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.
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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
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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
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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
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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
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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.
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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%
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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
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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
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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.
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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.
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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.