UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
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 30, 1999, was $339,326,309. 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 30, 1999, 20,937,580 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 26, 1999, 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"). On March 4, 1998,
the Board of Directors of the Company declared a three-for-two stock split of
the Company's Common Stock which was effected in the form of a stock dividend
paid on April 8, 1998 to stockholders of record on March 25, 1998. On May 11,
1998, the Company completed a secondary offering of 2,150,000 shares of Common
Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to an
underwriter's over-allotment allocation) for an aggregate of 2,302,500 shares.
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 is a leader in the design, development, marketing and
distribution of contemporary, high quality fashion watches and accessories. The
Company developed the FOSSIL-Registered Trademark- brand name to convey a
distinctive fashion, quality and value message and a brand image reminiscent of
"America in the 1950s" that suggests a time of fun, fashion and humor. Since its
inception in 1984, the Company has grown from its original flagship FOSSIL watch
product into a diversified company offering an extensive line of fashion watches
that includes its RELIC-Registered Trademark- and FSL-TM- brands as well as
complementary lines of small leather goods, belts, handbags and sunglasses under
certain of the Company's brands. In addition to developing its own brands, the
Company leverages its development and production expertise by designing and
manufacturing private label products for some of the most prestigious companies
in the world, including national retailers, entertainment companies and theme
restaurants. The Company's successful expansion of its product lines has
contributed to its increasing net sales and operating profits.
The Company has further capitalized on the increasing awareness of the
FOSSIL brand by entering into various license agreements for other categories of
fashion accessories and apparel, such as men's underwear and lounge wear and,
most recently, outerwear and optical frames under the FOSSIL brand. In addition,
the Company licenses the brands of other companies in order to further leverage
its infrastructure. For example, in 1997 the Company entered into a multi-year
license agreement with Giorgio Armani to design, manufacture, distribute and
market a line of EMPORIO ARMANI-Registered Trademark- watches.
The Company sells its products in approximately 15,000 retail locations in
the United States through a diversified distribution network that includes
approximately 2,000 department store doors, such as Federated/Macy's,
May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears
for its RELIC brand, as well as approximately 13,000 specialty retail locations.
The Company also sells its products through a network of 37 Company-owned stores
within the United States, with nine retail stores located in premier retail
malls and 28 outlet stores located in major outlet malls.
The Company's products are sold to department stores and specialty retail
stores in over 80 countries worldwide through Company-owned foreign sales
subsidiaries and through a network of approximately 50 independent distributors.
The Company's foreign operations include a presence in Europe, South and Central
America, the Caribbean, Canada, the Far East, Australia and the Middle East. In
addition,
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the Company's products are offered at retail locations in major airports in
the United States, on cruise ships and in independently-owned, authorized
FOSSIL retail stores and kiosks in certain international markets.
The Company 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 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"), a
wholly owned Italian subsidiary of Fossil B.V., 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 subsidiary of Fossil B.V., was formed in 1995
to market and sell the Company's products in France. 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. Fossil Singapore, Ltd.
("Fossil Singapore"), a majority owned subsidiary of the Company, was formed in
1998 and markets and sells the Company's products in Singapore.
FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in this Item 1. Business and Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve a number of risks and uncertainties.
The actual results of the future events described in such forward-looking
statements in the Annual Report could differ materially from those stated in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are: general economic conditions, competition,
government regulation and possible future litigation, as well as the risks and
uncertainties discussed in this Annual Report, including, without limitation,
the portions referenced above, and the risks and uncertainties set forth on the
Company's Current Report on Form 8-K dated March 30, 1999.
INDUSTRY OVERVIEW
WATCH PRODUCTS
The Company believes that the current market for watches in the United
States can be divided into four segments. One segment of the market consists of
fine watches characterized by internationally known
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brand names such as Concord, Piaget and Rolex. Watches offered in this
segment are usually made of precious metals or stainless steel and may be set
with precious gems. These watches are often manufactured in Switzerland and
are sold by trade jewelers and in the fine jewelry departments of better
department stores and other purveyors of luxury goods at retail prices
ranging from $1,500 to $20,000. A second segment of the market consists of
fine premium branded and designer watches manufactured in Switzerland and the
Far East such as Gucci, Rado, Raymond Weil, Seiko and Swiss Army. These
watches are sold at retail prices generally ranging from $150 to $1,500. The
Company's EMPORIO ARMANI line generally competes in this market segment. A
third segment of the market consists of watches sold by mass marketers, which
include certain watches sold under the Timex brand name as well as certain
watches sold by Armitron under various brand names and labels. Retail prices
in this segment range from $5 to $40.
The fourth segment of the market consists of moderately priced watches
characterized by contemporary fashion and well known brand names. Moderately
priced watches are typically manufactured in Japan or Hong Kong and are sold by
department stores and specialty stores at retail prices ranging from $40 to
$150. This market segment is targeted by the Company and its principal
competitors, including the companies that market watches under the Guess?, Anne
Klein II, Kenneth Cole and Swatch brand names, whose products attempt to
reflect emerging fashion trends in accessories and apparel. Some of the
watches in this sector are manufactured under license agreements with
companies that market watches under various brand names, including Guess?,
Anne Klein II and Kenneth Cole. The Company believes that one reason for the
growth of this sector has been that fashion-conscious consumers have
increasingly come to regard branded fashion watches not only as time pieces
but also as fashion accessories. This trend has resulted in consumers owning
multiple watches that may differ significantly in terms of style, features
and cost.
FASHION ACCESSORIES
The Company believes that the fashion accessories market in the United
States includes products such as small leather goods, handbags, belts, eyewear,
neckwear, underwear, lounge wear, costume jewelry, gloves, hats, hosiery and
socks. The Company believes that one reason for the growth in this line of
business is that consumers are becoming more aware of accessories as fashion
statements, and as a result, are purchasing brand name, quality items that
complement other fashion items. These fashion accessory products are generally
marketed through mass merchandisers, department stores and specialty shops,
depending upon price and quality. Higher price point items include products
offered by Coach, Dooney & Burke, Ralph Lauren and Donna Karan.
Moderately priced fashion accessories are typically marketed in department
stores and are characterized by contemporary fashion and well known brand names
at reasonable price points, such as FOSSIL and RELIC. The Company currently
offers small leather goods, handbags, belts, eyewear for both men and women and
men's underwear and lounge wear through department stores and specialty
retailers in the moderate to upper-moderate price range. Companies such as
Calvin Klein, Tommy Hilfiger, Guess?, Nine West, Kenneth Cole and Liz Claiborne
currently operate in this market.
BUSINESS STRATEGY
The Company's long-term goal is to capitalize on the strength of its
growing consumer brand recognition and capture an increasing share of a growing
number of markets by providing consumers with fashionable, high quality,
value-driven products. In pursuit of this goal, the Company has adopted
operating and growth strategies that provide the framework for the Company's
future growth, while maintaining the consistency and integrity of its brands.
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OPERATING STRATEGY
- - FASHION ORIENTATION AND DESIGN INNOVATION. The Company is able to market
its products to consumers with differing tastes and lifestyles by offering
a wide range of product categories at a variety of price points. The
Company attempts to stay abreast of emerging fashion and lifestyle trends
affecting accessories and apparel, and it responds to these trends by
making adjustments in its product lines several times each year. The
Company differentiates its products from those of its competitors
principally through innovations in fashion details, including variations in
the treatment of dials, crystals, cases, straps and bracelets for the
Company's watches and innovative treatments and details in its other
accessories.
- - COORDINATED PRODUCT PROMOTION. The Company coordinates in-house product
design, packaging, advertising and in-store presentations to more
effectively and cohesively communicate to its target markets the themes and
images associated with its brands. For example, many of the Company's
FOSSIL brand products and certain of its accessory products are packaged in
metal tins decorated with nostalgic "America in the 1950s" designs
consistent with the Company's marketing strategy and product image. In
addition, the Company generally markets its fashion accessory lines through
the same distribution channels as its watch lines, using similar in-store
presentations, graphics and packaging.
- - PRODUCT VALUE. The Company's products provide value to the consumer by
offering fashionable, high quality components and features at suggested
retail prices generally below those of competitive products of comparable
quality. The Company is able to offer its watches at a reasonable price
point by manufacturing them principally in the Far East at lower cost than
comparable quality watches manufactured in Switzerland. In addition, the
Company is able to offer its accessories at reasonable prices because of
its close relationships with manufacturers in the Far East. Unlike certain
of its principal competitors, the Company does not pay royalties on most of
its products, which the Company believes allows it to enjoy certain cost
advantages that enhance its ability to achieve attractive profit margins.
- - CAPTIVE SUPPLIERS. The Company owns a majority interest in a number of
watch assemblers with locations in Hong Kong and China. In addition, the
Company maintains close relationships with accessory manufacturers in the
Far East. The Company believes these relationships create a significant
competitive advantage, as they allow the Company to produce quality
products, reduce the delivery time to market and improve overall operating
margins.
- - ACTIVELY MANAGE RETAIL SALES. The Company manages the retail sales process
by monitoring customer sales and inventory levels by product category and
style, primarily through EDI, and by assisting retailers in the conception,
development and implementation of their marketing programs. As a result,
the Company believes it enjoys close relationships with its principal
retailers, often allowing it to influence the mix, quantity and timing of
customer purchasing decisions.
- - CENTRALIZED DISTRIBUTION. The Company distributes substantially all of its
products sold in the United States and certain of its products sold in
international markets from its warehouse and distribution center in
Richardson, Texas. The Company also distributes its products to
international markets from warehouse and distribution centers located in
Germany, Italy, Hong Kong and Japan. The Company believes its centralized
distribution capabilities enable it to reduce inventory risk, increase
flexibility
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in meeting the delivery requirements of its customers and maintain
significant cost advantages as compared to its competitors.
GROWTH STRATEGY
- - INTRODUCE NEW PRODUCTS. The Company continually introduces new products
within its existing brands and through brand extensions to attract a wide
range of consumers with differing tastes and lifestyles. For example, in
mid-1996 the Company introduced its FOSSIL BLUE line of watches, its FOSSIL
Steel line in mid-1997, its BLUE TEQ line in late 1997 and its BIG TIC
brand in the fall of 1998. In addition, the Company introduced its line of
RELIC leather goods in 1997, its line of nylon bags and FSL sport bags in
early 1998 and FOSSIL STEEL and FOSSIL BLUE sunwear in 1998.
- - EXPAND INTERNATIONAL BUSINESS. The Company increased its efforts to align
its FOSSIL brand watches sold internationally with its successful domestic
assortments. The Company believes these efforts will increase its global
brand recognition and allow it to leverage this recognition to successfully
market the Company's accessory lines in international markets.
- - ENTER INTO LICENSE AGREEMENTS. The Company leverages its brand recognition
and its design and marketing expertise to expand the scope of its product
offerings through the selective licensing of new product categories that
complement its existing products. For example, the Company entered into
license agreements with London Fog Industries in 1998 to offer FOSSIL
outerwear beginning with the fall line in 1999 and with Safilo Group in
1999 to offer FOSSIL optical frames in the United States and Canada and
optical frames and sunglasses in Italy later in 1999.
- - EXPAND RETAIL LOCATIONS. The Company is currently expanding its
Company-owned FOSSIL retail and outlet locations to further strengthen its
brand image. The Company currently operates 37 retail and outlet stores and
plans to open an additional six retail stores and five outlet stores in
1999. The Company also intends to continue to offer its products through
additional independently-owned, authorized FOSSIL retail stores in
airports, on cruise ships and in international markets.
- - LEVERAGE INFRASTRUCTURE. The Company believes it has the design, marketing,
manufacturing and distribution infrastructure in place to allow it to
manage and grow its businesses. The Company continues to develop additional
products and brands and seeks additional businesses and products to
complement its existing business and allow it to leverage its existing
infrastructure.
PRODUCTS
The Company designs, develops, markets and distributes fashion watches and
accessories, including sunglasses, small leather goods, belts and handbags,
principally under the FOSSIL, RELIC and FSL brand names.
WATCH PRODUCTS
In 1986, the Company introduced FOSSIL watches, its flagship product. The
Company 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 fiscal years 1998, 1997 and 1996
accounted for approximately 75.5%, 72.4% and 71.9%, respectively, of the
Company's gross sales.
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The following table sets forth certain information with respect to the
Company's watches:
SUGGESTED PRICE DISTRIBUTION
WATCH BRANDS POINT RANGE AVERAGE PRICE CHANNELS BRAND NAMES
- ------------ ----------- ------------- -------- -----------
FOSSIL $55-120 $73 Major dept. stores (Dayton BLUE TEQ, Dress, DRT, F2, FOSSIL
Hudson Corp., Dillard's, Steel, FOSSIL BLUE, BIG TIC,
Federated/Macy's, May Dept. FOSSIL Sterling, DEFENDER,
Stores, Mercantile Stores Limited Edition, Skeleton,
Company, Inc., Nordstrom, Vintage
Inc. and Profitts)
RELIC $45-75 $58 Major retailers (Ames Dept. Dressy, Metal Sport, Moon,
Stores, Bealls Dept. Stores, Novelty, Pendant, Pocket,
JCPenney, Kohl's Department RELIC Wet, RELIC
Stores, Inc., Montgomery Adjust-A-Link, RELIC
Ward & Co., Sears, Service Stainless Steel, Skeleton,
Merchandise Co., Inc., SRI, Sport
Uptons)
FSL $30-150 $60 Major dept. stores, specialty FSL
gift and apparel and sport
specialty stores
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 such as
Warner Bros. and Disney, as private label products or as premium and incentive
items for use in various corporate events. Under this arrangement, the Company
performs design and product development functions as well as acts as a sourcing
agent for its customers by contracting for the manufacture of watches, managing
the manufacturing process, inspecting the finished watches, purchasing the
watches and arranging for their shipment to the United States. Participation in
the private label and premium businesses provide the Company with certain
advantages, including increased manufacturing volume, which may reduce the costs
of manufacturing the Company's other watch products, and the strengthening of
business relationships with its manufacturing sources. These lines provide
income to the Company with reduced inventory risks and certain other carrying
costs.
EMPORIO ARMANI OROLOGI. In 1997, the Company entered into a multi-year,
worldwide license agreement with Giorgio Armani for the manufacture,
distribution and sale for a line of EMPORIO ARMANI watches. These products are
sold through major department stores, specialty retailers and jewelry stores at
retail prices generally ranging from $125 to $500 with an average price of $238.
LICENSED WATCHES. The Company has entered into a number of license
agreements for the sale of collectible watches under the Company's 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
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in 1998 included Felix the Cat, Mickey & Co., the X Files, Pink Panther,
Peanuts, the Simpsons and I Love Lucy.
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 and selected fashion
accessories under the RELIC and FSL brands. The Company currently sells its
fashion accessories through a number of its existing major department store and
specialty retail store customers. The Company generally markets its fashion
accessory lines through the same distribution channels as its watch business,
using similar in-store presentations, graphics and packaging. These fashion
accessories are typically sold in locations adjacent to watch departments, which
may lead to purchases by persons who are familiar with the Company's watches.
Sales of the Company's accessory lines for fiscal years 1998, 1997 and 1996
accounted for approximately 23.5%, 26.4% and 26.5%, respectively of the
Company's gross 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 styling similar to other
FOSSIL products. Suggested retail prices for the Company's FOSSIL brand
sunglasses generally range from $28 to $75 with an average price of $35.
SMALL LEATHER GOODS AND BELTS. In 1992, the Company introduced a line of
small leather goods and belts for women 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 and wallets. Retail prices for the
Company's FOSSIL brand small leather goods generally range from $15 to $70, with
an average price of $35. Retail prices for the Company's FOSSIL brand men's and
women's belts generally range from $20 to $40 with an average price of $26. In
addition, the Company has introduced a line of small leather goods and belts
under the RELIC brand name, with suggested retail prices generally ranging from
$14 to $24.
HANDBAGS. In 1996, the Company introduced a line of FOSSIL handbags and
recently introduced an additional line of handbags under the FSL brand name. 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
$35 to $170 with an average price of $85.
LICENSED PRODUCTS
In order to complement the Company's existing line of products and to
increase consumer awareness of the FOSSIL brand, the Company has entered into
various license agreements for other categories of fashion accessories and
apparel. These license agreements provide for royalty income to the Company
based on a percentage of net sales and are subject to certain guaranteed minimum
royalties.
MEN'S UNDERWEAR AND LOUNGE WEAR. The Company entered into a multi-year
license agreement with Tugaloo River Boxer Co. for the manufacture, marketing
and sale of men's underwear, sleepwear and
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lounge wear in the United States under the FOSSIL brand. This product line
was introduced in December 1997 and is available at better department stores
and specialty retailers in the United States.
APPAREL. The Company entered into a multi-year license agreement with
London Fog in 1998 for the manufacture, marketing and sale of outerwear in the
United States under the FOSSIL brand. This line is currently scheduled to be
introduced in the fall of 1999. The Company also entered into a multi-year
license agreement with Itochu Fashion Systems Co., Ltd. for the manufacture,
marketing and sale of casual shirts, knit tops, pants, jackets and related
separates for everyday wear in Japan under the FOSSIL brand.
FUTURE PRODUCTS. In March 1999, the Company entered into a multi-year
license agreement with the Safilo Group for the manufacture, marketing and sale
of optical frames under the FOSSIL brand in the United States and Canada and
optical frames and sunglasses in Italy. The line is currently scheduled for
introduction to optical stores later in 1999. In addition, the Company
continually evaluates opportunities to expand its product offerings in the
future to include other accessory or apparel lines that would complement its
existing product.
DESIGN AND DEVELOPMENT
The Company's products are created and developed by its in-house design
staff in cooperation with various outside sources, including its manufacturing
sources and component suppliers. Product design ideas are drawn from various
sources and are reviewed and modified by the design staff to ensure consistency
with the Company's existing product offerings and the themes and images that it
associates with its products. Senior management is actively involved in the
design process.
In order to respond effectively to changing consumer preferences, the
Company attempts to stay abreast of emerging lifestyle and fashion trends
affecting accessories and apparel. In addition, the Company attempts to take
advantage of the constant flow of information from the Company's customers
regarding the retail performance of its products. The design staff reviews
weekly sales reports provided by a substantial number of the Company's customers
containing information with respect to sales and inventories by product category
and style. Once a trend in the retail performance of a product category or style
has been identified, the design and marketing staffs review their product design
decisions to ensure that key features of successful products are incorporated
into future designs. Other factors having an influence on the design process
include the availability of components, the capabilities of the factories that
will manufacture the products and the anticipated retail prices of and profit
margins for the products.
The Company differentiates its products from those of its competitors
principally by incorporating into its product designs innovations in fashion
details, including variations in the treatment of dials, crystals, cases and
straps for the Company's watches and details and treatments of its other
accessories. In certain instances, the Company believes that such innovations
have allowed it to achieve significant improvements in consumer acceptance of
its product offerings with only nominal increases in manufacturing costs. The
Company believes that the substantial experience of its design staff will assist
it in maintaining its current leadership position in watch design and in
expanding the scope of its product offerings.
MARKETING AND PROMOTION
The Company's current FOSSIL brand advertising themes aim at evoking
nostalgia for the simpler values and more optimistic outlook of the 1950s
through the use of images of cars, trains, airliners and consumer products that
reflect the classic American tastes of the period. These images are carefully
8
coordinated in order to convey the flair for fun, fashion and humor that the
Company associates with its products. The Company's nostalgic "America in the
1950s" tin packaging concept for many of its watch products and certain of its
accessories is an example of these marketing themes. The tins have become a
signature piece to the FOSSIL image and have become popular with collectors.
The Company participates in cooperative advertising programs with its major
retail customers, whereby it shares the cost of certain of their advertising and
promotional expenses. An important aspect of the marketing process involves the
use of in-store visual support and other merchandising materials, including
packages, signs, posters and fixtures. Through the use of these materials, the
Company attempts to differentiate the space used to sell its products from other
areas of its customers' stores. In addition, the Company frequently offers
promotional gifts, such as T-shirts and caps, to consumers who purchase its
products. The Company also provides its customers with a large number of
preprinted, customized advertising inserts and from time to time stages
promotional events designed to focus public attention on its products.
The Company's in-house advertising department designs, develops and
implements all aspects of the packaging, advertising, marketing and sales
promotion of the Company's products. The advertising staff uses computer-aided
design techniques to generate the images presented on product packaging and
other advertising materials. The Company believes that the use of computers
encourages greater creativity and reduces the time and cost required to
incorporate new themes and ideas into effective product packaging and other
advertising materials. Senior management is involved in monitoring the Company's
advertising and promotional activities to ensure that themes and ideas are
communicated in a cohesive manner to the Company's target audience.
The Company advertises, markets and promotes its products to potential
consumers through a variety of media, including catalog inserts, billboards and
print media. The Company has advertised from time to time with billboards and
other outdoor advertisements including bus panels in major metropolitan areas.
The Company also periodically advertises in national fashion magazines such as
GQ and GLAMOUR, 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
approximately 2,000 department store doors, such as Federated/Macy's,
May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears
for its RELIC brand, as well as approximately 13,000 specialty retail locations.
The Company also sells its product at Company-owned FOSSIL retail stores located
at retail malls in the United States and sells certain of its products at
Company-owned FOSSIL outlet stores located at major outlet malls throughout the
United States. The Company also sells its products at retail locations in major
airports in the United States, on cruise ships and in independently-owned,
authorized FOSSIL retail stores and kiosks in certain international markets. The
Company generally does not have long-term contracts with any of its retail
customers. All transactions between the Company and its retail customers are
conducted on the basis of purchase orders, which generally require payment of
amounts due to the Company on a net 30-day basis.
DEPARTMENT STORES. For fiscal years 1998, 1997 and 1996, domestic
department stores accounted for approximately 48.4%, 45.2% and 46.6% of the
Company's net sales, respectively. In addition, in the same periods, the
Company's 10 largest customers represented approximately 47.0%, 45.0% and 47.0%
of net sales, respectively. For fiscal year 1996, Dillard's accounted for
approximately 10.0% of the Company's
9
net sales. No other customer accounted for more than 10% of the Company's net
sales in fiscal years 1998, 1997 and 1996. 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 10.0%,
10.8% and 11.1% of the Company's net sales in fiscal years 1998, 1997 and
1996, respectively. No other customer, when considered as a group under
common ownership, accounted for more than 10% of the Company's net sales in
fiscal years 1998, 1997 and 1996.
INTERNATIONAL SALES. The Company's products are sold to department stores
and specialty retail stores in over 80 countries worldwide through Company-owned
foreign sales subsidiaries and through a network of approximately 50 independent
distributors. The Company's foreign operations include a presence in Europe,
South and Central America, the Caribbean, Canada, the Far East, Australia and
the Middle East. Foreign distributors generally purchase products at uniform
prices established by the Company for all international sales and resell them to
department stores and specialty retail stores. The Company generally receives
payment from its foreign distributors in United States currency. During the
fiscal years 1998, 1997 and 1996, international and export sales accounted for
approximately 29%, 31% and 30% of net sales, respectively.
COMPANY-OWNED FOSSIL STORES. In 1995, the Company commenced operations of
FOSSIL outlet stores at selected major outlet malls throughout the United
States. The Company operated 28 outlet stores at the end of fiscal year 1998.
These stores, which operate under the FOSSIL name, enable the Company to
liquidate excess inventory and increase brand awareness. The Company's products
in such stores are generally sold at discounts from 25% to 50% off the suggested
retail price. The Company intends to open five additional outlet stores in 1999.
In 1996, the Company commenced operations of full priced FOSSIL retail
stores at some of the most prestigious retail malls in the United States in
order to broaden the recognition of the FOSSIL brand name. The Company currently
operates nine retail stores, located at Scottsdale Fashion Square (Scottsdale,
Arizona), Universal Studios City Walk (Los Angeles, California), Aventura Mall
(Aventura, Florida), the Galleria (Dallas, Texas and Houston, Texas), The Mall
at Short Hills (Millburn, New Jersey), The Mall of America (Minneapolis,
Minnesota), Tuttle Crossing (Columbus, Ohio) and Woodfield Mall (Schaumburg,
Illinois). These stores, which operate under the FOSSIL name, carry a full
assortment of FOSSIL merchandise which is generally sold at the suggested retail
price. The Company intends to open six additional retail stores in 1999.
INTERNET SALES. In November 1995, the Company began offering various
products for sale to consumers through America Online's Market Place. The
Company currently offers products through a "storefront" on America Online that
is connected to the Company's website. 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 announcements and promotional contests on the
website.
SALES PERSONNEL. The Company historically has relied on in-house sales
personnel for the FOSSIL brand. The Company utilizes independent sales
representatives to help develop the market for the FSL watch line into sports
specialty stores and 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 the end of fiscal year 1998, the Company had 75
in-house sales and customer service employees and 40 independent sales
representatives. The Company's in-house sales personnel receive a salary and, in
some cases, a commission
10
based on a percentage of gross sales attributable to specified accounts.
Independent sales representatives generally do not sell competing product
lines and are under contracts with the Company that are generally terminable
by either party upon 30 days' prior notice. These independent contractors are
compensated on a commission basis.
CUSTOMER SERVICE. During the past several years, the retail industry has
undergone significant consolidation. As a result of these developments,
department stores and other major retailers have generally become more dependent
on the resources and market expertise of their suppliers. The Company believes
that this dependence has created opportunities for suppliers that provide
superior service to their retail customers and are able to manage the retail
sales process effectively. In order to take advantage of the opportunities
presented by this increasing dependence, the Company has developed an approach
to managing the retail sales process that involves monitoring its customers'
sales and inventories by product category and style, primarily through EDI, and
assisting in the conception, development and implementation of their marketing
programs. For example, the Company reviews weekly selling reports prepared by
certain of its principal customers and has established an active EDI program
with certain of its customers. The Company also places significant emphasis on
the establishment of cooperative advertising programs with its major retail
customers. The Company believes that its management of the retail sales process
has resulted in close relationships with its principal customers, often allowing
it to influence the mix, quantity and timing of their purchasing decisions.
The Company believes that its sales approach achieves high retail turnover
in its products, which can result in attractive profit margins for its retail
customers. The Company believes that the resulting profit margins for its retail
customers encourage them to devote greater selling space to its products within
their stores and enable the Company to work closely with buyers in determining
the mix of products any store should carry. In addition, the Company believes
that the buyers' familiarity with the Company's sales approach should facilitate
the introduction of new products through its existing distribution network.
The Company permits the return of damaged or defective products. In
addition, although it has no obligation to do so, the Company accepts limited
amounts of product returns from its customers in certain other instances.
Accordingly, the Company provides allowances for the estimated amount of product
returns. The allowances for product returns for the fiscal years 1998, 1997 and
1996 were $13,966,000, $10,576,000 and $8,854,000, respectively. Since 1990, the
Company has not experienced any returns in excess of the aggregate allowances
therefor.
BACKLOG
For fiscal year 1998, the Company had unfilled customer orders of
approximately $22,237,000 compared to $16,223,000 and $15,852,000 for
fiscal years 1997 and 1996, 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.
11
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 29 factories located primarily in Hong Kong and China, and to a
lesser extent in Japan. The Company believes that its policy of outsourcing
products allows it to achieve increased production flexibility while avoiding
significant capital expenditures, build-ups of work-in-process inventory and
the costs of managing a substantial production work force.
The principal components used in the manufacture of the Company's watches
are cases, crystals, dials, movements and straps. These components are obtained
by the Company's manufacturing sources from a large number of suppliers located
principally in Hong Kong, Japan, China, Taiwan, Italy and Korea. The Company
estimates that the majority of the movements used in the manufacture of the
Company's watches are supplied by two principal vendors. No other single
component supplier accounted for more than 10% of component supplies in 1998.
Although the Company does not normally engage in direct transactions with
component suppliers, in some cases it actively reviews the performance of such
suppliers and makes recommendations to its manufacturing sources regarding the
sourcing of components. The Company does not believe that its business is
materially dependent on any single component supplier.
The Company believes that it has established and maintains close
relationships with a number of watch manufacturers located in Hong Kong and
Japan. In 1998, three separate watch manufacturers in which the Company holds a
majority interest, each accounted for 10% or more of the Company's watch
supplies. The loss of any one of these manufacturers could temporarily disrupt
shipments of certain of the Company's watches. However, as a result of the
number of suppliers from which the Company purchases its watches, the Company
believes that it could arrange for the shipment of goods from alternative
sources within approximately 30 days on terms that are not materially different
from those currently available to the Company. Accordingly, the Company does not
believe that the loss of any single supplier would have a material adverse
effect on the Company's business. In general, however, the future success of the
Company will depend upon its ability to maintain close relationships with its
current suppliers and to develop long-term relationships with other suppliers
that satisfy the Company's requirements for price and production flexibility.
The Company's products are manufactured according to plans that reflect
management's estimates of product performance based on recent sales results,
current economic conditions and prior experience with manufacturing sources. The
average lead time from the commitment to purchase products through the
production and shipment thereof ranges from two to three months in the case of
watches, from three to six months in the case of sunglasses and from three to
four months in the case of leather goods. The Company believes that the close
relationships that it has established and maintains with its principal
manufacturing sources constitute a significant competitive advantage and allow
it to quickly and efficiently introduce innovative product designs and alter
production in response to the retail performance of its products.
QUALITY CONTROL
The Company's quality control program attempts to ensure that its products
meet the standards established by its design staff. Samples of products are
inspected by the Company prior to the placement of orders with manufacturing
sources to ensure compliance with its specifications. The operations of the
Company's manufacturing sources located in Hong Kong are monitored on a periodic
basis by Fossil (East).
12
Substantially all of the Company's watches and certain of its other
accessories are inspected by personnel of Fossil East or by the manufacturer
prior to shipment to the Company. In addition, the Company performs quality
control checks on its products upon receipt at the Company's facility.
DISTRIBUTION
Upon completion of manufacturing, the Company's products are shipped to
its warehousing and distribution centers in Richardson, Texas, Italy, Japan,
Hong Kong and Germany from which they are shipped to customers in selected
markets. Since July 1997, the Company has owned and operated a new warehouse
and distribution facility in Richardson, Texas, adjacent to the Company's
headquarters, to maximize the Company's inventory management and distribution
capabilities.
The Company's warehouse and distribution facility is operated in a
special purpose subzone established by the United States Department of
Commerce Foreign Trade Zone Board. As a result of the establishment of the
subzone, the Company enjoys certain economic and operational advantages: (i)
the Company may not have to pay duty on imported merchandise until it leaves
the subzone and enters the United States market, (ii) the Company does not
pay any United States duty on merchandise if the imported merchandise is
subsequently re-exported, and (iii) the Company does not pay local property
tax on inventory located within the subzone.
MANAGEMENT INFORMATION SYSTEMS
INVENTORY CONTROL. The Company maintains inventory control systems at
its facilities that enable it to track each item of merchandise from receipt
from its manufacturing sources, through shipment to its customers. To
facilitate this tracking, a significant number of products sold by the
Company are pre-ticketed and bar coded prior to shipment to its retail
customers. The Company's inventory control systems report shipping, sales and
individual SKU level inventory information. The Company manages the retail
sales process by monitoring customer sales and inventory levels by product
category and style, primarily through EDI. The Company believes that its
distribution capabilities enable it to reduce inventory risk and increase
flexibility in responding to the delivery requirements of its customers. The
Company's management believes that its EDI efforts will continue to grow in
the future as customers focus further on increasing operating efficiencies.
In addition, the Company maintains systems that are designed to track
inventory movement through the FOSSIL retail and outlet stores. Detailed
sales transaction records are accumulated on each store's UNIX-based
point-of-sale ("POS") system and polled nightly by the Company on a system
that runs on an IBM RS/6000 system.
YEAR 2000. Beginning in 1997, the Company initiated a program to
evaluate whether internally developed and purchased computer programs that
utilize embedded date codes could experience operational problems when the
year 2000 is reached. The results of this program indicated that certain of
the Company's systems and the systems of certain of its customers and vendors
require remediation to properly address the Year 2000 problem. The Company
plans to complete all remediation efforts for its critical systems prior to
the year 2000. Based upon its evaluation to date, management currently
believes that while the Company will incur internal and external costs to
address the Year 2000 problem, such costs will not have a material impact on
the operations, cash flows or financial condition of the Company in future
years. SEE Management's Discussion and Analysis of Financial Condition and
Results of Operation contained in the Company's Annual Report to Stockholder
which is an exhibit to this Annual Report on Form 10-K.
13
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 consumers are processed at the Company's warehousing and
distribution centers. In most cases, defective products under warranty are
repaired by the Company's personnel. Products under warranty that cannot be
repaired in a cost-effective manner are replaced by the Company at no cost to
the customer. The Company also performs watch repair services on behalf of
certain of its private label customers.
GOVERNMENTAL REGULATIONS
IMPORTS AND IMPORT RESTRICTIONS. Most of the Company's products are
manufactured overseas. As a result, the United States and the countries in
which the Company's products are manufactured or sold may from time to time
modify existing or impose new quotas, duties, tariffs or other restrictions
in a manner that adversely affects the Company. For example, the Company's
products imported to the United States are subject to United States customs
duties and, in the ordinary course of its business, the Company may from time
to time be subject to claims by the United States Customs Service for duties
and other charges. Factors which may influence the modification or imposition
of these restrictions include the determination by the United States Trade
Representative that a country has denied adequate intellectual property
rights or fair and equitable market access to United States firms that rely
on intellectual property, trade disputes between the United States and a
country that leads to withdrawal of "most favored nation" status for that
country and economic and political changes within a country that are viewed
unfavorably by the government of the United States. The Company cannot
predict the effect, if any, these events would have on its operations,
especially in light of the concentration of its manufacturing operations in
Hong Kong and China.
GENERAL. The Company's sunglass products are subject to regulation by
the United States Food and Drug Administration as medical devices. The
Company does not believe that compliance with such regulations is material to
its operations. In addition, the Company is subject to various state and
federal regulations generally applicable to similar businesses.
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, and has applied for registration of, 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.
14
COMPETITION
There is intense competition in each of the businesses in which the
Company competes. The Company's watch business competes with a number of
established manufacturers, importers and distributors such as Guess? Anne
Klein II, Kenneth Cole and Swatch. In addition, the Company's leather goods
and sunglass businesses compete with a large number of established companies
that have significantly greater experience than the Company in designing,
developing, marketing and distributing such products. In all of its
businesses, the Company competes with numerous manufacturers, importers and
distributors who have significantly greater financial, distribution,
advertising and marketing resources than the Company. The Company's
competitors include distributors that import watches and accessories from
abroad, domestic companies that have established foreign manufacturing
relationships and companies that produce accessories domestically.
The Company competes primarily on the basis of style, price, value,
quality, brand name, advertising, marketing and distribution. In addition,
the Company believes that its ability to identify and respond to changing
fashion trends and consumer preferences, to maintain existing relationships
and develop new relationships with manufacturing sources, to deliver quality
merchandise in a timely manner and to manage the retail sales process are
important factors in its ability to compete.
The Company considers that the risk of significant new competitors is
mitigated to some extent by barriers to entry such as high startup costs and
the development of long-term relationships with customers and manufacturing
sources. During the past few years, it has been the Company's experience that
better department stores and other major retailers have been increasingly
unwilling to source products from suppliers who are not well capitalized or
do not have a demonstrated ability to deliver quality merchandise in a timely
manner. There can be no assurance, however, that significant new competitors
will not emerge in the future.
EMPLOYEES
As the end of fiscal year 1998, the Company (excluding the Company's
foreign subsidiaries) had 535 full-time employees, including 75 in executive
or managerial positions and the balance in design, advertising, sales,
quality control, distribution, clerical and other office positions. As of the
end of fiscal year 1998, the Company's foreign subsidiaries had 293 full-time
employees, including 21 in managerial positions.
The Company has not entered into any collective bargaining agreements
with its employees. The Company believes that its relations with its
employees are generally good.
ITEM 2. PROPERTIES
In July 1994, the Company completed construction of its current
corporate headquarters located in a 150,000 square foot facility in
Richardson, Texas. In July 1997, the Company completed construction of a
138,000 square foot distribution center located on land immediately adjacent
to its headquarters. These facilities contain the general office, warehousing
and distribution functions of the Company and are located on approximately 20
acres of land. The Company owns both facilities and the land on which each is
located.
As of the end of fiscal year 1998, the Company had entered into 10 lease
agreements for retail space at prime locations in the United States for the
sale of its full assortment of products. The leases,
15
including renewal options, expire at various times from 2003 to 2010 and
provide for minimum annual rentals above specified net sales amounts and for
the payment of additional rent based on a percentage of sales ranging from 6%
to 9%. The Company is also required to pay its pro rata share of the common
area maintenance costs at each retail mall, including, real estate taxes,
insurance, maintenance expenses and utilities.
The Company also leases retail space at selected outlet centers
throughout the United States for the sale of its products. As of the end of
fiscal year 1998, the Company had entered into 28 such leases. The leases,
including renewal options, expire at various times from 2002 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 retailers.
The Company leases approximately 37,600 square feet of office, warehouse
and assembly space in Hong Kong pursuant to a lease agreement that expires in
December 1999. The Company leases approximately 12,000 square feet of office
and warehouse space in Erlstatt, Germany pursuant to a lease agreement that
expires in 2002. The Company leases approximately 2,800 square feet of office
space in Vicenza, Italy and an additional 3,100 square feet of warehouse and
storage space. The Company 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 fiscal year 1998.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under
the symbol "FOSL." Quotation of the Company's Common Stock began on the
Nasdaq National Market on April 8, 1993.
The following table sets forth the range of quarterly high and low sales
prices per share of the Company's Common Stock on the Nasdaq National Market
for the fiscal years ended January 2, 1999 and January 3, 1998. Such prices
have been adjusted to reflect a three-for-two stock split (the "3 for 2 Stock
Split") of the Company's Common Stock effected as a fifty percent (50%) stock
dividend declared on March 4, 1998, paid on April 8, 1998 to all stockholders
of record on March 25, 1998.
HIGH LOW
---- ---
Fiscal year beginning January 3, 1998:
First Quarter $ 21 2/3 $ 14 1/2
Second Quarter 27 3/8 17 7/8
Third Quarter 27 13
Fourth Quarter 30 5/8 13
Fiscal year beginning January 1, 1997:
First Quarter $ 9 3/4 $ 7
Second Quarter 11 7/8 8 1/4
Third Quarter 15 1/2 11
Fourth Quarter 17 5/8 11
As of March 30, 1999, the Company estimates that there were
approximately 2,600 beneficial owners of the Company's Common Stock,
represented by approximately 132 holders of record.
DIVIDEND POLICY. The Company expects that it will retain all available
earnings generated by its operations for the development and growth of its
business and does not anticipate paying any cash dividends in the foreseeable
future. Any future determination as to dividend policy will be made in the
discretion of the Board of Directors of the Company and will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and future prospects of the Company and such other
factors as the Board of Directors may deem relevant.
The Company declared the 3 for 2 Stock Split on March 4, 1998, effected
as a fifty percent (50%) stock dividend paid on April 8, 1998 to all
stockholders of record on March 25, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under "Financial Highlights" beginning on page 5
of the Fossil, Inc. 1998 Annual Report is incorporated herein by reference.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing under "Management's Discussion and Analysis "
beginning on page 18 of the Fossil, Inc. 1998 Annual Report is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under "Management's Discussion and Analysis"
and "Financial Information" beginning on pages 18 and 37, respectively, of
the Fossil, Inc. 1998 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information appearing under "Financial Information" beginning on
page 37 of the Fossil, Inc. 1998 Annual Report is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company has had no disagreements with its accountants to report
under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item is incorporated herein
by reference to the Company's proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated herein
by reference to the Company's proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated herein
by reference to the Company's proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated herein
by reference to the Company's proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the end of the fiscal year covered by this report.
18
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 37 of the Fossil, Inc. 1998 Annual Report are incorporated
herein by reference.
2. FINANCIAL STATEMENT SCHEDULE:
The following Financial Statement Schedule and related Auditor's
Report are contained herein on pages S-1 and S-2 of this Report.
Schedule II - Valuation and Qualifying Accounts
3. EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc.
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, registration no.33-45357, filed
with the Securities and Exchange Commission).
3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Fossil, Inc. (incorporated by reference to Exhibit
3.1 of the Company's Report on Form 10-Q for the quarterly period
ended June 30, 1995).
3.4 Second Amended and Restated Certificate of Incorporation of Fossil,
Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report
on Form 10-Q for the quarterly period ended July 4, 1998).
10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 of the Company's Registration
Statement of Form S-1, registration no. 33-45357, filed with the
Securities and Exchange Commission).
10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10.2 of the Company's Registration Statement of
Form S-1, registration no. 33-45357, filed with the Securities and
Exchange Commission).
10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by
reference to Exhibit 10.3 of the Company's Registration Statement of
Form S-1, registration no. 33-45357, filed with the Securities and
Exchange Commission).
10.4(2) Description of Bonus Program (incorporated herein by reference to
Exhibit 10.4 of the Company's Registration Statement of Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
19
10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc.
and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit
10.12 of the Company's Registration Statement of Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992
between Fossil, Inc. and Fossil East Ltd. (incorporated by reference
to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the
principal amount of $5,000,000 executed by Fossil Partners, L.P. and
payable to the order of First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.6 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.8 Subordination Agreement of Fossil Trust for the benefit of First
Interstate Bank of Texas, N.A. dated as of August 31, 1994
(incorporated by reference to Exhibit 10.7 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners,
L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.8 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.10 Master Licensing Agreement dated as of August 30, 1994, by and between
Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to
Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1994).
10.11 Agreement of Limited Partnership of Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.13 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and
Fossil New York, Inc. dated October 1, 1994 (incorporated by reference
to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.13 Services and Operations Agreement by and between Fossil Partners, L.P.
and Fossil New York, Inc. dated October 1, 1994 (incorporated by
reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and
Fossil Stores I, Inc. dated December 1, 1994 (incorporated by
reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995
by and between First Interstate Bank of Texas, N.A., Fossil Partners,
L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil
New York, Inc. and Fossil Stores I, Inc. (without exhibits)
(incorporated by reference to Exhibit 10.1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between
Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.17 Joint Development Agreement entered into on December 25, 1995 by and
between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc.
(incorporated by reference to Exhibit 10.43 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
20
10.18 Joint Venture Agreement entered into on December 22, 1994 by and
between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia,
S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by
reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18,
1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico
Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated
by reference to Exhibit 10.45 of the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D.
Quick (incorporated by reference to Exhibit 10.32 of the Company's
Annual Report on Form 10-K for the year-ended December 31, 1996).
10.21 Stock Purchase Agreement dated February 1, 1997, by and between
Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the
transition period from January 1, 1997 to April 5, 1997).
10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the quarterly period ended July 4, 1998).
10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the quarterly period ended July 4, 1998).
10.24(1,2)Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option
Plan.
10.25(1,2)Fossil, Inc. and Affiliates Deferred Compensation Plan.
10.26 Third Amended and Restated Loan Agreement dated June 29, 1998, by and
among Wells Fargo Bank (Texas), National Association, a national
banking association formerly known as First Interstate Bank of Texas,
N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil
Stores II, Inc. (without exhibits) (incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly
period ended July 4, 1998).
13(1) Fossil, Inc. 1998 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.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the last
quarter of the period covered by this Report.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Richardson, State of Texas, on April 1, 1999.
FOSSIL, INC.
/s/ Tom Kartsotis
--------------------------------------------
TOM KARTSOTIS, CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ Tom Kartsotis Chairman of the Board, Chief Executive April 1, 1999
- ------------------------------- Officer and Director
TOM KARTSOTIS (Principal Executive Officer)
/s/ Kosta N. Kartsotis President and Chief Operating Officer April 1, 1999
- ------------------------------- and Director
KOSTA N. KARTSOTIS
/s/ Randy S. Kercho Executive Vice President, Chief Financial April 1, 1999
- ------------------------------- Officer and Treasurer
RANDY S. KERCHO (Principal Financial and Accounting Officer)
/s/ Michael W. Barnes Executive Vice President and Director April 1, 1999
- -------------------------------
MICHAEL W. BARNES
/s/ Jal S. Shroff Director April 1, 1999
- -------------------------------
JAL S. SHROFF
/s/ Kenneth W. Anderson Director April 1, 1999
- -------------------------------
KENNETH W. ANDERSON
/s/ Alan J. Gold Director April 1, 1999
- -------------------------------
ALAN J. GOLD
/s/ Donald J. Stone Director April 1, 1999
- -------------------------------
DONALD J. STONE
22
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 January 2, 1999 and January 3, 1998 and for each of the
three years in the period ended January 2, 1999 and have issued our report
thereon dated February 19, 1999, which report expressed an unqualified
opinion; such consolidated financial statements and report are included in
your 1998 Annual Report to Stockholders and are incorporated herein by
reference. Our audit also included the consolidated financial statement
schedule of Fossil, Inc. and subsidiaries listed in Item 14. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Dallas, Texas
February 19, 1999
S-1
SCHEDULE II
FOSSIL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years 1996, 1997, and 1998
Additions
---------
Charged Deductions
Balance at (Credited) to --------------
Beginning of Costs and Actual Returns Balance at End
Classification Period Expenses or Writeoffs of Period
- -------------- ------ -------- ------------ ---------
Fiscal Year 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)
Fiscal Year 1997:
Accounts receivable allowances:
Sales returns 8,854,453 17,399,057 (15,677,328) 10,576,181
Bad debts 4,292,146 2,024,647 (1,616,962) 4,699,831
Cash discounts 213,871 204,448 (229,722) 188,597
Inventory in transit for estimated
customer returns (4,463,946) (9,715,573) 8,484,687 (5,694,831)
Fiscal Year 1998:
Accounts receivable allowances:
Sales returns 10,576,181 22,967,297 (19,577,057) 13,966,421
Bad debts 4,699,831 4,004,929 (1,840,395) 6,864,365
Cash discounts 188,597 248,965 (209,335) 228,227
Inventory in transit for estimated
customer returns (5,694,831) (12,595,116) 10,804,762 (7,485,185)
S-2
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc.
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, registration no.33-45357, filed
with the Securities and Exchange Commission).
3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
3.5 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Fossil, Inc. (incorporated by reference to Exhibit
3.1 of the Company's Report on Form 10-Q for the quarterly period
ended June 30, 1995).
3.6 Second Amended and Restated Certificate of Incorporation of Fossil,
Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report
on Form 10-Q for the quarterly period ended July 4, 1998).
10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 of the Company's Registration
Statement of Form S-1, registration no. 33-45357, filed with the
Securities and Exchange Commission).
10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10.2 of the Company's Registration Statement of
Form S-1, registration no. 33-45357, filed with the Securities and
Exchange Commission).
10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by
reference to Exhibit 10.3 of the Company's Registration Statement of
Form S-1, registration no. 33-45357, filed with the Securities and
Exchange Commission).
10.4(2) Description of Bonus Program (incorporated herein by reference to
Exhibit 10.4 of the Company's Registration Statement of Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc.
and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit
10.12 of the Company's Registration Statement of Form S-1,
registration no. 33-45357, filed with the Securities and Exchange
Commission).
10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992
between Fossil, Inc. and Fossil East Ltd. (incorporated by reference
to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the
principal amount of $5,000,000 executed by Fossil Partners, L.P. and
payable to the order of First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.6 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.8 Subordination Agreement of Fossil Trust for the benefit of First
Interstate Bank of Texas, N.A. dated as of August 31, 1994
(incorporated by reference to Exhibit 10.7 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners,
L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.8 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.10 Master Licensing Agreement dated as of August 30, 1994, by and between
Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to
Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1994).
10.11 Agreement of Limited Partnership of Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.13 of the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1994).
10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and
Fossil New York, Inc. dated October 1, 1994 (incorporated by reference
to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.13 Services and Operations Agreement by and between Fossil Partners, L.P.
and Fossil New York, Inc. dated October 1, 1994 (incorporated by
reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and
Fossil Stores I, Inc. dated December 1, 1994 (incorporated by
reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995
by and between First Interstate Bank of Texas, N.A., Fossil Partners,
L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil
New York, Inc. and Fossil Stores I, Inc. (without exhibits)
(incorporated by reference to Exhibit 10.1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between
Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.17 Joint Development Agreement entered into on December 25, 1995 by and
between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc.
(incorporated by reference to Exhibit 10.43 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.18 Joint Venture Agreement entered into on December 22, 1994 by and
between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia,
S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by
reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18,
1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico
Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated
by reference to Exhibit 10.45 of the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark
D. Quick (incorporated by reference to Exhibit 10.32 of the Company's
Annual Report on Form 10-K for the year-ended December 31, 1996).
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.22 Stock Purchase Agreement dated February 1, 1997, by and between
Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q for
the transition period from January 1, 1997 to April 5, 1997).
10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the quarterly period ended July 4, 1998).
10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 4.1 of the Company's Report on
Form 10-Q for the quarterly period ended July 4, 1998).
10.24(1,2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock
Option Plan.
10.25(1,2) Fossil, Inc. and Affiliates Deferred Compensation Plan.
10.26 Third Amended and Restated Loan Agreement dated June 29, 1998, by
and among Wells Fargo Bank (Texas), National Association, a
national banking association formerly known as First Interstate
Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil
Stores I, Inc., and Fossil Stores II, Inc. (without exhibits)
(incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 10-Q for the quarterly period ended July 4, 1998).
13(1) Fossil, Inc. 1998 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.