-----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, MWm+8QzlcJTcifPSDxa8YDIqJSJZlTMKhzZ9Sf1FUqlSu2JTivNyAWGI8vTJdnq1 nslHT/y+EO05/qUANRiJ4w== 0000912057-97-011284.txt : 19970401 0000912057-97-011284.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011284 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-19848 FILM NUMBER: 97570144 BUSINESS ADDRESS: STREET 1: 2280 NORTH GREENVILLE AVE CITY: RICHARDSON STATE: TX ZIP: 75082 BUSINESS PHONE: 2142342525 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 DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File Number 0-19848 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 26, 1997, was $59,544,861. 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 26, 1997, 13,245,136 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 22, 1997, 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 Delaware corporation formed in December 1991 and is the successor to a Texas corporation formed in 1984. In 1993, the Company completed an initial public offering (the "Offering") of 2,760,000 shares of common stock, par value $.01 (the "Common Stock"). 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. The Company designs, develops, markets and distributes fashion watches and accessories, including sunglasses, small leather goods, belts and handbags, principally under the FOSSIL-Registered Trademark-, RELIC-Registered Trademark- and FSL-TM- brand names. The Company designs, manufactures and markets a line of limited edition watches bearing the trademarks and logos of various entities, as well as contracts with retailers and other customers for the manufacture of watches for sale under private label. The Company conducts substantially all of its United States operations through Fossil Partners, L.P. ("Partners"), a Texas limited partnership formed in August 1994, of which the Company is the sole general partner. The sole limited partner of Partners is Fossil Trust, a Delaware business trust, an indirect wholly owned subsidiary of the Company, formed in August 1994. The Company's operations in the state of New York are conducted by Fossil New York, Inc., a Delaware corporation, a wholly owned subsidiary of the Company. The Company's outlet stores are leased and operated by Fossil Stores I, Inc., a Delaware corporation, a wholly owned subsidiary of the Company formed in November 1994. The Company's retail stores are leased and operated by Fossil Stores II, Inc., a Delaware corporation, a wholly owned subsidiary of Fossil Stores I, Inc., formed in November 1994. In addition, certain merchandising activities of the Company are conducted through Arrow Merchandising, Inc., a Texas corporation, a wholly owned subsidiary of the Company formed in August 1992. 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 organized under the laws of Hong Kong and acquired by the Company in 1992. Fossil Europe B.V. ("Fossil B.V.") a Netherlands holding company established in May 1993, is a wholly owned subsidiary of the Company. Fossil Europe GmbH ("Fossil GmbH") is a wholly owned German subsidiary of Fossil B.V., which markets and resells the Company's products throughout Europe. Fossil Italia, S.r.l. ("Fossil Italy"), an Italian subsidiary in which Fossil B.V. owns 60% of the issued and outstanding stock, was formed in June 1994 and markets and sells the Company's products in Italy. Fossil France EURL, S.a.r.l. ("Fossil France"), a wholly owned French subsidiary of Fossil B.V., was formed in 1995 and markets and sells the Company's products in France. Fossil U.K. Ltd. ("Fossil UK"), a wholly owned British subsidiary of Fossil B.V., was formed in 1995 and markets and sells the Company's products in the United Kingdom. Fossil Spain, S. A. ("Fossil Spain"), a wholly owned subsidiary of Fossil B.V., was formed in 1996 and markets and sells the Company's products in Spain. Effective as of April 1, 1988, the Company elected to operate as an S Corporation under Subchapter S of the Internal Revenue Code and comparable provisions of certain state income tax laws. Effective as of the close of the Offering, the Company terminated its S Corporation status (the 1 "Termination Date"). For additional information regarding the termination of the Company's S Corporation status and the payment of cash dividends and other distributions to the stockholders of the Company prior the Termination Date, see "Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters." 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, are forward-looking statements 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 31, 1997. INDUSTRY OVERVIEW WATCH PRODUCTS The Company believes that the current market for watches in the United States can be divided into three segments. One segment of the market consists of fine watches characterized by high fashion and internationally known brand names, such as Concord, Piaget and Rolex. Watches offered in this segment 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 $150 to $20,000. A second 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 third 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. The Company believes that this segment in turn can be divided into two discrete sectors that are competitive with each other only to a limited extent. One sector of the moderately priced market segment is targeted by companies that generally offer conservatively styled time pieces under well known brand names such as Seiko and Citizen. The second sector of this market segment is targeted by the Company and its principal competitors, including the companies that market watches under the Anne Klein II, Guess? and Swatch brand names, whose products attempt to reflect emerging fashion trends in accessories and apparel. Some of the watches in this sector are manufactured under license agreements with companies that market watches under various brand names, including Guess?, Joe Boxer and Nautica. 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. 2 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. These fashion accessory products are generally marketed through mass merchandisers, department stores and speciality shops. Fashion accessories for both men and women are sold at low, moderate and higher price points. Lower price point items are typically retailed through mass merchandisers. Higher price point items are typically sold in moderate and better department stores and speciality shops and 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. Fossil currently offers small leather goods, belts and eyewear for both men and women, as well as handbags, through department stores and specialty retailers in the moderate to upper-moderate price range. Companies such as Calvin Klein, Tommy Hilfiger, Swank, Guess, Nine West, Kenneth Cole, and Liz Claiborne currently operate in this market. The Company believes that one reason for the growth in this line of business 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. The Company emphasizes its fashion accessories as a natural complement to the core watch business by offering consumers the same high quality and value that are associated with other FOSSIL brand products. 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. BUSINESS STRATEGY The Company's business strategy is designed to achieve further growth in its watch and fashion accessories businesses and to capitalize on growing consumer awareness of the FOSSIL, RELIC and FSL brand names by expanding the scope of its product offerings to include additional categories of fashion accessories. The Company intends to seek further growth in its watch business by increasing consumer awareness of, and sales of the products marketed under, the FOSSIL, RELIC and FSL brand names, expanding the scope of its product offerings through the introduction or licensing of new categories of fashion accessories that would complement its existing products, and placing increased emphasis on growth in selected international markets. The Company also intends to seek further growth in its accessories business by broadening its domestic distribution channels and by introducing accessories in selected international markets. In order to expand the scope of its product offerings, the Company may in the future introduce additional categories of fashion accessories that would complement its existing products. The following are the principal elements of the Company's business strategy: - BRAND DEVELOPMENT. The Company has established the FOSSIL and RELIC brand names and images to reflect a theme of fun, fashion and humor, and believes that both the FOSSIL and RELIC brand names have achieved growing acceptance among fashion-conscious consumers in their target markets. The Company has recently introduced a brand of extremely durable and radically designed sports watches under the FSL brand name. 3 - PRODUCT VALUE. The Company's products provide value to the consumer by offering high quality components and features at moderate prices. The Company's products offer a variety of distinctive details and treatments that provide value to the customer at suggested retail prices generally below competitive products of comparable quality. - FASHION ORIENTATION. The Company attempts to stay abreast of emerging lifestyle and fashion trends affecting accessories and apparel, and it responds to those trends by making adjustments in its product lines as frequently as five times each year. - INNOVATIVE PRODUCT DESIGN. 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 and straps for the Company's watches and innovative treatments and details in its other accessories. - EXPANSION OF INTERNATIONAL BUSINESS. The Company is seeking to achieve further growth in its international business through its international subsidiaries as well as by expanding the Company's network of distributors in selected international markets. - INTRODUCTION OF NEW PRODUCT CATEGORIES. The Company may leverage its design and marketing expertise to expand the scope of its product offerings through the introduction or licensing of new categories of fashion accessories that would complement its existing products. - ACTIVE MANAGEMENT OF RETAIL SALES. The Company manages the retail sales process by monitoring its customers' sales and inventories by product category and style and by assisting in the conception, development and implementation of their marketing programs. As a result, the Company believes it enjoys close relationships with its principal customers, often allowing it to influence the mix, quantity and timing of their purchasing decisions. - CLOSE RELATIONSHIPS WITH MANUFACTURING SOURCES. The Company has established and maintains close relationships with a number of watch manufacturers located in Hong Kong and Japan. The Company believes that these relationships allow it to quickly and efficiently introduce innovative product designs and alter production in response to the retail performance of its products. - COORDINATED PRODUCT PROMOTION. The Company coordinates product design, packaging and advertising functions in order to communicate in a cohesive manner to its target markets the themes and images that it associates with its products. - PERSONNEL DEVELOPMENT. The Company actively seeks to recruit and train its design, advertising, sales and marketing personnel to assist it in achieving further growth in its existing businesses and in expanding the scope of its product offerings. - COST ADVANTAGES. Because the Company does not pay royalties on the watch, leather goods or sunglass products sold under the FOSSIL, RELIC and FSL brand names, and because of cost savings associated with the location of its headquarters and warehousing and distribution center in Richardson, Texas, the Company believes that it enjoys certain cost advantages that enhance its ability to provide better value yet achieve attractive profit margins. 4 - CENTRALIZED DISTRIBUTION. Substantially all of the Company's products sold in the United States are distributed from its warehouse and distribution center located in Richardson, Texas. The Company's products sold in Europe generally are distributed from the Company's warehouse and distribution center located in Germany and Italy, and in Japan from the Company's warehouse and distribution center in Tokyo. The Company believes that its distribution capabilities enable it to reduce inventory risk and increase its flexibility in meeting the delivery requirements of its customers. PRODUCTS WATCH PRODUCTS In 1986, the Company introduced FOSSIL watches, its flagship product. The Company commenced its FOSSIL watch strap program in 1989, introduced its RELIC watches in 1990 and introduced its FSL watches in 1995. 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 the years ended December 31, 1996, 1995 and 1994 accounted for approximately 71.9% , 83.6% and 87.2% respectively, of the Company's gross sales. FOSSIL WATCHES. The Company's FOSSIL watches are targeted at middle and upper income consumers between the ages of 16 and 40 and are sold at retail prices generally ranging from $45 to $120, with an average price of approximately $70. The Company currently offers various categories of FOSSIL watches, including Casual, Defender, Dress, Fossil Blue, Limited Edition, Pyramid Crystal, Skeleton, StarMaster and Vintage watches. The Company believes that its strategy of offering various categories of FOSSIL watches enables it to market its watches to a wide range of consumers with differing tastes and lifestyles. New lines of FOSSIL watches are introduced five times each year in -January, March, May, August and November. FOSSIL watches are sold through a diversified distribution system which includes major department stores, such as Federated/Macy's Department Stores, Dillard's, May Department Stores, Mercantile Stores, Dayton Hudson and Nordstroms, as well as specialty retail stores and independent distributors. RELIC WATCHES. RELIC watches incorporate a number of the features found in FOSSIL watches into a format suitable for lower priced fashion watches. RELIC watches are targeted at mid-level income consumers and are sold at retail prices generally ranging from $25 to $60, with an average price of approximately $45. The Company currently offers various categories of RELIC watches, including Dressy, Metal Sport, Moon, Novelty, Pendant, Pocket, Skeleton and Sport watches. New lines of RELIC watches are introduced three times each year - in February, July and September. RELIC watches are sold principally through major retailers, such as Ames Department Stores, Bealls, JCPenney, Kohl's, Montgomery Ward, Sears, Service Merchandise, SRI and Uptons. FSL WATCHES. FSL watches are sold at retail prices generally ranging from $30 to $110, with an average price of approximately $65. The Company offers both analog and digital watches under the FSL brand which combine high quality engineering and fashion. New lines of FSL watches are introduced three times each year - in January, May and August and are sold through better department stores, specialty gift and apparel stores and sports specialty stores. FOSSIL WATCH STRAPS. The Company markets a line of FOSSIL watch straps, which are generally targeted at the same customers as are its FOSSIL watches. These watch straps are individually packaged and displayed in counter-top cases and are sold in a variety of sizes, colors and styles. Because 5 they are designed to fit a wide range of different watches, sales of FOSSIL watch straps are not limited to persons who own FOSSIL watches. Retail prices for FOSSIL watch straps generally range from $10 to $18. FOSSIL watch straps are sold principally through a number of major department stores that offer FOSSIL watches. PRIVATE LABEL AND PREMIUM 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 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. Certain of these services are provided for the Company through Fossil East. The Company has recently expanded the scope of its private label business to include other categories of accessories such as sunglasses, small leather goods, gifts and clocks. The Company's private label products are currently sold to certain retail chains and other customers. The Company's premium and incentive products are sold to many Fortune 500 companies. 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. LICENSED PRODUCTS. The Company has entered into a number of licensing agreements for the sale of collectible watches under both the FOSSIL and RELIC brands. 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. Sales of collectible watches under the FOSSIL brand in 1996 included Mickey & Co., Toy Story, The Beatles, Star Trek as well as NBA and NFL licensed series. The RELIC line has also developed special licensed limited edition sets including classic American cars and the NFL. 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 sunglasses, men's and women's small leather goods, men's and women's belts, and handbags under the FOSSIL brand. The Company currently sells its sunglasses, small leather goods, belts and handbags through a number of its existing major department store and specialty retail store customers. 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 FOSSIL watches. Sales of the Company's accessory lines for the year ended December 31, 1996, 1995 and 1994 accounted for 26.5%, 15.2% and 7.9%, respectively of the Company's total sales. SUNGLASSES. In 1995, the Company introduced a line of sunglasses sold under the FOSSIL brand name. The FOSSIL Sunwear collection offers designs for both men and women. The sunglass line features optical quality lenses in both plastic and metal frames, with classic and fashion retro styling as found with other FOSSIL products. Suggested retail prices for the Company's sunglasses generally range from $30 to $75 with an average price of $40. 6 SMALL LEATHER GOODS AND BELTS. In 1992, the Company introduced a line of small leather goods and belts for ladies sold under the FOSSIL brand name. In July 1993, the Company introduced a line of small leather goods for men under the FOSSIL brand name and expanded the men's line to include belts in April 1994. These small leather goods are made of fine leathers and include items such as mini-bags, coin purses, key chains, personal organizers and wallets. Retail prices for the Company's small leather goods generally range from $20 to $45, with an average price of $40. Retail prices for the Company's men's and women's belts generally range from $20 to $40 with an average price of $30. HANDBAGS. In 1996, the Company introduced a new line of FOSSIL handbags. The Company's handbags are made of a variety of fine leathers and other materials. These products emphasize classic styles and incorporate a variety of creative designs. Suggested retail prices for the Company's handbags generally range from $65 to $160. with an average price of $108. FUTURE PRODUCTS In 1996, the Company entered into a multi-year license agreement for the manufacture, marketing and sale of men's neckwear under the FOSSIL brand. The Company anticipates introducing the line of neckwear in early 1997. The Company has also entered into a multi-year license agreement for the manufacture, marketing and sale of men's underwear, sleepwear and lounge wear under the FOSSIL brand. This product line is scheduled to be introduced in the later part of 1997. These license agreements provide for the payment of royalties based on a percentage of net sales, as defined, and are subject to certain guaranteed minimum royalties. The Company may expand its product offerings in the future to include selected accessories that would complement its existing products. DESIGN AND DEVELOPMENT The Company's products are created and developed by the in-house design staff for such products 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 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 7 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. 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 22 factories located primarily in Hong Kong, and to a lesser extent in Japan and the United States Virgin Islands. Newtime, Ltd. ("Newtime"), a Hong Kong corporation, is an indirect wholly owned subsidiary of the Company. In addition, the Company holds a majority interest in Pulse Time Center Company, Ltd. ("Pulse Time"), a Hong Kong corporation, Amazing Time, Ltd. ("Amazing Time"), a Hong Kong corporation and Trylink International Ltd. ("Trylink"), a Hong Kong corporation. During the year ended December 31, 1996, approximately 18.5% of the Company's watches were manufactured by Pulse Time; 12.5% by Amazing Time; approximately 16.4% by Trylink and 14.3% by Newtime. In addition, one other factory accounted for more than 10% of the Company's watch supplies in 1996. The Company's sunglasses are manufactured by approximately nine factories located in Hong Kong, Korea, Taiwan, China and Italy. The Company's leather products are manufactured by approximately 12 factories located in Italy, Korea, Taiwan, China and Hong Kong. Except for its interest in Pulse Time, Amazing Time, Trylink and Newtime, the Company does not own or operate any manufacturing facilities. The Company does not have long-term contracts with any of its manufacturing sources. All transactions between the Company and its manufacturing sources are conducted on the basis of purchase orders. 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. Because components are sold directly to the Company's manufacturing sources, the Company is not aware of the precise quantities sourced from particular suppliers. Based upon the information available to the Company, the Company estimates that the majority of the movements used in the manufacture of the Company's watches are supplied by three principal vendors. The Company estimates that no other single component supplier accounted for more than 10% of component supplies in 1996. 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 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 Company believes that it has established and maintains close relationships with a number of watch manufacturers located in Hong Kong and Japan. In 1996, four 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 8 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, including Pulse Time, Amazing Time, Trylink or Newtime 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. 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. Fossil East, a subsidiary of the Company, acts as the Company's exclusive agent in Hong Kong. In such capacity, Fossil East is responsible for overseeing the production of samples of new products, placing orders with factories located in Hong Kong and China, monitoring manufacturing operations on a daily basis, inspecting finished goods and coordinating the shipment of finished goods. Fossil East also acts as the Company's payment agent in purchasing products from the Company's manufacturing sources. 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, substantially all of the Company's products are re-inspected by its personnel upon receipt at the Company's facility. MARKETING AND PROMOTION The Company's in-house advertising department oversees the conception, development and implementation of 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. 9 The Company's current 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 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, caps and pens, 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 has opened a number of FOSSIL concept "shops" in stores operated by its retail customers. In 1991, the Company, in cooperation with Macy's, designed and established an elaborate concept shop inside of Macy's Manhattan store. Based on the initial success of the "shop-in-shop" format the Company opened additional concept shops in selected retail locations. Certain of these concept shops are used to establish a permanent presence in stores operated by key retail customers. Other concept shops are temporary in nature and are used to provide increased visibility for the Company's products during the peak selling seasons. The Company believes that the "shop-in-shop" format provides it with an opportunity to ensure that the Company's products are sold in an environment that is consistent with the advertising themes and images that it associates with its products. This format also frequently places personnel trained by the Company in direct contact with the ultimate purchasers of its products and allows the Company to monitor more closely changing consumer preferences. Furthermore, the Company believes that this format may in some cases result in a greater amount of space being devoted to the Company's products in stores operated by its retail customers. In 1994, the Company introduced the Fossil Collectors Club. Club members receive a special limited edition watch, lapel pin, T-shirt and official Club membership card. Newsletters are produced quarterly to inform members of new product launches and to provide information to members about FOSSIL collectibles, trivia and upcoming store events. In 1995, the Fossil Collectors Club was successfully launched in certain international markets as well. 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 Chicago, Dallas, Los Angeles, San Francisco and New York City and has advertised in national fashion magazines, as well as in trade publications such as Women's Wear Daily and Daily News Record. SALES AND CUSTOMERS The Company sells its products in approximately 15,000 retail locations in the United States through a diversified distribution network that includes department stores and other major retailers, as well as specialty retail stores. The Company also sells its product in retail stores operated by Fossil located at retail malls in the United States and sells certain of its products in Fossil outlet stores located at selected outlet centers throughout the United States. In addition, the Company from time to time sells 10 its products to certain off-price retailers in order to manage current product offerings and inventory levels. The Company 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. For the years ended December 31, 1996 , 1995 and 1994, domestic department stores accounted for 46.6%, 40.5% and 47.8% of the Company's net sales, respectively. In addition, in the same periods, the Company's ten largest customers represented approximately 47.0% , 46.0% and 47.2% of net sales, respectively. For the year ended December 31, 1996, Dillards Department Stores accounted for 10% of the Company's net sales and no customer accounted for more than 10% of the Company's net sales in the years ended December 31, 1995, and 1994. 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 11.1% and 11.8% of the Company's net sales in the years ended December 31, 1996 and 1995, respectively. No other customer, when considered as a group under common ownership, accounted for more than 10% of the Company's net sales in the year ended December 31, 1996, 1995 and 1994. Sales by the Company to off-price retailers accounted for approximately 2.7%, 2.2% and 2.6% of its net sales during the years ended December 31, 1996, 1995 and 1994, respectively. Off-price retailers include those customers to whom the Company makes periodic or occasional sales of products at reduced prices. A majority of the products sold to off-price retailers consist of watch styles that the Company has eliminated or proposes to eliminate from its current product lines. In 1995, the Company commenced operations of Fossil outlet stores at selected outlet centers throughout the United States. These stores, which operate under the FOSSIL name, carry some of the product that previously were sold by the Company to off-priced retailers. The Company's products in such stores are generally sold at discounts from 25% to 50% off the suggested retail price. In 1996, the Company commenced operations of full priced Fossil retail stores at retail malls located in Dallas, Texas (The Galleria), Short Hills, New Jersey (The Mall at Short Hills), and Chicago, Illinois (Woodfield Mall). These stores, which operate under the FOSSIL name, carry a full assortment of FOSSIL merchandise which is generally sold at the suggested retail price. In November 1995, the Company began offering various products for sale to consumers through America Onlines's Market Place. These products include selected FOSSIL watches, sunglasses and leather goods, as well as NFL and NBA licensed watches. In November 1996, the Company established its own website at www.fossil.com. In addition to offering selected FOSSIL products, the Company also provides Company news and information, product annoucements and promotional contests on the website. The Company historically has relied on in-house sales personnel, instead of the independent sales representatives more typical in the industry. In 1996, the Company utilized independent sales representatives to help develop the market for the FSL watch line into sports specialty stores. The Company also utilized independent sales representatives to expand the distribution of RELIC watches to selected retailers and to promote the sale of the Company's leather goods to certain specialty retailers. As of December 31, 1996, the Company had 72 in-house sales and customer service employees and 53 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 11 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. The Company's products are sold in over 60 countries through foreign subsidiaries in which Fossil has an interest and through a network of approximately 42 independent distributors operating in South and Central America, the Carribean, 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. In May 1993, the Company formed Fossil B.V. which established Fossil GmbH to market and resell the Company's products throughout Europe. Fossil GmbH resells the Company's products directly to department stores or other retailers, and in certain countries, Fossil GmbH offers the Company's products through independent distributors. In 1994, Fossil B.V. established Fossil Italy to market and sell the Company's products in Italy. In 1995, Fossil B.V. established Fossil France and Fossil U.K. to market and sell the Company's products in France and England, respectively. In 1996, Fossil B.V. established Fossil Spain to market and sell the Company's products in Spain. In April 1996, the Company acquired an 81% interest in Fossil Japan which acts as the sole distributor of the Company's products in Japan. During the years ended December 31, 1996, 1995 and 1994, international and export sales accounted for 30%, 32% and 24% of net sales, respectively. During the past several years, the retail industry has undergone significant consolidation and a number of department stores and other major retailers have experienced financial difficulties. 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 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 electronic data interchange 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 12 product returns. The allowances for product returns at December 31, 1996, 1995 and 1994 were $8,855,000, $9,034,000 and $8,137,000, respectively. Since 1990, the Company has not experienced any returns in excess of the aggregate allowances therefor. BACKLOG At December 31, 1996, the Company had unfilled customer orders of approximately $15,852,000 compared to $14,340,000 and $15,371,000 at December 31, 1995 and 1994, respectively. 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 amounts shown above include 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. In addition, the increase use and reliance on the electronic data interchange program in recent years has contributed to the decline in backlog in comparison to prior years. DISTRIBUTION Upon completion of manufacturing, the Company's products are shipped to its warehousing and distribution centers in Richardson, Texas, Italy, Japan and Germany from which they are shipped to customers in their respective markets. In 1994, the Company consolidated its United States warehouse and distribution facilities into a single facility which enhances the Company's inventory management and distribution capabilities. The Company is currently constructing an additional warehouse and distribution facility adjacent to its existing facility which should be completed by mid-1997. The Company maintains inventory control systems at this facility which enable it to track each item of merchandise from receipt to ultimate sale. A significant number of products sold by the Company are pre- ticketed and bar coded prior to shipment to its retail customers. The Company believes that its distribution capabilities enable it to reduce inventory risk and increase its flexibility in responding to the delivery requirements of its customers. 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 sunglass line is covered by a one year limited warranty against defects in materials or workmanship. Defective products returned by customers 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. 13 GOVERNMENTAL REGULATIONS IMPORTS AND IMPORT RESTRICTIONS. The Company's products are currently manufactured in China and Hong Kong and, to a lesser extent, in Japan, Italy, Korea, and Taiwan. The Company's arrangements with its manufacturing sources are subject to the risks of doing business abroad. 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. The United States and the countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust prevailing quotas, duty or tariff levels, which could adversely affect the Company's operations and its ability to import products at current or increased levels. In general, the Company cannot predict the likelihood or frequency of any such events occurring or what effect such events could have on its financial condition and results of operations. The United States Trade Representative (the "USTR") has been directed to designate those countries that deny adequate and effective intellectual property rights or fair and equitable market access to United States firms that rely on intellectual property. From the countries designated, the USTR is to identify as "priority" foreign countries those countries where the lack of intellectual property rights protection is most egregious and has the greatest adverse impact on United States products. The USTR is directed to identify and investigate as priority foreign countries only those that have not entered into good faith negotiations or made significant progress in protecting intellectual property. Where such an investigation does not lead to a satisfactory resolution of such practices, through consultations or otherwise, the USTR is authorized to take retaliatory action, including the imposition of retaliatory tariffs and import restraints on goods from the priority foreign country. The Company cannot predict whether any of the countries in which its products are currently manufactured or any of the countries in which the Company may manufacture its products in the future will be subject to an investigation by the USTR. The Company cannot predict the likelihood, type or effect of any trade retaliation as a result of such investigations. Trade retaliation in the form of increased tariffs or quotas, or both, against products that are manufactured on behalf of the Company now or in the future could increase the cost or reduce the supply of such products available to the Company. There have been a number of ongoing trade disputes between the United States and China during which the United States has threatened to impose tariffs and duties on some products imported from China and to withdraw China's "most favored nation" status. There can be no assurance that legislation will not be introduced in Congress seeking to place restrictions on the renewal of China's most favored nation status or that China will continue to enjoy such status in the future. If goods manufactured in China enter the United States without the benefit of most favored nation treatment, such goods will be subject to significantly higher duty rates. Any such increased duties would increase the cost or reduce the supply of goods from China, although the Company believes that it could replace such goods with items manufactured in other countries at prices that would not materially affect its profit margins. Accordingly, the Company believes that the expiration of China's most favored nation status would not have a material adverse effect on the Company's financial condition or results of operations. 14 In addition to the foregoing factors, the Company's import operations may be adversely affected by political instability, foreign governmental regulation, fluctuations in exchange rates and changes in economic conditions in countries in which the Company's manufacturing sources are located, any of which could result in the disruption of trade from exporting countries. The potential effect of these factors on the Company may be heightened as a result of the fact that substantially all of the Company's products are manufactured in, or sourced from, Hong Kong, over which China will resume sovereignty in 1997. The Company cannot predict the effect, if any, this event will have on its operations in Hong Kong and there can be no assurances that Hong Kong will not experience political, economic or social disruption as a result of the resumption of Chinese sovereignty. 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. TRADEMARKS The Company has registered the FOSSIL and RELIC trademarks for use on the Company's watches, leather goods and other fashion accessories, and has applied for registration of the FSL trademark for use on the Company's watches and other accessories in the United States. 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, RELIC and FSL, 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 the distinctive rectangular tins in which the Company packages the majority of its Fossil watch products. The Company regards its trademarks and trade dress as valuable assets and believes that they have significant value in the marketing of its products. The Company intends to protect its trademarks and trade dress 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? and Swatch. In addition, the Company's leather goods and sunglass businesses compete with a large number of established companies that have significantly greater experience than the Company in designing, developing, marketing and distributing such products. In all its businesses, the Company competes with numerous manufacturers, importers and distributors who have significantly greater financial, distribution, advertising and marketing resources than the Company. The Company's competitors include distributors that import watches and accessories from abroad, domestic companies that have established foreign manufacturing relationships and companies that produce watches and accessories domestically. 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. 15 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 of December 31, 1996, the Company (excluding Fossil GmbH, Fossil Italy, Fossil Japan, Fossil France, Fossil U.K., Fossil Spain and Fossil East) had 430 full-time employees, including 52 in executive or managerial positions, and the balance in design, advertising, sales, quality control, distribution, clerical and other office positions. Also included in this amount are 52 full-time employees of Fossil Stores I, Inc. and 8 full-time employees of Fossil Stores II, Inc. As of December 31, 1996, Fossil East had 53 full-time employees, including 12 in managerial positions and the balance in sampling, quality control, clerical and other office positions. As of December 31, 1996, Fossil GmbH had 132 full time-employees, including 3 in managerial positions and the balance in sampling, quality control, clerical and other office positions.. As of December 31, 1996, Fossil Japan had 26 full time-employees, including 3 in managerial positions and the balance in sampling, quality control, clerical and other office positions. As of December 31, 1996, Fossil Italy had 27 full-time employees, Fossil France had 11 full-time employees and Fossil U.K. had 10 full-time employees. 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. ITEM 2. PROPERTIES In July 1994, the Company completed construction of its new corporate headquarters located in a 150,000 square foot facility in Richardson, Texas. This facility contains the general office, warehousing and distribution functions of the Company and is located on approximately ten acres of land. In December 1996, the Company commenced construction of a new 138,000 square foot distribution center located on approximately ten acres of land immediately adjacent to its headquarters. The new distribution center will contain the warehouse and distribution functions of the Company's leather goods and is scheduled to be completed by mid-1997. The Company owns both facilities and the land on which each is located. The land and the current facility are subject to mortgage indebtedness. As of December 31, 1996, the Company had entered into four lease agreeements 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 2005 to 2007 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 6% to 7%. 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. The Company also leases retail space at selected outlet centers throughout the United States for the sale of its products. As of December 31, 1996, the Company had entered into 26 such leases. The 16 leases, including renewal options, expire at various times from 2005 to 2010, 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 4% to 6%. 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 also leases showrooms in Atlanta, Chicago, Los Angeles and New York City, which are used to display the Company's products to its retail customers. Fossil East leases approximately 37,600 square feet of office, warehouse and assembly space in Hong Kong pursuant to a lease agreement that expires in December 1997. Fossil GmbH leases approximately 6,100 square feet of office space in Traunstein, Germany pursuant to a lease agreement that expires in 2000, and an additional 6,300 square feet of warehouse and storage space under leases that expire in 2001. Fossil Italy leases approximately 2,800 square feet of office space in Vicenza, Italy and an additional 3,100 square feet of warehouse and storage space. Fossil Japan also leases warehouse and office space in Tokyo, Japan. 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. 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 year ended December 31, 1996. 17 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 year ended December 31, 1996 and 1995. Fiscal year beginning January 1, 1996: HIGH LOW ------- ------- First Quarter $11 1/4 $ 6 3/4 Second Quarter 16 3/8 9 3/4 Third Quarter 14 3/4 7 3/8 Fourth Quarter 15 7/8 11 1/2 Fiscal year beginning January 1, 1995: First Quarter $19 1/8 $12 3/4 Second Quarter 19 1/2 13 7/8 Third Quarter 26 1/4 12 1/8 Fourth Quarter 13 1/4 7 As of March 26, 1997, the Company estimates that there were approximately 2,400 beneficial owners of the Company's Common Stock, represented by approximately 150 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 following table sets forth certain information regarding the cash dividends and other distributions paid by the Company to Messrs. Tom Kartsotis, Kosta N. Kartsotis and Alan D. Moore (the "Principal Stockholders") during the years ended December 31, 1996, 1995 and 1994. YEARS ENDED DECEMBER 31, (IN $000S) 1996 1995 1994 ---- ---- ---- Cash Dividends 0 0 1,077(1) Promissory Notes 0 1,000(2) 1,000(2) Total 0 1,000 2,077 18 (1) Represents cash payments of $1,077,500 made by the Company to the Principal Stockholders in 1994 in respect of their federal and state income tax obligations attributable to the Company's 1993 Subchapter S Earnings following the determination of the amount of such earnings based upon a pro rata allocation of the Company's earnings for the full fiscal year ended December 31, 1993. (2) Represents the principal payments to the Principal Stockholders under the notes (the "New Notes") in the principal amount of $10,910,000 issued to the Principal Stockholders prior to the date of the Offering. The Company used a portion of the proceeds of the Offering to repay $8,910,000 principal amount of the New Notes. RECENT SALES OF UNREGISTERED SECURITIES. On October 1, 1996, the Company entered into an agreement to purchase 3,791 shares of common stock of Fossil Europe, B.V. from Franz Scheurl for $1,000,000 in cash, 50,000 shares of Common Stock and options to acquire 20,000 shares of Common Stock at an exercise price of $11.75 per share. Such securities were not registered under the Securities Act of 1933, as amended, in reliance on the exemption from registration provided under Section 4(2) thereof. ITEM 6. SELECTED FINANCIAL DATA The information appearing under "Selected Consolidated Financial Highlights" beginning on page 3 of the Fossil, Inc. 1996 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" beginning on page 12 of the Fossil, Inc. 1996 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The information appearing under "Financial Information" beginning on page 25 of the Fossil, Inc. 1996 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. 19 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. 20 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 25 of the Fossil, Inc. 1996 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). 4.1 Promissory Note in the principal amount of $6,000,500 dated as of April 6, 1993 by Fossil, Inc. in favor of Tom Kartsotis (incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 Promissory Note in the principal amount of $2,727,500 dated as of April 6, 1993 by Fossil, Inc. in favor of Kosta N. Kartsotis (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.3 Promissory Note in the principal amount of $2,182,000 dated as of April 6, 1993 by Fossil, Inc. in favor of Alan D. Moore (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.4 Promissory Note in the principal amount of $839,620 dated as of December 31, 1993 by Fossil, Inc. in favor of Jal S. Shroff and Pervin J. Shroff (incorporated herein by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 21 4.5 Promissory Note in the principal amount of $181,570.20 by Fossil, Inc. in favor of Arrow Merchandising, Inc. (incorporated herein by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.1 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 Amended and Restated Loan Agreement dated August 31, 1994, by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. and Fossil Trust (without exhibits) (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 First Amendment to Amended and Restated Loan Agreement dated September 30, 1994, by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust and Fossil New York, Inc. (without exhibits) (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.9 Second Amendment to Amended and Restated Loan Agreement dated February 13, 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 10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.10 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 22 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). 10.11 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). 10.12 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). 10.13 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). 10.14 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). 10.15 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). 10.16 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). 10.17 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). 10.18(2) Letter Agreement dated April 1, 1994 between Fossil, Inc. and Richard H. Gundy (incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.19 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). 10.20 Third Amended and Restated Master Revolving Credit Note dated April 30, 1995, in the stated principal amount of $25,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.21 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). 23 10.22 Stock Purchase Agreement by and between Gerhardt Geisreiter and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.23 Stock Purchase Agreement by and between Hans Stopfinger and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.24 Stock Purchase Agreement by and between Mike Houtzaager and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.25 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). 10.26 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). 10.27 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). 10.28 Stock Purchase Agreement between Kabushiki Kaisha Hattori Seiko and Fossil, Inc., dated March 29, 1996 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.29 First Amendment to Second Amended and Restated Loan Agreement by and between First Interstate Bank of Texas, N.A. and Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. dated as of March 27, 1996 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.30 Second Amendment to Second Amended and Restated Loan Agreement by and between First Interstate Bank of Texas, N.A. and Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc. and Fossil Stores II, Inc. dated as of May 3, 1996 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996). 10.31(1) Stock Purchase Agreement by and between Franz Scheurl and Fossil, Inc. dated October 1, 1996. 10.32(1,2)Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick. 13(1) Fossil, Inc. 1996 Annual Report to Stockholders. 21.1(1) Subsidiaries of Fossil, Inc. 24 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. 25 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 28, 1997. 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, March 28, 1997 - --------------------------- Chief Executive TOM KARTSOTIS Officer and Director (Principal Executive Officer) /s/ Kosta N. Kartsotis President and Chief March 28, 1997 - --------------------------- Operating Officer KOSTA N. KARTSOTIS and Director /s/ Randy S. Kercho Executive Vice President, March 28, 1997 - --------------------------- Chief Financial Officer RANDY S. KERCHO and Treasurer (Principal Financial and Accounting Officer) /s/ Michael W. Barnes Executive Vice President March 28, 1997 - --------------------------- and Director MICHAEL W. BARNES /s/ Alan D. Moore Director March 28, 1997 - --------------------------- ALAN D. MOORE /s/ Jal S. Shroff Director March 28, 1997 - --------------------------- JAL S. SHROFF /s/ Kenneth W. Anderson Director March 28, 1997 - --------------------------- KENNETH W. ANDERSON /s/ Alan J. Gold Director March 28, 1997 - --------------------------- ALAN J. GOLD /s/ Donald J. Stone Director March 28, 1997 - --------------------------- DONALD J. STONE 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Fossil, Inc. We have audited the consolidated financial statements of Fossil, Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 and have issued our report thereon dated February 15, 1997, which report expressed an unqualified opinion; such consolidated financial statements and report are included in your 1996 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. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Dallas, Texas February 15, 1997 S-1 SCHEDULE II FOSSIL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1994, 1995, and 1996 Additions Charged Balance at (Credited) to Deductions Beginning of Costs and Actual Returns Balance at End Classification Period Expenses or Writeoffs of Period - -------------- ------------ ------------- -------------- -------------- December 31, 1994: Accounts receivable allowances: Sales returns 6,218,721 11,849,783 (9,931,309) 8,137,195 Bad debts 1,026,900 1,101,523 (77,537) 2,050,886 Cash discounts 35,705 85,232 (35,705) 85,232 Inventory in transit for estimated customer returns (3,408,654) (6,234,286) 5,365,362 (4,277,578) December 31, 1995: Accounts receivable allowances: Sales returns 8,137,195 14,536,232 (13,639,303) 9,034,124 Bad debts 2,050,886 1,389,980 (584,800) 2,856,066 Cash discounts 85,232 115,507 (94,621) 106,118 Inventory in transit for estimated customer returns (4,277,578) (8,074,296) 7,524,874 (4,827,000) December 31, 1996: Accounts receivable allowances: Sales returns 9,034,124 12,524,626 (12,704,297) 8,854,453 Bad debts 2,856,066 2,103,499 (667,419) 4,292,146 Cash discounts 106,118 218,500 (110,747) 213,871 Inventory in transit for estimated customer returns (4,827,000) (6,330,967) 6,694,021 (4,463,946)
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). 3.3 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). 4.1 Promissory Note in the principal amount of $6,000,500 dated as of April 6, 1993 by Fossil, Inc. in favor of Tom Kartsotis (incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 Promissory Note in the principal amount of $2,727,500 dated as of April 6, 1993 by Fossil, Inc. in favor of Kosta N. Kartsotis (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.3 Promissory Note in the principal amount of $2,182,000 dated as of April 6, 1993 by Fossil, Inc. in favor of Alan D. Moore (incorporated by reference to Exhibit 4.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.4 Promissory Note in the principal amount of $839,620 dated as of December 31, 1993 by Fossil, Inc. in favor of Jal S. Shroff and Pervin J. Shroff (incorporated herein by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 4.5 Promissory Note in the principal amount of $181,570.20 by Fossil, Inc. in favor of Arrow Merchandising, Inc. (incorporated herein by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.1 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). EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 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 Amended and Restated Loan Agreement dated August 31, 1994, by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. and Fossil Trust (without exhibits) (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 First Amendment to Amended and Restated Loan Agreement dated September 30, 1994, by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust and Fossil New York, Inc. (without exhibits) (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.9 Second Amendment to Amended and Restated Loan Agreement dated February 13, 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 10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.10 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). 10.11 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). EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 10.12 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). 10.13 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). 10.14 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). 10.15 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). 10.16 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). 10.17 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). 10.18(2) Letter Agreement dated April 1, 1994 between Fossil, Inc. and Richard H. Gundy (incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.19 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). 10.20 Third Amended and Restated Master Revolving Credit Note dated April 30, 1995, in the stated principal amount of $25,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.21 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). EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 10.22 Stock Purchase Agreement by and between Gerhardt Geisreiter and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.23 Stock Purchase Agreement by and between Hans Stopfinger and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.24 Stock Purchase Agreement by and between Mike Houtzaager and Fossil, Inc. entered into as of July 1, 1995 (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1995). 10.25 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). 10.26 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). 10.27 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). 10.28 Stock Purchase Agreement between Kabushiki Kaisha Hattori Seiko and Fossil, Inc., dated March 29, 1996 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.29 First Amendment to Second Amended and Restated Loan Agreement by and between First Interstate Bank of Texas, N.A. and Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. dated as of March 27, 1996 (incorporated by reference to Exhibit 10.2 of the Company's Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.30 Second Amendment to Second Amended and Restated Loan Agreement by and between First Interstate Bank of Texas, N.A. and Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc. and Fossil Stores II, Inc. dated as of May 3, 1996 (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1996). 10.31(1) Stock Purchase Agreement by and between Franz Scheurl and Fossil, Inc. dated October 1, 1996. 10.32(1,2)Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 13(1) Fossil, Inc. 1996 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-10.31 2 EXHIBIT 10.31 EXHIBIT 10.31 STOCK PURCHASE AGREEMENT This Agreement made as of this 1st day of October 1996, by and between Franz Scheurl, residing at Anton Beilhack Strasse 7, W-83278 Traunstein, Germany ("Seller") and Fossil, Inc., a Delaware, U.S.A. corporation ("Buyer"). A. Seller currently is the registered owner of 3791 shares of common stock (the "Shares") of Fossil Europe, B.V., a Dutch corporation (the "Company"); and B. Seller wishes to sell, and Buyer wishes to buy, the Shares on the following terms and conditions. NOW, THEREFORE, the parties agree as follows: 1. PURCHASE AND SALE OF SHARES. Seller agrees to sell and Buyer agrees to purchase from Seller all of the Shares, which constitute all of the ownership interest of Seller in the Company. 2. PURCHASE PRICE. The consideration to be paid by Buyer to Seller for the Shares is as follows: 1) USD $1,000,000 payable in cash or check by Buyer; 2) 50,000 shares of common stock of Fossil, Inc. (unregistered and nontransferable); and 3) 20,000 options to purchase an equivalent number of shares of Fossil, Inc. common stock at a purchase price of USD $11.75 per share, substantially in the form of agreement attached as Exhibit A. Upon payment of the purchase price by Buyer, Seller shall deliver to Buyer a certificate representing all of the Shares, duly endorsed in blank for transfer or accompanied by stock powers duly executed in blank, or such other documents as may be necessary or required in order to transfer the Shares to Buyer. 3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents, warrants and covenants to Buyer as set forth below: 3.1 OWNERSHIP OF SECURITIES. Seller represents and warrants to Buyer that he is the record and beneficial owner of the Shares, free and clear of any charges, liens, options, claims and encumbrances of any kind whatsoever (other than and subject to the legends, if any, upon tile certificate representing the Shares and laws and regulations restricting the transfer thereof); and that other than as provided in this Agreement, there are no agreements or commitments on the part of the Seller for the sale or other disposition of the Shares. Upon delivery of and payment for the Shares in accordance with this Agreement, good and marketable title and beneficial ownership thereto will be delivered to the Buyer free and clear of any liens, claims or encumbrances. 3.2 (a) AUTHORITY. Seller has full power and authority to execute and perform this Agreement, to deliver the Shares hereunder, to perform his other obligations hereunder and to consummate the transactions contemplated hereby. All necessary action has been taken by the Seller to authorize the execution, delivery and performance of this Agreement, and the delivery of the Shares hereunder. This Agreement constitutes the legal valid, and binding obligation of the Seller, enforceable against the Seller in accordance with its terms. (b) EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and performance of this Agreement, does not, and will not, result in any violation of or be in conflict with or constitute a default under any term or provision of any judgement, decree, order, statute, injunction, rule or regulation applicable to the Seller, or any note, bond, mortgage, indenture, lease, license, franchise, agreement or other instrument or obligation to which Seller is bound. 3.3 CONSENTS AND APPROVALS. All consents, waivers, orders, approvals and authorizations of, and declarations, designations, filings, registrations and qualifications with any court, governmental or regulatory authority, or any third party, necessary for the valid execution and delivery of this Agreement, have been, or prior to the purchase of the Shares, will be obtained by Seller. 4. REPRESENTATIONS OF BUYER. (a) Buyer represents that it has the full legal capacity and authority to enter into this Agreement and to purchase the Shares as contemplated hereunder. (b) Buyer represents and warrants to Seller that Buyer is acquiring the Shares for its own account for investment and not with a view to, or for sale in connection with, any distribution thereof Buyer confirms its understanding that the shares may be subject to certain restrictions, including that such Shares have not been registered or qualified under applicable securities laws. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. SELLER: PURCHASER: FOSSIL, INC. /s/ FRANZ SCHEURL By: /s/ RANDY S. KERCHO - --------------------------------- ---------------------------------- Franz Scheurl Title: Chief Financial Officer 2 EX-10.32 3 EXHIBIT 10.32 EXHIBIT 10.32 October 4, 1995 Mr. Mark Quick c/o Fossil, Inc. 2280 N. Greenville Ave. Richardson, Texas 75082 Re: Compensation Program - Senior Vice President Dear Mark: Listed below is an outline of the Fossil, Inc. Compensation Program for the position of Senior Vice President. A. Salary As of the commencement of your employment with Fossil on November 15, 1995, you will assume the office of Senior Vice President with an annual salary of $175,000. B. Bonus You will be eligible to participate in the Annual Bonus Program of Fossil as amended from time to time. C. Stock Options A total of 75,000 stock options will be awarded to you on or about November 15, 1995, with an exercise price equal to the closing price of a share of common stock of Fossil as of that date. This award is subject to the terms and conditions of the 1993 Long-Term Incentive Plan of Fossil, Inc. and your stock option award agreement (attached hereto). These stock options will become exercisable, on a cumulative basis, as follows: (i) with respect to 50% of the total number of shares subject to options, such options shall be exercisable as of the first anniversary date of the grant; and (ii) with respect to an additional 25% of the total number of shares subject of options, such options shall be exercisable as of the second anniversary date of the grant; and (iii) with respect to the remaining 25% of the total number of shares subject to options, such options shall be exercisable as of the third anniversary date of the grant. D. Notice of Termination Employment may be terminated by either party effective upon written notice to the other party. In the event that your employment is terminated by Fossil without cause prior to the third anniversary date of your commencement of employment, then Fossil agrees to pay you salary continuation (at your then current salary) from the date of such termination until such third anniversary date. In Fossil's sole and absolute discretion, such payments may either be in the form of monthly installments or a lump sum amount due and payable upon termination. No such payments shall be due, however, in the event of termination by reason of death, termination with cause, or voluntary termination of employment prior to the third anniversary date of your commencement of employment. E. Insurance You will be able to participate in the Company's medical, dental and disability insurance programs in accordance with standard Company plans. Sincerely, /s/ Kosta N. Kartsotis Kosta N. Kartsotis Enclosures: Form of Stock Option Award Agreement 1993 Long-Term Incentive Plan of Fossil, Inc. EX-13 4 EXHIBIT 13 EXHIBIT 13 01 Company Profile 03 Financial Highlights 05 Letter to Stockholders 09 Company Overview 12 Management's Discussion 25 Financial Information 41 Corporate Information Inside front cover table of contents (graphics) company PROFILE FOSSIL IS A DESIGN AND MARKETING company that specializes in consumer products which are predicated on fashion and value. FOSSIL watches, the Company's flagship product, is an extensive line of fashion watches sold in department stores and other upscale retailers in over 60 countries around the world. Complementary lines of various accessories such as small leather goods, belts, handbags and sunglasses also capitalize on the increasing awareness of the FOSSIL brand. The wholesome brand image of "America in the 1950s" is one that is targeted to the value-driven, back-to-basics consumer of the 1990s. Designs for the distinctive tin box packaging, advertising materials and visual enhancements at the point-of-purchase are efficiently created in an in-house creative services department. The product is designed and developed utilizing a series of product design, manufacturing and marketing systems which are flexible, quick and efficient. The strategy is to capture an increasing market share of a growing number of markets by providing customers with high quality, value-driven products which are marketed in a unique manner. The Company also develops products under the RELIC and FSL brand names, in addition to private label products for some of the most distinguished companies in the world. 1 FOSSIL 1996 ANNUAL REPORT Graphic depicting: Net Sales Operating Income Net Income Stockholders' Equity 2 selected consolidated FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) 1996 1995 1994 1993 1992 Net sales............... $205,899 $181,114 $161,883 $105,089 $73,831 Gross profit............ 98,038 82,900 71,880 45,343 29,031 Operating income........ 24,373 20,463 26,217 16,576 11,167 Income before taxes..... 23,040 20,142 24,923 16,718 10,698 Net income(1)........... 13,591 12,057 15,345 11,485 7,050 Earnings per share(1)... $ 1.02 $ 0.91 $ 1.15 $ 0.91 $ 0.62 Weighted average common and common equivalent shares outstanding(1).. 13,378 13,293 13,304 12,662 11,408 Working capital......... $ 59,861 $ 49,251 $ 41,434 $ 27,692 $12,021 Total assets............ 119,456 96,994 80,420 46,539 27,561 Long-term debt.......... 4,350 4,811 4,750 1,000 840 Stockholders' equity.... 74,568 61,269 48,906 33,025 15,017 (1) 1993 amounts and prior are pro forma 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. 1996 HIGH LOW First quarter $11 1/4 $ 6 3/4 Second quarter 16 3/8 9 3/4 Third quarter 14 3/4 7 3/8 Fourth quarter 15 7/8 11 1/2 1995 HIGH LOW First quarter $19 1/8 $12 3/4 Second quarter 19 1/2 13 7/8 Third quarter 26 1/4 12 1/8 Fourth quarter 13 1/4 7 3 FOSSIL 1996 ANNUAL REPORT Graphic depicting Fossil world logo 4 letter to STOCKHOLDERS The strategy of continually investing with a long term mindset seems to be paying off. In 1996, the Company's brands continued to widen their audience and increased in value. We continued to accelerate the recognition of our brands by diversifying through the introduction of new product lines, opening related businesses and expanding geographically. The costs of this diversification were apparent in the operating results early in the year. Maintaining our focus for the future, however, proved to be the correct strategy as our operating income increased over 40% on net sales increases of 15% during the second half of 1996. We are pleased with the momentum that we seem to be building. We look back on 1996 as the year that our long term investments in the women's handbag business finally paid off. For years, we have been developing our design and sourcing capabilities within the handbag business at the same time as we have been grooming the FOSSIL brand for successful product roll-outs. The reception to our handbag offering in 1996 was phenomenal and it fueled the sales of our other leather products as well. We are also pleased with the development of our core FOSSIL watch business in the domestic market in 1996. Development of the entire line became more focused and the performance of our watches over the retail counter improved noticeably. The launch of FOSSIL Blue, a line of sport watches with metal bracelets, was the most successful new line of watches that we have introduced in some time. We also saw nice success in the roll-out of ladies metal bracelet watches in our F2 collection. These mid-year introductions provided the momentum to begin recording the first increases in domestic watch sales since the first quarter of 1995. In April of 1996, we purchased the majority control of our marketing and distribution company in Japan. While from a bottom line perspective we believe it may take another year to return a profit, we believe that Japan is a major market for our products which opens up a gateway into the far east. Our increased presence in Japan has substantially impacted our visibility throughout the far east and is allowing us to operate more aggressively in this region. Our strong presence in Japan is also presenting us new business opportunities at an encouraging pace. During 1996, we opened three FOSSIL General Stores in premier mall locations in key markets near New York, Dallas and Chicago. These locations not only provide a source of income for our Company but also function as a 5 FOSSIL 1996 ANNUAL REPORT Graphic of Fossil products 6 Graphic of Fossil Products 7 showcase for all our products and our brand image. In visiting one of these locations our retail customers and our consumers immediately understand the strong brand image that FOSSIL has developed. We are actively developing our retail strategy on a global basis. In addition, 1996 became our inaugural year in developing relationships with companies who will license our brand for products that are in demand from consumers but for which we do not have expertise in developing. We have recently entered the business of ties and boxer shorts/lounge wear through strategic alliances with two strong companies who specialize in these unique businesses. Additional product categories will be approached on a global basis through licensing when we believe products can be more effectively developed by companies with existing infrastructure as opposed to building a separate infrastructure within our Company. Our strategy continues to be dedicating our energy towards building brand name recognition, creating worldwide expansion and seeking strategic diversification. The continuing momentum of the FOSSIL brand is bringing opportunities at an increasing rate. In the immediate future look for our retail presence to expand with FOSSIL shops in domestic airport locations, on premier cruise ships, shop-in-shop expansions internationally and the installation of a FOSSIL shop on the main floor of Tourneau's Superstore opening in 1997 on 57th Street in New York City. From a product perspective, future years will bring further diversification through the roll-out of new products driven both internally and through license arrangements. We believe we are on the right track in building long term viable brands which can continually fuel increased stockholder value. In closing we would like to send a special thanks to our dedicated employees and supportive customers, suppliers and distributors around the world who are all responsible for our continued growth. Sincerely, /s/ TOM KARTSOTIS /s/ KOSTA N. KARTSOTIS TOM KARTSOTIS KOSTA N. KARTSOTIS Chairman of the Board President 8 FOSSIL 1996 ANNUAL REPORT company OVERVIEW BUILDING A BRAND The Company's primary objective is to create value by building the FOSSIL brand name. An enhanced brand encourages retailers to increase the importance of FOSSIL products within their assortments and thus increase sales. A strong brand also provides opportunities to expand into new product categories within department stores. During 1996, the FOSSIL brand continued to be one of the leading fashion watch brands, gain momentum in its sales of non-watch products and increase its brand presence internationally thus, signifying the emergence of FOSSIL as a global brand. WATCHES. The FOSSIL line continued its leadership position in department stores with the highly successful launch of FOSSIL Blue, a water resistant sport watch collection for men and women. FOSSIL Blue has become the dominant product category in the FOSSIL line with stainless steel metal bracelets comprising the majority of the assortment. Women's metal dress watches also had a terrific year during 1996 with the addition of Adjust-o-Matic styles featuring easily adjustable bracelet bands. FOSSIL made great strides in quick response shipping in 1996 through timely delivery of the best selling styles to the appropriate department stores resulting in a quicker inventory turn in 1996. LEATHER ACCESSORIES. Sales and brand awareness continued to increase in the Company's non-watch product categories with sales of FOSSIL leather accessories increasing 75% over the prior year. The success of the Company's leather accessory line can be attributed in large part to the launch of women's handbags in 1996. Women's handbags gained wide consumer acceptance in 1996 through the Company's targeted distribution pattern and remain a considerable sales volume opportunity for 1997. During 1996, the Company also demonstrated growth in leather accessories through a dramatic sales increase of over 100% in women's small leather goods compared to the prior year. These increases are due in large part to the sales of FOSSIL mini-bags and the expansion of this category to additional retail stores. Women's belts are well positioned in key department stores and posted strong double-digit sales increases in 1996. The Company expanded its men's small leather goods to an additional key department store account during 1996 thus, propelling men's small leather good business to double-digit sales growth. The Company's men's belt business generated strong retail performance on a small retail base in 1996 and represents a key area of growth for 1997. SUNGLASSES. FOSSIL established additional brand awareness through its eyewear business in 1996. FOSSIL sunglasses penetrated a majority of women's and men's departments in FOSSIL's traditional department store customer base. FOSSIL sunglasses were also introduced to new distribution channels this past year including optical stores such as LensCrafters and speciality retail stores such as Sunglass Hut and Gadzooks. FOSSIL enjoyed immediate success with sales of FOSSIL sunglasses in international markets accounting for over 25% of total sunglass sales in 1996. The FOSSIL sunglass collection has proven to be an excellent addition to the FOSSIL product assortment. FOSSIL sunwear complements the quality and value of the FOSSIL brand perfectly by providing 100% UV protection, optical quality materials and the unique tin box with its assortment. In addition, the seasonality of the sunglass business is directly opposite to the seasonality of the fashion watch business, thus operational 9 FOSSIL 1996 ANNUAL REPORT Graphic of Fossil retail store 10 synergy is achieved. Sunglasses have proven to be an attractive industry from a profit margin perspective as it is primarily dominated by companies who license other company's brand names. Since the Company owns the FOSSIL brand, it is able to offer an incredible price-value relationship to consumers while maintaining an attractive profit margin for the Company and its stockholders. WORLDWIDE. The Company remains committed to achieving brand and sales growth through expansion into new territories, improving distribution channels in existing territories and expanding the distribution of product categories in the international marketplace. The international market continues to offer excellent growth opportunities for the Company and the brand. The value of the FOSSIL brand was clearly demonstrated in 1996 beyond the United States borders. In 1996, FOSSIL added new distributors in 11 countries including: Australia, Brazil, Indonesia, Kuwait, Malaysia, Oman, Philippines, Qatar, Saudi Arabia, Thailand and United Arab Emirates. The Company anticipates meaningful contributions from these new territories in 1997 and increased expansion in other regions around the globe. OTHER BUSINESS FSL. During 1996, the Company almost doubled the distribution of its' next-generation sport brand, FSL, over 1995. Sales of FSL watches continued to remain strong in international markets, particularly in Japan where FSL is being touted as the next up-and-coming brand. RELIC. Through its increased distribution in national and regional department stores, specialty stores and catalog showrooms, RELIC has become a national brand over its seven year history. RELIC watches feature similar styling, quality and value as the FOSSIL brand yet with subtle changes in the design and component specifications that allow for a lower price point. This past year, RELIC expanded upon its core line with select licensed products such as a line of "Barbie" watches and new pocket watches in its "Classic American Car" series featuring a '57 Chevy and a '64 Ford Mustang. Sears Roebuck & Co. named RELIC as a recipient of its prestigious "Partners in Progress" award for the second consecutive year. This award recognizes Sears' most outstanding suppliers from a list of more than 10,000 vendors. PRIVATE LABEL. In addition to building its own brand, the Company also designs and manufactures private label product 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 business as well as integrate other product categories such as leather goods and eyewear. The Company's premium/incentive division featured substantial gains in 1996 utilizing its sourcing, design and development systems to translate many corporate themes, events or promotions into a comprehensive custom program. FOSSIL GENERAL STORES. Three full-price FOSSIL Stores were opened in 1996. Locations were strategically selected to elevate FOSSIL's presence and to build brand recognition. The first three FOSSIL stores were opened in Chicago, Illinois (Woodfield Mall), Short Hills, New Jersey (The Mall at Short Hills) and Dallas, Texas (The Galleria). Additional locations are being evaluated for 1997. 11 FOSSIL 1996 ANNUAL REPORT MANAGEMENT'S DISCUSSION Since the Company's origination in 1984, sales growth has been principally attributable to increased sales of FOSSIL brand watches both domestically and in a growing number of international markets. Adding to the Company's sales growth has been the addition of FOSSIL brand leather goods and sunglasses, the diversification into FOSSIL outlet and retail stores and the introduction of other watch brands (RELIC and FSL). Increased sales volume has also been generated through leveraging the Company's infrastructure of sourcing, design and developmental systems for the production of its products for corporate gift programs as well as under the names of internationally recognized specialty retailers, entertainment companies and theme restaurants. The Company's products are marketed internationally, mainly through major department stores and specialty retailers. The Company maintains sales and distribution offices in the United States, Germany, Italy, Japan, the United Kingdom, Spain, France and Hong Kong. In addition to sales through the Company's offices, FOSSIL also currently distributes its products to over 50 additional countries through licensed distributors. 1996 HIGHLIGHTS - - The newly-designed line of FOSSIL handbags, first shipped in mid-1996, were a success in the retail marketplace. Sales of FOSSIL handbags also increased the awareness and sales of the Company's other leather products allowing leather good sales to exceed last year's gross sales by 75%. - - FOSSIL Blue, a line of mainly metal-banded, water resistant sport watches was introduced. This line of watches, introduced in mid-1996, marked the Company's first large scale movement into metal-banded as opposed to leather- banded watches. - - The Company opened nine additional Outlet Stores for a total of 26 sites operating at the end of 1996. - - Three FOSSIL retail stores were opened in 1996 in some of the most prestigious malls in the U.S. - - Profits from the Company's European-based operations declined as the Company continued to invest in international infrastructure in both existing and new markets, despite a slow down in international revenue growth. - - The Company acquired 81% control of its marketing and distribution company in Japan. 12 Graphic of Fossil eyewear 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 year from year years ended december 31, 1996 1995 1995 1994 1994 Net sales 100.0% 13.7% 100.0% 11.9% 100.0% Cost of sales (52.4) 9.8 (54.2) 9.1 (55.6) ------------------------------------------ Gross profit 47.6 18.3 45.8 15.3 44.4 Operating expenses (35.8) 18.0 (34.5) 36.7 (28.2) ------------------------------------------ Operating income 11.8 19.1 11.3 (21.9) 16.2 Interest expense (0.6) 7.9 (0.6) 90.8 (0.4) Other income (expense) -- (116.0) 0.4 (212.3) (0.4) ------------------------------------------ Income before income taxes 11.2 14.4 11.1 (19.2) 15.4 ------------------------------------------ Income taxes: Federal, State, Foreign (4.6) 16.9 (4.4) (15.6) (5.9) ------------------------------------------ Net income 6.6% 12.7% 6.7% (21.4)% 9.5% 14 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 years indicated (in millions, except percentage data): years ended december 31, 1996 1995 1994 1996 1995 1994 International: Europe $ 45.9 $ 40.0 $ 22.9 22.3% 22.1% 14.1% Other 15.2 18.7 15.0 7.4 10.3 9.3 ------------------------ ---------------------- Total International 61.1 58.7 37.9 29.7 32.4 23.4 ------------------------ ---------------------- ------------------------ ---------------------- Domestic: Watch products 86.4 89.4 106.0 41.9 49.4 65.5 Other products 44.5 25.7 17.9 21.6 14.2 11.1 ------------------------ ---------------------- Total 130.9 115.1 123.9 63.5 63.6 76.6 Stores 13.9 7.3 -- 6.8 4.0 -- ------------------------ ---------------------- Total Domestic 144.8 122.4 123.9 70.3 67.6 76.6 ------------------------ ---------------------- Total Net Sales $205.9 $181.1 $161.8 100.0% 100.0% 100.0% ------------------------ ---------------------- ------------------------ ---------------------- NET SALES. The growth in net sales during 1996 was principally due to sales volume increases in the Company's leather goods, sunglass products and sales generated through the Company's additional owned stores. These same sales factors, in addition to significant sales volume increases from the Company's European-based operations, were primarily responsible for net sales increases in 1995. The Company's European-based sales grew dramatically during 1995 as a result of opening several additional points of distribution in Europe during late 1994. However, a sluggish economy abroad in 1996 coupled with a reduction in the number of new points of sale as compared to the previous year, slowed the 1996 sales growth of our European-based operations to 14.8%. Domestic sales during 1995 were negatively impacted by both a weak retail environment and an inventory reduction effort by several of the Company's major customers. Several retailers, in anticipation of decreased sales during the 1995 holiday season, began reducing their inventory levels by decreasing their product reorders commencing in approximately July 1995. 15 Graphic of Fossil leather goods 16 The Company's sales volume was also negatively impacted during 1995 and early 1996 due to a dramatic consumer preference shift from leather-banded to metal-banded watches. Primarily as a result of new metal-banded watch product offerings and a stabilization of inventory levels of the Company's merchandise at its major customers, domestic sales of the Company's watches increased, beginning the third quarter of 1996 compared to the same period in 1995. Management anticipates that sales volumes will continue to increase in 1997 at approximately the 1996 rate primarily based on increased sales of the Company's leather goods, as well as continued positive momentum in the sales of its domestic watch products. GROSS PROFIT. Gross profit margins increased steadily the last two years from 44.4% in 1994, to 45.8% in 1995, to 47.6% in 1996. The increases in gross profit margins are primarily attributable to an increase in the amount of the Company's watch products supplied by its majority-owned assembly facilities and an increase in the sales through its European-based operations. In addition, gross profit margins have been positively impacted by an increase in the percentage of sales mix of products which generally provide higher than average gross profit margins, including sunglasses and sales derived from Company-owned outlet and retail stores. Furthermore, during 1996, the Company's purchase cost of certain watch components decreased due 16 to the strength of the U.S. dollar over the Japanese Yen. Management believes that the Company's gross profit margins in 1997 will approximate 1996 levels. OPERATING EXPENSES. Total selling, general and administrative expenses as a percentage of net sales were 35.8% in 1996 compared to 34.5% in 1995 and 28.2% in 1994. The aggregate increases in operating expenses were due primarily to costs necessary to support increased sales volumes, operating costs of new ventures in Japan, France, Spain and the United Kingdom and operating costs of the Company's outlet and retail stores added throughout 1995 and 1996. In addition to these factors, operating expenses in 1995 were negatively impacted by a significant sales increase in the Company's European-based operations. The Company's international operations historically operate at a higher operating expense ratio to sales than domestically due to generally higher advertising and sales related expenses in distributing the products and in building FOSSIL brand name recognition. Furthermore, operating expenses of FOSSIL outlet and retail stores are historically substantially higher, as a percentage of sales, than the consolidated average. Management believes the operating expense ratio during 1997 will approximate 1996 levels. However, the operating expense percentage for the first quarter of 1997 may exceed the prior year's comparable percentage due to the negative impact of additional store 17 FOSSIL 1996 ANNUAL REPORT operations as compared to the previous year, and from the costs of the Company's operations in Japan, acquired in the second quarter of 1996, both of which historically operate at a loss in the first quarter. OTHER INCOME (EXPENSE). Other income (expense) typically reflects the minority interests in the profit (loss) of the Company's European-based operations and majority owned assembly facilities. As a percentage of net sales, other income (expense) has gone from an expense of 0.4% in 1994, to income of 0.4% in 1995, to being immaterial in 1996. The increase in 1995 was primarily attributable to income of $1.0 million from non-recurring consulting services to a major watch company performed by the Company and from insurance proceeds of approximately $600,000 received to cover lost profits resulting from a fire at one of the Company's operations. During 1996, income derived from refunds of certain prior year duty payments in addition to interest income substantially offset minority interest expense. PROVISION FOR INCOME TAXES. In 1996, the Company's effective tax rate increased to 41.0% compared to 40.1% and 38.4% in 1995 and 1994, respectively. The 1996 increase resulted primarily from losses incurred in countries where the Company recently commenced operations or has generated losses from inception. The Company will not recognize any tax benefits in these countries until realization is assured. During 1995, the effective tax rate increased mainly due to an increase in the mix of operating income from the Company's European-based operations, which have tax rates exceeding the Company's domestic tax rates. 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. LIQUIDITY AND CAPITAL RESOURCES The Company's general business operations historically have not required significant capital expenditures. However, beginning in 1994 the Company incurred substantial expenditures in building office and distribution facilities and building out Company owned stores. During 1994, the Company built a new corporate headquarters and distribution facility. In connection with this building project the Company had expenditures of approximately $7.0 million. During 1995 and 1996, the Company built out 29 store locations totaling $3.9 million in leasehold improvement expenditures. Currently the Company is 18 FOSSIL 1996 ANNUAL REPORT building an additional 138,000 sq. ft. warehouse facility on Company owned property adjacent to its main headquarters. The capital requirements of this facility and equipment will be approximately $5.0 million. Long-term financing of $5.0 million was arranged for the 1994 building project of which $4.6 million remained outstanding as of December 31, 1996. The Company intends to secure similar long-term financing for the 1997 building project. The Company has combined short-term credit facilities of approximately $33.0 million available for general working capital needs of which $9.3 million was outstanding at the end of 1996. Management believes the Company's financial position as of December 31, 1996 remains extremely strong with working capital of $60 million and net cash balances (defined as cash and cash equivalents less current notes payable) of $1.5 million as compared to working capital of $49 million and negative net cash balances of $1.2 million as of December 31, 1995. Management believes that cash flow from operations and existing credit facilities as well as financing for the Company's 1997 building project will be sufficient to satisfy its working capital expenditure requirements for at least the next twelve months. FORWARD LOOKING STATEMENTS Included in the management's discussion of the Company's operating results, the Company made forward looking statements regarding the expectations for 1997. The actual results could differ materially from those expressed by these forward looking statements. Significant factors that could cause the Company's sales, gross profit margins and operating expenses 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 German Mark 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 31, 1997. SELECTED QUARTERLY FINANCIAL DATA The table on page 21 sets forth selected quarterly financial information. This 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. 19 FOSSIL 1996 ANNUAL REPORT Graphic of FSL Watch 20 1996 (dollars in thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter Net sales $42,909 $45,238 $52,821 $64,931 Gross profit 19,036 22,463 25,756 30,783 Operating expenses 14,787 17,862 18,478 22,538 Operating income 4,249 4,601 7,278 8,245 Income before income taxes 3,902 4,464 6,491 8,183 Provision for income taxes 1,562 1,880 2,661 3,346 Net income 2,340 2,584 3,830 4,837 Earnings per share 0.18 0.19 0.29 0.36 Gross profit as a percentage of net sales 44.4% 49.7% 48.8% 47.4% Operating expenses as a percentage of net sales 34.5% 39.5% 35.0% 34.7% Operating income as a percentage of net sales 9.9% 10.2% 13.8% 12.7% 1995 (dollars in thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter Net sales $35,497 $43,340 $43,545 $58,732 Gross profit 16,674 19,972 19,397 26,856 Operating expenses 12,320 14,809 14,860 20,447 Operating income 4,354 5,163 4,537 6,409 Income before income taxes 3,927 4,916 4,659 6,640 Provision for income taxes 1,512 1,910 1,850 2,813 Net income 2,415 3,006 2,809 3,827 Earnings per share 0.18 0.23 0.21 0.29 Gross profit as a percentage of net sales 47.0% 46.1% 44.5% 45.7% Operating expenses as a percentage of net sales 34.7% 34.2% 34.1% 34.8% Operating income as a percentage of net sales 12.3% 11.9% 10.4% 10.9%
21 Graphic of Fossil retail display 22 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, typically generates in excess of 30% of the Company's annual operating income, while the first quarter generally accounts for less than 20% of the 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 the Christmas season, as well as general economic conditions and other factors beyond the Company's control. In general, high levels of inventory at the end of the Christmas season may have an adverse effect on net sales and operating income in the first quarter as a result of lower 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 1996 were not substantially above or below targeted levels and therefore should not significantly impact retailer's restocking orders in the first quarter of 1997. Since the Company has increased the number of owned outlet and retail stores, the percentage of operating income occurring in the second half of the year may increase above historical levels in the future. 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. 23 FOSSIL 1996 ANNUAL REPORT Graphic of Fossil Merchandise 24 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 December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Dallas, Texas February 15, 1997 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 from 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 25 FOSSIL 1996 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS ASSETS december 31, 1996 1995 Current assets: Cash and cash equivalents $ 11,981,246 $ 5,980,535 Accounts receivable -- net 30,252,964 24,932,467 Inventories 49,782,555 42,515,468 Deferred income tax benefits 3,666,344 3,290,419 Prepaid expenses and other current assets 1,942,791 1,428,273 ---------------------------- Total current assets 97,625,900 78,147,162 Property, plant and equipment -- net 16,718,976 15,464,559 Intangible and other assets 4,633,193 3,381,806 ---------------------------- Total assets $118,978,069 $ 96,993,527 ---------------------------- Liabilities and Stockholders' Equity Current liabilities: Notes payable: Banks $ 9,505,400 $ 6,044,462 Affiliates 1,000,744 1,128,574 Accounts payable 7,476,324 5,173,792 Accrued expenses: Co-op advertising 7,857,196 6,181,063 Compensation 2,154,996 2,711,800 Other 7,931,693 4,835,474 Income taxes payable 1,838,656 2,820,890 ---------------------------- Total current liabilities 37,765,009 28,896,055 ---------------------------- Long-term debt 4,350,000 4,811,298 Commitments Minority interests in subsidiaries 2,295,026 2,016,716 Stockholders' equity: Common stock, shares issued and outstanding -- 13,242,994 and 13,182,333, respectively 132,430 131,823 Additional paid-in capital 22,766,468 22,219,692 Retained earnings 52,315,069 38,723,962 Cumulative translation adjustment (645,933) 193,981 ---------------------------- Total stockholders' equity 74,568,034 61,269,458 ---------------------------- $118,978,069 $ 96,993,527 ---------------------------- See notes to consolidated financial statements. FOSSIS 1996 ANNUAL REPORT 26 CONSOLIDATED STATEMENTS OF INCOME years ended december 31, 1996 1995 1994 Net sales $205,899,262 $181,114,447 $161,883,257 Cost of sales 107,861,291 98,214,748 90,003,683 -------------------------------------------- Gross profit 98,037,971 82,899,699 71,879,574 Operating expenses: Selling and distribution 50,638,117 42,581,303 30,748,099 General and administrative 23,026,895 19,854,943 14,914,808 -------------------------------------------- Total operating expenses 73,665,012 62,436,246 45,662,907 -------------------------------------------- Operating income 24,372,959 20,463,453 26,216,667 Interest expense (1,205,233) (1,116,883) (585,317) Other income (expense) -- net (127,619) 795,894 (708,433) -------------------------------------------- Income before income taxes 23,040,107 20,142,464 24,922,917 Provision for income taxes 9,449,000 8,085,000 9,578,000 -------------------------------------------- Net income $ 13,591,107 $ 12,057,464 $ 15,344,917 -------------------------------------------- Earnings per share $ 1.02 $ 0.91 $ 1.15 -------------------------------------------- Weighted average common and common equivalent shares outstanding 13,378,435 13,293,040 13,303,948
See notes to consolidated financial statements. 27 FOSSIL 1996 ANNUAL REPORT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY common stock --------------------- additional cumulative total par paid-in retained translation stockholders' shares value capital earnings adjustment equity --------------------- ----------- ----------- ---------- ------------- Balance at January 1, 1994 13,125,499 $131,255 $21,739,386 $11,321,581 $(167,206) $33,025,016 Common stock issued upon exercise of stock options 37,425 374 283,369 -- -- 283,743 Net income -- -- -- 15,344,917 -- 15,344,917 Foreign currency translation adjustment -- -- -- -- 252,069 252,069 ---------- -------- ----------- ----------- ---------- ----------- Balance at December 31, 1994 13,162,924 131,629 22,022,755 26,666,498 84,863 48,905,745 Common stock issued upon exercise of stock options 19,409 194 196,937 -- -- 197,131 Net income -- -- -- 12,057,464 -- 12,057,464 Foreign currency translation adjustment -- -- -- -- 109,118 109,118 ---------- -------- ----------- ----------- ---------- ----------- Balance at December 31, 1995 13,182,333 131,823 22,219,692 38,723,962 193,981 61,269,458 Common stock issued upon exercise of stock options 10,661 107 106,651 -- -- 106,258 Common stock issued for purchase of certain minority interests 50,000 500 440,125 -- -- 441,125 Net income -- -- -- 13,591,107 -- 13,591,107 Foreign currency translation adjustment -- -- -- -- (839,914) (839,914) ---------- -------- ----------- ----------- ---------- ----------- Balance at December 31, 1996 13,242,994 $132,430 $22,766,468 $52,315,069 $(645,933) $74,568,034 ---------- -------- ----------- ----------- ---------- -----------
28 See notes to consolidated financial statements. FOSSIL 1996 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ------------ ----------- ------------ Operating Activities: Net income $ 13,591,107 $12,057,464 $ 15,344,917 Noncash items affecting net income: Minority interest in subsidiaries 362,084 685,055 773,940 Depreciation and amortization 3,125,598 2,481,649 1,502,958 Equity in net income of affiliate -- -- (82,975) Increase in allowance for doubtful accounts 1,424,243 911,298 988,281 Increase in allowance for returns -- net of related inventory in transit 183,382 347,508 1,049,550 Deferred income tax benefits (375,925) (504,236) (1,056,531) Cumulative translation adjustment (839,914) 109,118 196,833 Cash from (used for) changes in assets and liabilities: Accounts receivable (5,384,069) 1,526,055 (18,503,546) Inventories (6,353,919) (9,611,015) (12,275,154) Prepaid expenses and other current assets 82,839 (655,458) (244,600) Accounts payable 2,125,766 1,303,388 1,522,613 Accrued expenses 3,989,332 2,314,422 6,284,808 Income taxes payable (992,803) 806,227 (1,595,733) ----------- ----------- ------------ Net cash from (used in) operation 10,937,721 11,771,475 (6,094,639) ----------- ----------- ------------ Investing Activities: Net assets acquired in business combination/consolidation, net of cash received (634,734) -- 467,365 Additions to property, plant and equipment (4,183,990) (6,225,894) (8,233,470) Increase in intangible and other assets (391,669) (1,179,619) (665,701) ----------- ----------- ------------ Net cash used in investing activities (5,210,393) (7,405,513) (8,431,806) ----------- ----------- ------------ Financing Activities: Issuance of common stock 547,383 197,131 283,743 Increase (decrease) in minority interests in subsidiaries (83,774) (368,714) 355,088 Issuance of notes payable -- affiliates -- 1,128,574 -- Repayment of notes payable -- affiliates (127,830) (1,000,000) (1,000,000) Increase (repayments) in notes payable -- bank (62,396) (659,240) 11,515,000 Distributions to S Corporation stockholders -- -- (1,077,500) ----------- ----------- ------------ Net cash from (used in) financing activities 273,383 (702,249) 10,076,331 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents 6,000,711 3,663,713 (4,450,114) Cash and cash equivalents: Beginning of year 5,980,535 2,316,822 6,766,936 ----------- ----------- ------------ End of year $11,981,246 $ 5,980,535 $ 2,316,822 ----------- ----------- ------------ ----------- ----------- ------------
See notes to consolidated financial statements. 29 FOSSIL 1996 ANNUAL REPORT 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"). Significant intercompany balances and transactions are eliminated in consolidation. The organizational structure of the Company's U.S.-based operations was changed in August 1994 by transferring substantially all of its assets and liabilities, except those connected with investments in subsidiaries, trademarks, or similar intangible assets, to Fossil Partners, L.P., a Texas limited partnership. Fossil, Inc. is the sole managing general partner of Fossil Partners, L.P. The company is primarily engaged in the design, development and distribution of fashion watches and other accessories, principally under the "FOSSIL," "FSL", 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. ACCOUNTS RECEIVABLE are stated net of allowances of $8,854,453 and $9,034,124 for estimated customer returns and $4,292,145 and $2,856,066 for doubtful accounts at December 31, 1996 and 1995, 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 in stockholders' equity 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 which affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net income. The Company realized net foreign currency losses of approximately $308,000, $151,000 and $104,000 for 1996,1995 and 1994 respectively, which have been included in other income (expense). FORWARD CONTRACTS are entered into by the Company principally to hedge the expected 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 December 31, 1996, the Company had hedge contracts to sell 6,000,000 deutsche marks for approximately $4.1 million, expiring through July 1997. REVENUES are recognized as sales when merchandise is shipped. 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 the years ended December 31, 1996, 1995 and 1994 were approxi mately $14,919,000, $14,254,000 and $12,676,000, respectively. 30 FOSSIL 1996 ANNUAL REPORT 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. EARNINGS PER SHARE is based on the weighted average number of common and common equivalent shares outstanding during each period. FAIR VALUE OF FINANCIAL INSTRUMENTS are estimated to approximate the related book values, unless otherwise indicated, based on market information available to the Company. 2. ACQUISITIONS Effective April 1, 1996, the Company invested approximately $700,000 in cash for an 81% interest in Kabushiki Kaisha Fossil Japan, a Japanese corporation ("Fossil Japan"). Fossil Japan is the sole distributor of Fossil products within Japan and was previously 100% owned by a foreign-based entity. The acquisition has been accounted for as a purchase, and in connection therewith, the Company recorded goodwill of approximately $300,000. In May 1993, the Company formed Fossil Europe b.v., a Netherlands holding company ("FOSSIL B.V."). The Company contributed $1.43 million to the joint venture for 70% of Fossil b.v.'s outstanding common stock. In July 1995, the Company acquired an additional 18% of Fossil b.v.'s outstanding common stock from its minority stockholders for approximately $1.68 million, of which approximately $1.32 million was recorded as goodwill. Effective October 1, 1996, the Company acquired the remaining 12% of Fossil b.v.'s outstanding common stock from its minority stockholders for $1.0 million in cash, 50,000 shares of the Company's $0.01 par value common stock ("Common Stock") and the issuance of options to acquire 20,000 shares of Common Stock, of which approximately $1.0 million was recorded as goodwill, Fossil b.v.'s initial purpose was to form and purchase through Fossil Europe GmbH ("Fossil GmbH") certain inventory and fixed assets from the Company's prior distributor in Germany. During 1994, Fossil b.v. formed an Italian subsidiary, Fossil Italia, S.r.l., ("Fossil Italy") and invested approximately $7,500 for a 60% equity interest in the Italian subsidiary. Fossil b.v. also formed a wholly owned subsidiary in both France and the United Kingdom, during 1995, and in Spain, during 1996. Each of these subsidiaries is generally responsible for sales and operations within their respective countries with the exception of Fossil GmbH, which acts as the Company's main marketing and distribution point in Europe. The balance sheets and results of operations of these subsidiaries and affiliates are included in the accompanying consolidated financial statements since the dates of their formation or acquisition. 3. INVENTORIES Inventories consist of the following: DECEMBER 31, ------------------------- 1996 1995 ----------- ----------- Components and parts $ 2,294,750 $ 1,929,100 Work-in-process 657,125 546,917 Finished merchandise on hand 38,404,535 33,406,561 Merchandise at Company's stores 3,962,199 1,805,890 Merchandise in-transit from customer returns 4,463,946 4,827,000 ----------- ----------- $49,782,555 $42,515,468 ----------- ----------- ----------- ----------- FOSSIL 1996 ANNUAL REPORT 31 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: december 31, 1996 1995 Land $ 2,535,361 $ 2,535,361 Building 4,982,164 4,855,898 Office and store furniture and fixtures 5,960,469 5,042,603 Equipment 4,446,863 3,724,761 Computer software 1,203,440 981,453 Leasehold improvements 5,260,858 3,116,370 ------------------------- 24,389,155 20,256,446 Less accumulated depreciation and amortization 7,670,179 4,791,887 ------------------------- $16,718,976 $15,464,559 5. INTANGIBLE AND OTHER ASSETS Intangibles and other assets consist of the following: december 31, 1996 1995 Costs in excess of tangible net assets acquired $ 4,031,643 $ 2,770,751 Noncompete agreement 475,000 475,000 Trademarks 528,132 442,969 Deposits 453,213 310,261 Other 253,411 276,997 ------------------------- 5,741,399 4,275,978 Less accumulated amortization 1,108,206 894,172 ------------------------- $ 4,633,193 $ 3,381,806 6. DEBT BANKS. In December 1993, the Company acquired a 20-acre parcel of land in Richardson, Texas. Approximately ten acres was utilized as a site for the Company's new corporate offices and distribution facility, completed in July 1994. In August 1994, the Company signed a $5.0 million financing agreement with its primary bank ("Long-Term Revolver") to partially finance the approximate $7.0 million cost of the facility and for other general corporate purposes. The financing agreement is for a ten-year revolving term loan with quarterly payments equal to 1% of the stated principal amount of the facility. The interest rate is the lender's prime rate (8.25% at December 31, 1996) and is payable quarterly. The financing agreement additionally allows for interest to be calculated at the London Interbank Offered Rate ("LIBOR") (5.53% at December 31, 1996), plus 1.25%. In connection with the financing agreement the Company agreed to pay an origination fee equal to .75% of the original principal amount of the facility and an unused fee of .50% per annum. At December 31, 1996, $4.55 million was outstanding under this facility of which $200,000 is due during 1997. Interest expense under these 32 FOSSIL 1996 ANNUAL REPORT credit facilities was $1,104,140, $855,631, and $456,063 for 1996, 1995 and 1994 respectively. In April 1996, the Company amended its short-term revolving credit facility in the United States ("U.S. short-term revolver") with its primary bank to additionally allow for Japanese Yen currency borrowings ("Yen Borrowings") not to exceed $5,000,000. All outstanding borrowings under the amended facility bore interest at the bank's prime rate less 0.5% or the Euroyen rate plus 1.00% (1.58% at December 31, 1996), at the option of the Company. In May 1996, the Company renewed its U.S. short-term revolver through May 3, 1997. At the time of the renewal, the Company increased the funds available under the facility by $5,000,000 to the lesser of $30,000,000 or the result of a calculated borrowing base, determined principally on the Company's cash flow, as defined within the loan agreement. The U.S. short-term revolver is collateralized by substantially all the Company's assets and requires the maintenance of specific levels of tangible net worth, working capital and financials ratios. In December 1996, the Company entered into a short-term revolving credit facility in Japan ("Japan short-term revolver") with a Japan-based bank and paid off all Yen Borrowings which were outstanding under the U.S. short-term revolver. The borrowings under the Japan short-term revolver are in Yen and bear interest at the Euroyen rate plus 0.5% (1.08% at December 31, 1996). The Japan short-term revolver is collateralized by a standby letter of credit issued by the Company's primary U.S. bank. As of December 31, 1996, based on the borrowing formula, the entire U.S. credit facility was available, less borrowings. The Company as of December 31, 1996, had total cash borrowings under the U.S. and Japan short-term revolvers of approximately $6,500,000 and $2,805,000, respectively. During April 1995, Pulse Time purchased its office facilities in Hong Kong and signed a financing agreement with its primary bank for approximately $350,000 ("Term Loan") to partially finance the approximate $650,000 cost of the facility. The financing agreement was for a seven-year term loan with monthly payments of approximately 1.2% of the stated principal amount plus interest, calculated at bank prime rate in the United States plus 1.5%. The entire note balance was paid in full during 1996. During the first quarter of 1995, Fossil GmbH entered into a short-term credit facility with each of two German-based banks. No borrowings were outstanding under the combined credit facilities at December 31, 1996, with outstanding borrowings of 4,000,000 deutsche marks (approximately $2.8 million) at December 31, 1995. Outstanding borrowings under the facilities bear interest at approximately 6% and are collateralized by substantially all of Fossil GmbH's assets. At December 31, 1996 and 1995, the Company had outstanding letters of credit of approximately $2,695,000, and $592,000, respectively, to vendors for the purchase of merchandise. AFFILIATES. In connection with the Company's initial public offering in April 1993, the Company issued notes payable to stockholders of $10,910,000 which represented S Corporation distributions; $8,910,000 was paid from a portion of the public offering proceeds and an additional $1,000,000 was paid during both 1994 and 1995. Interest paid to stockholders totaled $20,000 and $84,444 for 1995, and 1994, respectively. On March 31, 1993, two separate dividends were declared payable by the Company to the stockholders as of that date as follows: (i) $1,787,000 of which $1,077,500 remained payable as of December 31, 1993 and was paid during 1994 and (ii) $1,500,000 was declared representing a return on their investment in the Company, which was paid in December 1993. The minority stockholders of Fossil Italy are providing a portion of the short-term financing for that entity. The credit agreement between Fossil b.v. and the minority stockholders requires short-term financing be provided in the amount of approximately $1.1 million at an interest rate equivalent to the bank prime interest rate in the United States, payable based on certain financial covenants being attained within Fossil Italy. Interest paid to the minority stockholders totaled approximately $75,000 for the year ended December 31, 1995. No interest was paid to minority interest stockholders for the year ended December 31, 1996. 33 FOSSIL 1996 ANNUAL REPORT 7. OTHER INCOME (EXPENSE) -- NET Other income (expense) -- net consists of the following: years ended december 31, 1996 1995 1994 Consulting fees $ - $1,000,000 $ - Insurance proceeds above book value 101,814 579,673 - Minority income (expense) (840,084) (685,055) (773,940) Legal settlements 50,000 (251,000) (25,000) Duty drawback 321,836 - - Interest income 235,098 91,896 69,423 Other income (expense) 3,717 60,380 21,084 ----------------------------------- $(127,619) $ 795,894 $(708,433) 8. 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: december 31, 1996 1995 Deferred tax assets: Bad debt allowance $ 1,146,268 $ 890,283 Returns allowance 2,835,344 2,914,393 263(a) capitalization of inventory 555,135 598,121 Miscellaneous tax asset items 655,514 455,837 Deferred tax liabilities: In-transit returns inventory (1,525,917) (1,568,215) -------------------------- Net current deferred tax benefits $ 3,666,344 $ 3,290,419 Management believes that no valuation allowance against net deferred tax benefits is necessary. The resulting provision for income taxes consists of the following: years ended december 31, 1996 1995 1994 Current expense: United States $6,776,925 $5,932,384 $ 9,259,841 Foreign 3,048,000 2,656,852 1,374,690 Deferred benefit - United States (375,925) (504,236) (1,056,531) -------------------------------------- Provision for income taxes $9,449,000 $8,085,000 $ 9,578,000 34 FOSSIL 1996 ANNUAL REPORT 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: years ended december 31, 1996 1995 1994 Tax at statutory rate $8,064,037 $7,049,862 $8,723,021 State, net of federal tax benefit 194,312 288,073 477,381 Other 1,190,651 747,065 377,598 ------------------------------------- Provision for income taxes $9,449,000 $8,085,000 $9,578,000 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. 9. 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 $1,365,579, $1,299,976, and $1,591,530 in 1996, 1995, and 1994, respectively. These amounts are included in the Company's cost of sales. The Company has several agreements in effect at December 31, 1996, which expire on various dates from April 1997 to December 1999, and require the Company to pay royalties ranging from 5% to 15% of defined net sales. Future minimum royalty commitments under such license agreements at December 31, 1996, are as follows: Royalties --------- 1997 $299,000 1998 164,000 1999 213,000 -------- $676,000 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 $3,698,981, $2,288,677, and $1,264,26 for 1996, 1995 and 1994, respectively. Future minimum rental commitments under such leases at December 31, 1996, are as follows: 35 FOSSIL 1996 ANNUAL REPORT Leases ----------- 1997 $ 3,755,000 1998 2,655,000 1999 2,458,000 2000 2,032,000 2001 1,628,000 Thereafter 2,721,000 ----------- $15,249,000 10. STOCKHOLDER'S EQUITY AND BENEFIT PLANS The Company has 50,000,000 shares of authorized $0.01-par-value common stock ("Common Stock"), with 13,242,994 and 13,182,333 shares issued and outstanding at December 31, 1996 and 1995, respectively. The Company has 1,000,000 shares of authorized $0.01-par-value preferred stock with none issued or outstanding. SAVINGS PLAN. The Company has a savings plan in the form of a defined contribution plan (the "401(k) plan") established in July 1992 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 $129,035, $97,808, and $55,971 for 1996, 1995 and 1994, respectively. LONG-TERM INCENTIVE PLAN. An aggregate of 1,150,000 shares of Common Stock were reserved for issuance pursuant to the 1993 Fossil Long-Term Incentive Plan ("Incentive Plan"), adopted April 1993. An additional 600,000 shares were reserved in 1995 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 nonrestricted 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 three-year period and were priced at not less than estimated fair market value of the Company's Common Stock at the date of grant. Effective January 10, 1996, the Company offered the participants under the Incentive Plan the opportunity to exchange any outstanding stock option grants with an exercise price of $15.50 or above for a pro-rata number of options at a $10.00 exercise price. The pro-rata number of options offered in exchange was equivalent to the total number of options outstanding for each grant exchanged multiplied by the percentage figure calculated by dividing $10.00 by the optionees's previous exercise price. A total of 244,325 options with exercise prices ranging from $15.50 to $28.50 were canceled in exchange for 130,794 options with an exercise price of $10.00. The weighted average fair value of the stock options granted during 1996, 1995 and 1994 were $4.94, $7.56 and $10.64, respectively. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. An aggregate of 100,000 shares of Common Stock were reserved for issuance pursuant to this nonqualified stock option plan, adopted April 1993. During the first year an individual is 36 FOSSIL 1996 ANNUAL REPORT elected as a nonemployee director of the Company, they receive a grant of 5,000 nonqualified stock options. In addition, on the first day of each subsequent calendar year, each nonemployee director will automatically receive a grant of an additional 3,000 nonqualified stock options, so 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 time of grant. The weighted average fair value of the stock options granted during 1996, 1995 and 1994 were $5.17, $8.69, and $19.00, respectively. The fair value of options granted under the Company's stock option plans during 1996, 1995 and 1994 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 65%, risk free interest rate of 6.11%, and expected life of 5 years. The following tables summarize the Company's stock option activity: INCENTIVE PLAN weighted weighted average average exercise exercise exercise price price price available per share per share outstanding per share exercisable for grant ------------- --------- ----------- --------- ----------- --------- At December 31, 1993 $ 7.50-$18.50 $ 8.126 202,950 -- -- 947,050 Granted $15.50-$28.50 $18.866 298,650 -- -- (298,650) Exercised $ 7.50-$11.50 $ 7.581 (37,425) -- -- -- Canceled $ 7.50-$27.50 $18.000 (7,075) -- -- 7,075 Exercisable $ 7.50-$18.50 -- -- $ 8.210 68,925 -- ---------------------------------------------------------------------------- At December 31, 1994 $ 7.50-$28.50 $14.655 457,100 $ 8.210 68,925 655,475 Shares designated for grant through the Incentive Plan -- -- -- -- -- 600,000 Granted $8.875-$25.50 $12.550 326,200 -- -- (326,200) Exercised $ 7.50-$19.50 $10.157 (19,409) -- -- -- Canceled $ 7.50-$26.75 $11.045 (33,950) -- -- 33,950 Exercisable -- -- -- $14.220 166,729 -- ---------------------------------------------------------------------------- At December 31, 1995 $ 7.50-$28.50 $13.894 729,941 $14.212 235,654 963,225 Granted $6.625-$15.875 $ 7.984 552,194 -- -- (552,194) Exercised $ 7.50-$13.625 $10.014 (10,661) -- -- -- Canceled $6.625-$28.50 $17.391 (300,207) -- -- 300,207 Exercisable -- -- -- $10.652 176,600 -- ---------------------------------------------------------------------------- At December 31, 1996 $6.625-$25.75 $ 9.782 971,267 $10.430 412,254 711,238
37 FOSSIL 1996 ANNUAL REPORT NONEMPLOYEE DIRECTOR PLAN weighted weighted average average exercise exercise exercise price price price available per share per share outstanding per share exercisable for grant ------------- --------- ----------- --------- ----------- --------- At December 31, 1993 $ 7.50 $ 7.50 24,000 -- -- 76,000 Granted $19.00 $19.00 14,000 -- -- (14,000) Exercisable $ 7.50 -- -- $ 7.50 7,500 -- ----------------------------------------------------------------------------- At December 31, 1994 $ 7.50 -$19.00 $11.813 24,000 $ 7.500 7,500 76,000 Granted $13.125-$17.125 $14.554 14,000 -- -- (14,000) Exercisable $ 7.50 -$19.00 -- -- $13.772 8,250 -- ----------------------------------------------------------------------------- At December 31, 1995 $ 7.50 -$19.00 $12.822 38,000 $10.786 15,750 62,000 Granted $ 8.375 $ 8.375 12,000 -- -- (12,000) Exercisable $ 7.50 -$19.00 -- -- $13.289 13,000 -- ----------------------------------------------------------------------------- At December 31, 1996 $ 7.50 -$19.00 $11.755 50,000 $11.917 28,750 50,000
Additional weighted average information for options outstanding and exercisable as of December 31, 1996: options outstanding options exercisable ----------------------- --------------------- weighted weighted weighted average average average range of exercise remaining exercise exercise number price contractual number of price prices of shares per share life shares per share -------------- --------- --------- ----------- --------- --------- Incentive Plan: $ 6.625-$12.99 696,510 $ 8.269 8 years 186,707 $ 8.842 $13.00 -$25.75 274,757 $13.617 8 years 225,547 $13.781 Nonemployee Director Plan: $ 7.50 -$12.99 27,000 $ 7.889 7 years 15,000 $ 7.500 $13.00 -$19.00 23,000 $16.293 8 years 13,750 $16.736
The Company applies Accounting Principles Board Opinion No.25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost (generally measured as the excess, if any, of the quoted market price of the Common Stock at the date of the grant over the amount an employee must pay to acquire the Common Stock) has been recognized for the Company's stock option plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") issued by the Financial Accounting Standards Board in 1995, prescribed 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 123 in 1996 and 1995 are presented below. Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that expected in future years. 38 FOSSIL 1996 ANNUAL REPORT years ended december 31, 1996 1995 Net income: As reported $13,591,107 $12,057,464 Pro forma $12,254,598 $11,345,196 Earnings per share: As reported $ 1.02 $ 0.91 Pro Forma $ 0.92 $ 0.85 11. SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows: years ended december 31, 1996 1995 1994 Cash paid during the year for: Interest $ 1,117,107 $ 1,073,248 $ 521,920 Income taxes $11,614,532 $ 7,424,463 $12,256,101
12. SIGNIFICANT CUSTOMERS 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: years ended december 31, 1996 1995 1994 Customer A 11% 12% -- Customer B 10% -- --
39 FOSSIL 1996 ANNUAL REPORT The Company operates in a single industry, as a designer, developer, marketer and distributor of fashion watches and other accessories. Information about the Company's operations in the United States and international markets in 1996, 1995 and 1994 is presented below. Intercompany sales of products between geographic areas are referred to as intergeographic 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. year ended december 31, 1996 Net Sales Operating Income Assets United States $158,159,270 $17,741,711 $ 78,302,341 Europe 45,926,815 1,781,220 27,842,878 Far East 66,270,186 5,008,243 8,335,684 Japan 6,266,671 (158,215) 4,497,166 Intergeographic items (70,723,680) -- -- --------------------------------------------- Consolidated $205,899,262 $24,372,959 $118,978,069 year ended december 31, 1996 Net Sales Operating Income Assets United States $134,747,319 $14,293,470 $ 64,772,200 Europe 40,053,692 1,701,085 24,795,443 Far East 69,430,240 4,468,898 7,425,884 Intergeographic items (63,116,804) -- -- --------------------------------------------- Consolidated $181,114,447 $20,463,453 $ 96,993,527 year ended december 31, 1996 Net Sales Operating Income Assets United States $138,934,157 $19,348,201 $ 58,224,508 Europe 23,155,617 1,758,554 11,996,136 Far East 92,959,221 5,109,912 10,199,458 Intergeographic items (93,165,738) -- -- --------------------------------------------- Consolidated $161,883,257 $26,216,667 $ 80,420,102 40 FOSSIL 1996 ANNUAL REPORT information CORPORATE 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 Alan D. Moore Executive Vice President Senior Vice President, Director and Director Development 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 ChaseMellon Shareholder Deloitte & Touche LLP Jenkens & Gilchrist Services LLC 2200 Ross Avenue 1445 Ross Avenue Overpeck Centre Dallas, TX 75201 Dallas, TX 75202 85 Challenger Road Ridgefield Park, NJ 07760 INTERNET WEB SITE The Company maintains a web site at the worldwide web 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 Thursday, May 22, 1997, 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, are available to stockholders without charge upon written request to FOSSIL, Investor Relations, 2280 N. Greenville Ave., Richardson, Texas 75082-4412.
EX-21.1 5 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF FOSSIL, INC. AS OF DECEMBER 31, 1996 PLACE OF PERCENT NAME OF SUBSIDIARY 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 Fossil Trust Delaware Fossil Intemediate, 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 Amazing Time, Ltd. Hong Kong Fossil East, Ltd. 65 Trylink International, Ltd. Hong Kong Fossil East, Ltd. 51 Fossil Europe GmbH Germany Fossil Europe B.V. 100 Fossil Italia, S.r.l. Italy Fossil Europe B.V. 60 Fossil France Eurl, S.a.r.l. France Fossil Europe B.V. 100 Fossil (U.K.) Ltd. England Fossil Europe B.V. 100 Fossil Spain, S.A. Spain Fossil Europe B.V. 100
EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 65980 and Post-Effective Amendment No. 1 to Registration Statement No. 33-77526 on Form S-8 of our reports dated February 15, 1997, appearing in and incorporated by reference in the Annual Report on Form 10-K of Fossil, Inc. for the year ended December 31, 1996. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Dallas, Texas March 28, 1997 EX-27 7 FDS
5 This schedule contains summary financial information extracted from Part I item Financial Statements of Fossil, Inc. and Subsidiaries as of the twelve month period ended December 31, 1996 filed on Form 10K and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 11,981,246 0 34,416,235 4,163,271 49,782,555 97,625,900 24,389,156 7,670,180 119,456,069 37,765,009 0 0 0 132,430 74,435,604 119,456,069 205,899,262 205,899,262 107,861,291 181,526,303 0 1,424,243 1,205,233 23,040,107 9,449,000 0 0 0 0 13,591,107 1.02 0
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