
12. SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows:
FISCAL YEAR 1999 1998 1997 IN THOUSANDS Cash paid during the year for: Interest ...................................... $ 402 $ 82 $ 924 Income taxes .................................. 27,532 18,388 10,642 Acquisition of minority interest in subsidiary in exchange for common stock .................. -- -- 1,237 Reduction in income tax payable resulting from exercise of employee stock options ....... 3,902 1,495 464
13. MAJOR CUSTOMER, SEGMENT AND GEOGRAPHIC INFORMATION Customers of the Company consist principally of major department stores and specialty retailers located throughout the United States. The most significant customers, individually or considered as a group under common ownership, which accounted for over 10% of net sales for the periods presented, were as follows:
FISCAL YEAR 1999 1998 1997 Customer A ............................................ 9% 10% 11%
The Company's majority owned facilities operate primarily in four geographic regions. The Company operates in a single industry, as a designer, developer, marketer and distributor of fashion watches and other accessories, except in the United States where the Company has an additional reportable segment: Stores. Stores consist of the Company's outlet and mall-based retail stores selling the Company's product directly to the consumer. Specific information related the Company's reportable segments and geographic areas are contained in the following table. Intercompany sales of products between geographic areas are referred to as inter-geographic items. These intercompany sales primarily consist of product sales from the Far East into the U.S. and European operations which are priced at cost plus a 5%-8% trade agent commission. 42
FISCAL YEAR END 1999 NET SALES OPERATING INCOME LONG-LIVED ASSETS TOTAL ASSETS IN THOUSANDS United States--exclusive of Stores: $ 24,554 $ 144,465 External customers ..................... $ 252,816 $ 36,020 -- -- Intergeographic ........................ 34,700 -- -- -- Stores .................................... 37,797 4,361 8,294 24,818 Europe: 2,745 23,099 External customers ..................... 86,714 17,793 -- -- Intergeographic ........................ 500 -- -- -- Far East: 2,687 74,469 External customers ..................... 34,091 29,662 -- -- Intergeographic ........................ 140,800 -- -- -- Japan ..................................... 7,516 (387) 277 2,513 Intergeographic items ..................... (176,172) -- -- -- -------------------------------------------------------------------------------- Consolidated $ 418,762 $ 87, 449 $ 38,557 $ 269,364 -------------------------------------------------------------------------------- FISCAL YEAR END 1998 United States--exclusive of Stores: $ 17,851 $ 124,133 External customers ..................... $ 188,959 $ 22,278 -- -- Intergeographic ........................ 25,000 -- -- -- Stores .................................... 26,117 2,658 5,359 14,941 Europe: 2,028 31,756 External customers ..................... 62,668 10,149 -- -- Intergeographic ........................ -- -- -- -- Far East: 2,361 18,245 External customers ..................... 19,192 21,032 -- -- Intergeographic ........................ 107,100 -- -- -- Japan ..................................... 7,667 (747) 146 5,003 Intergeographic items ..................... (131,960) -- -- -- -------------------------------------------------------------------------------- Consolidated $ 304,743 $ 55,370 $ 27,745 $ 194,078 -------------------------------------------------------------------------------- FISCAL YEAR END 1997 United States--exclusive of Stores: $ 16,837 $ 81,817 External customers ..................... $ 148,854 $ 18,844 -- -- Intergeographic ........................ 20,700 -- -- -- Stores .................................... 20,036 1,558 4,722 13,941 Europe: 1,965 24,744 External customers ..................... 45,233 2,553 -- -- Intergeographic ........................ 800 -- -- -- Far East: 2,261 14,333 External customers ..................... 21,214 12,370 -- -- Intergeographic ........................ 68,000 -- -- -- Japan ..................................... 9,613 (715) 126 4,735 Intergeographic items ......................... (89,652) -- -- -- -------------------------------------------------------------------------------- Consolidated $ 244,798 $ 34,610 $ 25,911 $ 139,570 --------------------------------------------------------------------------------
43 CORPORATE INFORMATION EXECUTIVE OFFICERS AND DIRECTORS
Tom Kartsotis Randy S. Kercho Kenneth W. Anderson Chairman of the Board and Executive Vice President Director Chief Executive Officer and Chief Financial Officer Kosta N. Kartsotis Mark D. Quick Alan J. Gold President, Executive Vice President Director Chief Operating Officer and Director Michael W. Barnes T. R. Tunnell Michael Steinberg Executive Vice President Senior Vice President, Development Director and Director Chief Legal Officer and Secretary Richard H. Gundy Jal S. Shroff Donald J. Stone Executive Vice President Managing Director- Director Fossil East and Director CORPORATE INFORMATION Transfer Agent and Registrar Independent Auditors Corporate Counsel Chase Mellon Shareholder Services LLC Deloitte & Touche LLP Jenkens & Gilchrist Overpeck Centre 2200 Ross Avenue 1445 Ross Avenue 85 Challenger Road Dallas, TX 75201 Dallas, TX 75202 Ridgefield Park, NJ 07760
INTERNET WEB SITE The Company maintains a web site at the worldwide internet address of www.FOSSIL.com. Certain product, event, press release and collector club information concerning the Company is available at the site. STOCKHOLDER INFORMATION Annual Meeting The Annual Meeting of Stockholders will be held on Wednesday, May 24, 2000, at 4:00 pm at the Company's headquarters, 2280 N. Greenville Ave., Richardson, Texas. COMPANY INFORMATION A copy of the Company's Annual Report on Form 10-K and the Annual Report to Stockholders, as filed with the Securities and Exchange Commission, in addition to other Company information, is available to stockholders without charge upon written request to Fossil, Investor Relations, 2280 N. Greenville Ave., Richardson, Texas 75082-4412. 44 EX-21.1 3 EXHIBIT 21-1 EXHIBIT 21.1 SUBSIDIARIES OF FOSSIL, INC. AS OF JANUARY 1, 2000
PLACE PERCENT NAME OF SUBSIDIARY OF INCORPORATION PARENT COMPANY OWNERSHIP - -------------------------------------------------------------------------------------------------------------- Fossil Intermediate, Inc. Delaware Fossil, Inc. 100 Fossil Stores I, Inc. Delaware Fossil, Inc. 100 Fossil New York, Inc. Delaware Fossil, Inc. 100 Arrow Merchandising, Inc. Texas Fossil, Inc. 100 Fossil East Limited Hong Kong Fossil, Inc. 100 Fossil Europe B.V. The Netherlands Fossil, Inc. 100 Fossil Japan, K.K. Japan Fossil, Inc. 81 SII Marketing International, Inc. Delaware Fossil, Inc. 20 Fossil Trust Delaware Fossil Intermediate, Inc. 100 Fossil Stores II, Inc. Delaware Fossil Stores I, Inc. 100 Newtime, Ltd. Hong Kong Fossil East, Ltd. 100 Pulse Time Center Company, Ltd. Hong Kong Fossil East, Ltd. 60 Trylink International, Ltd. Hong Kong Fossil East, Ltd. 51 Fossil Trading, Ltd Hong Kong Fossil East, Ltd. 100 Fossil Singapore, Ltd. Singapore Fossil East, Ltd. 81 Fossil Europe GmbH Germany Fossil Europe B.V. 100 Fossil Italia, S.r.l. Italy Fossil Europe B.V. 100 Fossil France Eurl, S.a.r.l. France Fossil Europe B.V. 100 Fossil Spain, S.A. Spain Fossil Europe B.V. 100 Fossil U.K. Ltd. United Kingdom Fossil Europe B.V. 100
EX-23.1 4 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-65980, Post-Effective Amendment No. 1 to Registration Statement No. 33-77526 and Registration Statement No. 333-70477 on Form S-8 of our reports dated February 18, 2000 appearing in and incorporated by reference in the Annual Report on Form 10-K of Fossil, Inc. for the fiscal year ended January 1, 2000. DELOITTE & TOUCHE LLP Dallas, Texas March 30, 2000 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART IV ITEM 14 FINANCIAL STATEMENTS OF FOSSIL, INC AND SUBSIDIARIES AS OF AND FOR THE FIFTY-TWO WEEKS ENDED JANUARY 1, 2000 FILED ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-01-2000 JAN-03-1999 JAN-01-2000 90,908 10,870 59,356 7,957 63,029 230,807 47,113 18,510 269,364 75,609 0 0 0 321 190,876 269,364 418,762 418,762 205,875 331,313 0 1,044 117 87,841 36,015 0 0 0 0 51,826 1.63 1.55
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