Fossil
1998 Annual Report
Company Profile
4
Financial Highlights
5
Letter to Stockholders
8
Company Overview
11
Management's Discussion
and Analysis
18
Financial Information
37
Corporate Information
55
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4 COMPANY PROFILE
Fossil is a design, development, marketing and distribution company that
specializes in consumer products predicated on fashion and value. The
Company's flagship product, FOSSIL brand watches, is sold in department
stores and other upscale retailers in over 80 countries around the world.
Product offerings have been diversified into an extensive line of fashion
watches that includes its RELIC and FSL brands as well as complementary lines
of small leather goods, belts, handbags and sunglasses under certain of the
Company's brands.
The Company's products are differentiated from its competitors principally
through innovations in fashion details, including variations in the
treatment of watch dials, crystals, cases, straps and bracelets for the
Company's watches and innovative treatments and details in its other
accessories. An in-house creative services team coordinates product design,
packaging, advertising and in-store presentations to more effectively and
cohesively communi cate to its target markets the themes and images
associated with its brands. Brand name development is further enhanced
through Company-owned stores as well as the Company's e-commerce web site.
Utilizing several majority-owned watch assembly facilities and centralized
distribution points enables the Company to reduce its inventory risk,
increase flexibility in meeting the delivery requirements of its customers
and maintain significant cost advantages compared to its competitors. To
further leverage the Company's infrastructure, including its design,
development and production expertise, the Company has licensed the brands of
other companies as well as designing and manufacturing private label products
for some of the most distinguished companies in the world.
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.
[GRAPH] [GRAPH] [GRAPH] [GRAPH]
NET SALES OPERATING INCOME NET INCOME STOCKHOLDERS' EQUITY
(IN MILLIONS OF DOLLARS) (IN MILLIONS OF DOLLARS) (IN MILLIONS OF DOLLARS) (IN MILLIONS OF DOLLARS)
FINANCIAL HIGHLIGHTS 5
FISCAL YEAR 1998 1997 1996 1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales ....................................................... $304,743 $244,798 $205,899 $181,114 $161,883
Gross profit .................................................... 150,504 117,528 98,038 82,900 71,880
Operating income ................................................ 55,370 34,610 24,373 20,463 26,217
Income before income taxes ...................................... 54,729 32,151 23,040 20,142 24,923
Net income ...................................................... 32,161 18,942 13,591 12,057 15,345
Basic earnings per share (1) .................................... 1.55 0.94 0.69 0.61 0.78
Diluted earnings per share (1) .................................. 1.48 0.91 0.68 0.60 0.77
Weighted average common and common equivalent shares outstanding:
Basic shares (1) ........................................... 20,703 20,136 19,783 19,761 19,720
Diluted shares (1) ......................................... 21,724 20,833 20,068 19,940 19,956
Working capital ................................................. $109,040 $ 70,603 $ 59,861 $ 49,251 $ 41,434
Total assets .................................................... 194,078 139,570 118,978 96,994 80,420
Long-term debt .................................................. -- -- 4,350 4,811 4,750
Stockholders' equity ............................................ 134,919 95,263 74,568 61,269 48,906
Return on average stockholders' equity .......................... 29.3% 23.1% 20.3% 22.0% 38.8%
(1) All share and per share data has been adjusted to reflect a three-for-two
stock split effected in the form of a stock dividend paid April 8, 1998.
STOCK INFORMATION
Fossil's common stock prices are published daily in The Wall Street Journal
and other publications under the Nasdaq National Market Listing. The stock is
traded under the ticker symbol "FOSL." The following are the high and low
sale prices of the Company's stock per the Nasdaq National Market. All share
data has been adjusted to reflect a three-for-two stock split effected in the
form of a stock dividend paid on April 8, 1998. Stock prices have been
adjusted to the nearest traded amount.
1998 1997
------------------- -------------------
HIGH LOW HIGH LOW
------- ------- ------ -----
FIRST QUARTER $21 2/3 $14 1/2 $9 3/4 $7
SECOND QUARTER 27 3/8 17 7/8 11 7/8 8 1/4
THIRD QUARTER 27 13 15 1/2 11
FOURTH QUARTER 30 5/8 13 17 5/8 11
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8 LETTER TO STOCKHOLDERS
We are pleased to report continued record sales and earnings this past year.
Net sales increased 25% over 1997, surpassing the $300 million mark. Net
income of $32 million represented a 70% increase over the prior year marking
ten consecutive quarters during which the Company's earnings averaged in
excess of 40% over its prior year's comparable quarter results.
Sales of FOSSIL branded watch products both domestically and internationally
were the largest contributor to the Company's sales growth. Over the past two
years, the FOSSIL watch product assortment has transitioned from novelty
designs to the mainstream watch business. As that migration has taken place,
we have seen our market share continue to expand as our target consumer
demographic increased in size. Realizing that the products the Company offers
need to hit the consumer sweet spot, our design teams focused on integrating
design, packaging and visual treatments to create a high quality and
desirable product. Focusing on these elements and fully utilizing the
Company's efficient and vertical infrastructure yields products at prices our
competitors find hard to beat. In addition, as FOSSIL's market share
increases, so does its brand recognition. Enhanced brand presence provides
the Company more opportunities to extend the brand into additional product
categories. Later this year the product extensions will continue with the
introduction of FOSSIL brand outerwear and optical frames through key
licensing agreements.
Product extensions and increased recognition for the FOSSIL brand has also
been achieved through the development of the Company's retail store concept
as well as a growing internet presence. FOSSIL general stores in key high
traffic malls across the United States offer us the opportunity to
effectively display the Company's products and communicate the FOSSIL image
to our customers. By the end of 1999, we anticipate having approximately 15
of these locations in the United States while also testing this retail
concept internationally. The Company's e-commerce at www.fossil.com continues
to increase in volume while also providing consumers the opportunity to learn
more about our Company, the FOSSIL brand and product selection.
The Company is simultaneously growing other Fossil-owned brands including the
RELIC brand. RELIC brand watches are currently sold in leading national and
regional chain department and specialty stores. As a result of increasing
brand recognition for RELIC, we have
LETTER TO STOCKHOLDERS 9
recently begun expanding this brand out of its roots in the watch department
and into the leather goods and eyewear departments, in a similar direction to
the path we took with the FOSSIL brand.
Internationally, we have continued to build the Company's infrastructure.
Today, FOSSIL branded products are sold in over 80 countries across the
globe. A significant number of these are serviced out of the Company's six
owned facilities strategically placed across Europe and Asia. This
international infrastructure not only provides us a solid foundation from
which to grow our owned brand names, but also represents a platform from
which we can launch other brand names. The Company's strength in design and
worldwide distribution has been a major factor in securing several strategic
relationships with some of the most prestigious companies in the world
including Disney, Eddie Bauer, Giorgio Armani and Warner Bros.
Our Company's foundation continues to strengthen through product extensions,
geographic expansion, broadened distribution channels and strategic alliances
with world class companies. The expansion in each of these areas has
increased the predictability of our business and provided additional
platforms from which to grow the Company's sales. We appreciate everyone who
contributed to our growth during 1998, especially our dedicated employees,
customers, suppliers and, most importantly, our consumers. Combined, we are
positioned to enter the new millennium stronger than ever!
Sincerely,
/s/ TOM KARTSOTIS /s/ KOSTA N. KARTSOTIS
TOM KARTSOTIS KOSTA N. KARTSOTIS
Chairman of the Board President
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COMPANY OVERVIEW 11
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. The Fossil brand continued to be one of the leading
fashion watch brands in 1998, while continuing to gain momentum in sales of
non-watch products and increasing its brand presence globally.
WATCHES: The Fossil brand continued to build market share in department
stores in 1998. New product introductions throughout the year contributed to
driving comparable store sales to record levels. The introduction of Fossil
BIG TIC in the fall was highly successful and FOSSIL Steel solid stainless
steel watches continued to build momentum after their 1997 debut. FOSSIL BLUE
water-resistant sport watches continued to increase market share and FOSSIL
BLUE TEQ chronograph-styled watches were strong throughout the year. FOSSIL
F2 women's dress watches performed well all year and continued to maintain a
leadership position in the dress classification at department stores.
LEATHERS: The leather division continued to exhibit strong sales and earnings
growth in 1998. Handbags continued to increase market share and enhance the
visibility and sales of the Company's other leather cate gories, including
men's and women's small leather goods and belts. A new line of FOSSIL nylon
handbags was introduced in 1998 in addition to a group of bags with a sporty
feel and look. Strong growth should continue in the leather product category
during 1999 as key basic collections continue sales increases fueled by new
lines of more classic, less ornamented styles providing a fresh and exciting
product assortment.
SUNGLASSES: FOSSIL sunwear rebounded in 1998 with double-digit increases in
the midst of continued turmoil in the sunglass market. The overall success of
the division was spurred by significant growth in optical and specialty
stores such as Lenscrafters and Sunglass Hut. Strong international sales,
particularly in northern Europe, played a role in the growth of this product
category. A new collection of more popularly-priced sunglasses provided
increased market share and retail sales in the Company's department store
distribution channel, prompting the introduction of two new collections in
the third quarter. FOSSIL Steel sunwear, featuring polarized polycarbonate
lenses and stainless steel frames, and FOSSIL BLUE sunwear, crafted from a
technologically advanced plastic material that floats, complement the
quality and value of the FOSSIL brand perfectly.
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14 COMPANY OVERVIEW
INTERNATIONAL: Increasing demand for FOSSIL products worldwide, coupled with
the expansion of the EMPORIO ARMANI licensed line of watches, helped broaden
the Company's business tremendously across the globe. The FOSSIL brand is
available in over 80 countries around the world through the Company's six
subsidiary operations and a network of independent distributors. The Company
began distribution in five additional markets in 1998, including Argentina,
Uruguay, Egypt, Israel and Korea Duty Free. In addition, FOSSIL retail stores
and kiosks grew from 40 international locations in 1997 to over 80 locations
in 1998. These stores and kiosks are principally owned and operated by
independent distributors. International distribution will continue to offer
excellent growth opportunities for the Company in 1999.
RELIC: The RELIC brand displayed strong sales in 1998, due primarily to an
improved product assortment and a new store image and visual presentation.
The RELIC brand featured an assortment of four primary categories: RELIC
Wet (water-resistant sport watches), RELIC Adjust-A-Link (women's metal dress
watches with easily adjustable links), RELIC Stainless Steel (100% solid
stainless Steel cases and bracelets), and RELIC Pocket Watches (geared toward
the young, casual consumer). The RELIC division unveiled a new image and
visual presentation - upscale look featuring natural wood, black and white
photography, and the strong red RELIC logo. These new displays were
installed in over 1,000 doors during 1998, and due to the excellent sales
results, another 1,000 doors are currently scheduled to receive the new look
in 1999.
EMPORIO ARMANI: The Company has a worldwide, multi-year licensing agreement
with Giorgio Armani for Emporio Armani Orologi, a line of watches featuring
distinctive interpretations of retro and modern design. Throughout the
collection, the Emporio Armani name and Eagle logo are used as a background
element on the dials, etched into the casings, or incorporated more subtly
into the band designs. Available in Emporio Armani Boutiques, better
department stores, specialty stores and select jewelry stores, the line
continues to grow in sales and distribution worldwide. New markets continue
to open as the product continues to perform well at retail.
LICENSING: The Company continues to test new products bearing the FOSSIL mark
by utilizing license agreements with select partners. The Company is careful
to limit the size and penetration of these product categories to be sure that
the products are consistent with the brand image and desirable to end
consumers. FOSSIL brand outerwear and optical frames will be launched in
1999. The Company will continue to evaluate additional
COMPANY OVERVIEW 15
license arrangements as a mechanism for product expansion as suitable
products and partners are identified.
PRIVATE LABEL: In addition to building its own brand, the Company also
designs and manufactures private label products for some of the most
prestigious companies in the world, including national retailers,
entertainment companies and theme restaurants. The Company continues to
expand its core private label watch business as well as integrate other
product categories such as leather goods and eyewear. In 1998, the Company's
premium/incentive division continued to utilize its sourcing, design, and
development expertise to translate many corporate themes, events, or
promotions into a comprehensive custom program.
FOSSIL GENERAL STORES: The Company was operating nine FOSSIL stores at the end
of 1998, adding three new locations during the year. New stores were opened in
North Miami, Florida (Aventura Mall), Scottsdale, Arizona (Scottsdale Fashion
Square), and Los Angeles, California (Universal Studios City Walk). The FOSSIL
stores continue to provide an exciting and profitable format in which to display
the Company's increasing product assortments and to convey the FOSSIL brand
image. The Company also operates 28 outlet stores coast-to-coast, allowing the
Company to control the timely liquidation of discontinued styles while
maintaining the integrity of the FOSSIL brand.
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and artistic designs]
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is a leader in the design, development, marketing and
distribution of contemporary, high quality fashion watches and accessories.
The Company developed the FOSSIL 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 and FSL 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 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 outerwear and optical frames under
the FOSSIL brand. In addition, the Company licenses the brands of other
companies to further leverage its infrastructure. For example, during 1997
the Company entered into a multi-year license agreement with Giorgio Armani
to design, manufacture, market and distribute a line of EMPORIO ARMANI brand
watches.
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 Asia,
Australia, Canada, the Caribbean, Europe, Central and South America and the
Middle East. In addition, the Company's products are offered at Company-owned
retail locations throughout the United States and in independently-owned,
authorized FOSSIL retail stores and kiosks located in several major airports,
on cruise ships and in certain international markets. The Company's
successful expansion of its product lines and leveraging of its
infrastructure has contributed to its increasing net sales and operating
profits.
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
COMPANY HIGHLIGHTS
Overall
- - Net sales increases have averaged in excess of 20% for the most recent two
years and have grown at an average compounded growth rate of 19% over the
last five years.
- - For the past ten consecutive fiscal quarters ended January 2, 1999, the
Company has achieved increases in net income, in comparison to the previous
year's comparable period, of not less than 26% and averaging 48%.
- - A three-for-two stock split of the Company's $0.01 par-value common stock
("Common Stock") was effected in the form of a 50% stock dividend paid on
April 8, 1998.
- - A secondary offering of 2,302,500 shares of the Company's Common Stock was
completed mid-year 1998, of which the Company sold 215,000 shares.
- - In 1997 the Company acquired the remaining 40% of the capital stock of its
distribution company covering Italy and the remaining 35% of the capital
stock of one of the Company's three main watch assembly factories.
Product Expansion
- - FOSSIL BLUE, a line of mainly metal-bracelet, water resistant sport watches
first introduced in mid-1996, marked the Company's first large scale
movement into metal banded as opposed to leather strap watches.
- - FOSSIL Steel, a line of stainless steel watches, and BLUE TEQ, chronograph
look watches, were introduced under the FOSSIL brand in mid- and late-1997,
respectively. Both of these introductions were well received and became a
significant part of the Company's core watch assortment in 1997 and 1998.
- - FOSSIL BIG TIC, a revolutionary part analog, part digital watch that
highlights the seconds on a backlite digital display was introduced late
in 1998. This style was extremely well received and should contribute
positively to sales growth during 1999.
- - RELIC, the Company-owned brand sold in leading national and regional chain
department stores and specialty stores, continued to gain brand name
recognition. As a result, the Company began the extension of the RELIC
brand into leather products during 1998.
- - A newly designed line of FOSSIL brand handbags, first shipped in mid-1996,
was a success in the retail marketplace. FOSSIL handbag sales continued to
record double-digit growth in 1997 and 1998. In addition, sales of FOSSIL
handbags increased the awareness and sales of the Company's other leather
products.
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22 MANAGEMENT'S DISCUSSION AND ANALYSIS
- - Sales of FOSSIL brand sunglasses, introduced in mid-1995, positively
contributed to sales growth during 1996. Sunglass sales were negatively
impacted during 1997 as a multitude of competitors entered the marketplace
driving supply above apparent consumer demand. The Company quickly reacted
to the market conditions by producing a new sunglass line with a wider
breadth of price points and design, contributing to double-digit sales
growth in the category during 1998.
Licensing The Fossil Brand Name
- - Several multi-year license agreements have been awarded to companies for
the use of the FOSSIL brand name on their products. These included FOSSIL
brand underwear introduced domestically in late 1997, FOSSIL brand apparel
in Japan introduced during 1998 and FOSSIL brand outerwear and optical
frames to be introduced during 1999.
Retail Location Expansion
- - The Company operated 28 FOSSIL outlet stores at the end of 1998. Additional
outlet stores have been added each year since the first store openings in
early 1995 with an additional nine new stores opening in 1996 and one in
both 1997 and 1998.
- - The Company operated nine FOSSIL retail stores at the end of 1998. The
retail stores, located in high volume, international destination-type
malls, allow the Company to test new product introductions and enhance the
FOSSIL brand name. The Company added three retail stores each year from
1996 through 1998.
Leveraging Infrastructure
- - The Company entered into a worldwide, multi-year licensing agreement with
Giorgio Armani for the rights to design, produce and market a line of
EMPORIO ARMANI brand watches. Distribution began in September 1997 and
amounted to $7.7 million in net sales volume during the year, increasing to
approximately $22.6 million in 1998.
- - The Company signed a five-year agreement with Eddie Bauer, Inc. appointing
the Company as the exclusive supplier of Eddie Bauer watches, effective
January 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
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
FISCAL YEAR 1998 1997 1997 1996 1996
Net sales ................ 100.0% 24.5% 100.0% 18.9% 100.0%
Cost of sales ............ (50.6) 21.2 (52.0) 18.0 (52.4)
----- ----- -----
Gross profit ............. 49.4 28.1 48.0 19.9 47.6
Operating expenses ....... (31.2) 14.7 (33.9) 12.6 (35.8)
----- ----- -----
Operating income ......... 18.2 60.0 14.1 42.0 11.8
Interest expense ......... (0.1) (78.0) (0.4) (20.7) (0.6)
Other income (expense) ... (0.1) 71.4 (0.6) (1,077.6) --
----- ----- -----
Income before income taxes 18.0 70.2 13.1 39.5 11.2
Income taxes ............. (7.4) 70.9 (5.4) 39.8 (4.6)
----- ----- -----
Net income ............... 10.6% 69.8% 7.7% 39.4% 6.6%
----- ----- -----
The following table sets forth certain components of the Company's
consolidated net sales and the percentage relationship of the components to
consolidated net sales for the fiscal years indicated (dollars in millions):
FISCAL YEAR 1998 1997 1996 1998 1997 1996
International:
Europe.............................. $ 62.7 $ 45.2 $ 45.9 20.6% 18.4% 22.3%
Other............................... 26.9 30.8 15.2 8.8 12.6 7.4
------ ------- ------- ------ ------ ------
Total international................. 89.6 76.0 61.1 29.4 31.0 29.7
Domestic:
Watch products...................... 137.0 101.2 86.4 45.0% 41.3% 41.9%
Other products...................... 52.0 47.6 44.5 17.0 19.5 21.6
------ ------- ------- ------ ------ ------
Total............................... 189.0 148.8 130.9 62.0 60.8 63.5
Stores.............................. 26.1 20.0 13.9 8.6 8.2 6.8
------ ------- ------- ------ ------ ------
Total domestic...................... 215.1 168.8 144.8 70.6 69.0 70.3
------ ------- ------- ------ ------ ------
Total net sales..................... $304.7 $ 244.8 $ 205.9 100.0% 100.0% 100.0%
------ ------- ------- ------ ------ ------
NET SALES. Worldwide sales volume of FOSSIL branded watches have continued to
represent the single largest factor in the Company sales growth. FOSSIL brand
watches had strong
24 MANAGEMENT'S DISCUSSION AND ANALYSIS
sales gains in the later half of 1996 and throughout 1997 and 1998, due
primarily to the increase of metal bracelet watches in the Company's sales
mix and the popularity of its FOSSIL brand core watch assortments. Metal
bracelet watches have increased significantly as a percentage of the
Company's watch mix in response to a dramatic shift in consumer preference
away from leather strap watches during 1995. In addition, over the past few
years, the Company has transitioned its FOSSIL and RELIC brand watch
assortments from mainly novelty designs to mainstream preferences. This
inherent change in the style mix has increased the Company's target audience
demographic, increasing the ability for the Company to capture additional
market share. Internationally, the process of aligning the Company's watch
collection offered in Europe with the Company's best selling styles in the
U.S., which the Company began mid-1997, has resulted in significant increases
in the European sales momentum. "International Other" sales as denoted in the
above table, were negatively impacted in 1998 as a result of declining sales
in the Company's Asian-based operations, due primarily to the region's
economic problems, and an approximate $6 million sale during 1997 of
non-branded watches used as a premium incentive. Worldwide sales generated
from the continued rollout of the Company's EMPORIO ARMANI licensed brand
watches also positively impacted watch sales during 1997 and 1998. Leather
and sunglass product sales, which comprise the majority of the "Domestic
Other" sales line in the above table, each contributed double digit growth to
overall net sales increases in 1996 and 1998. While the Company continued to
increase its market share in leather goods during 1997, sunglass sales
declined. Continued expansion of Company-owned stores, as well as increases
in same store sales, has added to sales growth in each of the last three
years. Management anticipates that sales volumes will continue to increase in
1999 at approximately the 1998 rate from continued sales momentum across the
Company's product lines and geographic regions.
GROSS PROFIT. Gross profit margins steadily increased over the past two years.
The increases in gross profit margin are primarily attributable to the increased
strength of the U.S. dollar over the Japanese Yen, an increased mix of the
Company's watch products supplied by its majority-owned assembly facilities and
increased sales through Company-owned retail locations. The Company's cost of
certain watch components declined as the U.S. dollar strengthened in relation to
the Japanese Yen. Management believes that the Company's gross profit margins
for fiscal 1999 will approximate 1998 levels. Gross profit margins in the 2nd
quarter of 1999 will be negatively impacted, however,
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26 MANAGEMENT'S DISCUSSION AND ANALYSIS
by an international-based sale of non-branded watches used as a premium
incentive, similar to the sale the Company recorded in the 2nd quarter of
1997.
OPERATING EXPENSES. The aggregate increases in operating expenses were due
primarily to costs necessary to support increased sales volumes and operating
costs of both new ventures and from the Company's increasing outlet and
retail store locations. Total selling, general and administrative expenses as
a percentage of net sales decreased significantly over the past two years.
Leveraging expenses against higher sales volumes positively impacted
operating expense ratios. Management believes the operating expense ratio for
1999 will marginally improve as a result of leveraging fixed costs on higher
sales volumes offsetting an increase in the Company's infrastructure to
support its current and future sales growth.
OTHER INCOME (EXPENSE). Other income (expense) increased marginally in 1998
over 1996 levels but spiked during 1997. The fluctuation in 1997 was
primarily due to unusual charges, including an expense of $700,000 related to
legal settlements. An increase in foreign currency losses over the past two
years, due mainly to the strength of the U.S. dollar, has been mitigated by
an increase in interest income the Company has received.
PROVISION FOR INCOME TAXES. During the last three years, the Company's
effective tax rate was approximately 41.0%. Management believes that the
effective tax rate during 1999 will approximate 1998 levels.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS 27
YEAR 2000 COMPLIANCE
Computer programs that were written using two digits rather than four digits
to define the applicable year may recognize a date using "00" as the year
1900 rather than the year 2000. This result is commonly referred to as the
"Year 2000" problem. The Year 2000 problem could result in information system
failures or miscalculations. Beginning in 1997, the Company initiated a
program to evaluate whether internally developed and/or purchased computer
programs that utilize embedded date codes could experience operational
problems when the year 2000 is reached. The scope of this effort addressed
internal computer systems and supplier capabilities. The Company is
completing an extensive review of its businesses to determine whether or not
purchased and internally developed computer programs are Year 2000
compliant, as well as determine the extent of any remedial action and
associated costs. Management believes it has substantially completed the
review of the Company's internal computer systems and either substantially
made modifications or purchased new hardware and software to make the
Company's internal computer systems Year 2000 compliant. The Company is now
involved in the testing phase of its computer modifications and new system
purchases to determine its ability to handle Year 2000 related date
calculations. Based on the Company's evaluation to date, management believes
that the Company will incur approximately $2.4 million in internal and
external costs to address the Year 2000 problem of which $2.0 million has
been expended as of year-end 1998. The Company plans to complete all
remediation efforts for its critical systems prior to year 2000. The
financial impact of the Year 2000 reviews, modifications, testing,
replacements or related purchases are not expected to have a material adverse
effect on the Company's business or its consolidated financial position,
results of operations or cash flows. The Company is also contacting its key
suppliers and customers to determine their Year 2000 readiness in order to
ensure a steady flow of goods and services to the Company and continuity with
respect to customer service. The Company has no information that indicates
that a significant vendor may be unable to sell to the Company; that a
significant customer may be unable to purchase from the Company; or that a
significant service provider may be unable to provide services to the
Company. The Company is formulating a contingency plan in the event of
failure of production operations, the inability of major suppliers to fulfill
their commitments and the inability of major customers to submit orders and
receive product. The Company expects to have the majority of its contingency
plans formalized by September
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and artistic designs]
30 MANAGEMENT'S DISCUSSION AND ANALYSIS
1999. Notwithstanding the above, the effect, if any, on the Company's future
results of operations, due to the Company's major suppliers and customers not
being Year 2000 compliant, cannot be reasonably estimated. Management
believes that this latter risk is mitigated somewhat by the Company's broad
base of customers and suppliers and the worldwide nature of its operations.
ADOPTION OF THE EURO
On January 1, 1999, the European Union nations launched a single currency,
the euro (the "Euro"). The Euro is currently being utilized for electronic
financial and banking transactions, but will transition into Euro coins and
notes on January 1, 2002. During January 1999, the Company's European-based
operations began processing certain transactions denominated in the Euro.
These transactions have been processed accurately and efficiently. At an
appropriate point in the transition period, the Company's financial systems
located in the participating countries will be converted from local currency
denominations to Euros. Management does not expect the introduction of the
Euro to result in any material risk or a material increase in costs to the
Company.
FOREIGN CURRENCY RISK
As a multinational enterprise, the Company is exposed to changes in foreign
currency exchange rates. The Company employs a variety of practices to manage
this market risk, including its operating and financing activities and, where
deemed appropriate, the use of derivative financial instruments. Forward
contracts have been utilized by the Company to mitigate foreign currency
risk. The Company's most significant foreign currency risk relates to the
Euro. The Company uses derivative financial instruments only for risk
management purposes and does not use them for speculation or for trading.
There were no significant changes in how the Company managed foreign currency
transactional exposures during 1998 and management does not anticipate any
significant changes in such exposures or in the strategies it employs to
manage such exposure in the near future.
MANAGEMENT'S DISCUSSION AND ANALYSIS 31
LIQUIDITY AND CAPITAL RESOURCES
The Company's general business operations historically have not required
significant capital expenditures. During 1997, capital expenditures increased
over 1996 mainly as a result of the construction of a 138,000 sq. ft.
warehouse and distribution facility. The construction costs of the facility
were approximately $4.4 million. Long-term financing of $5.0 million was
obtained in 1994 to cover building projects of which approximately $4.4
million was outstanding at 1997 year-end. During January 1998, the Company
paid this long-term credit facility in full with available cash. Capital
expenditures remained elevated in 1998 based on computer system hardware and
software acquisitions to address the Year 2000 problem and the construction
costs for five additional Company-owned stores. During 1998, the Company
completed a secondary offering of 2,302,500 shares of Common Stock from which
it received approximately $3.6 million in cash proceeds for working capital
needs. The Company's Board of Directors during 1998, authorized management to
repurchase up to 500,000 shares of the Company's Common Stock in the open
market or privately negotiated transactions. As of year-end 1998, the Company
had repurchased 188,500 shares of Common Stock at a cost of approximately
$2.6 million. Management believes the Company's financial position remains
extremely strong. Working capital of $109.0 million and net cash balances
(defined as cash and cash equivalents less current notes payable) of $52.7
million existed at the end of fiscal 1998 compared to working capital of
$70.6 million and net cash balances of $13.2 million as of year-end 1997.
During fiscal year 1999, management believes capital expenditures may exceed
1998 levels due to the Company's intent to construct approximately ten
additional retail locations and further build-out its U.S. headquarters
requiring capital expenditures in excess of $4.3 million. Short-term credit
facilities totaling approximately $43.0 million are available to the Company
for general working capital needs of which $4.5 million was outstanding at
the end of 1998. Management believes that cash flow from operations and
existing credit facilities will be sufficient to satisfy its capital
expenditure requirements.
[Collage of various
FOSSIL brand products
and artistic designs]
[Collage of various
FOSSIL brand products
and artistic designs]
34 MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
Included within management's discussion and analysis of the Company's
operating results and this annual report, "forward-looking statements" were
made within the meaning of the Private Securities Litigation Reform Act of
1995 regarding expectations for 1999. The actual results may differ
materially from those expressed by these forward-looking statements.
Significant factors that could cause the Company's 1999 operating results to
differ materially from management's current expectations include, among other
items, significant changes in consumer spending patterns or preferences,
competition in the Company's product areas, international in comparison to
domestic sales mix, changes in foreign currency valuations in relation to the
United States Dollar, principally the Euro and Japanese Yen, an inability of
management to control operating expenses in relation to net sales without
damaging the long-term direction of the Company and the risks and
uncertainties set forth in the Company's current report on Form 8-K dated
March 30, 1999.
SELECTED QUARTERLY FINANCIAL DATA
The table below sets forth selected quarterly financial information. The
information is derived from unaudited consolidated financial statements of the
Company and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of results
for such periods. The operating results for any quarter are not necessarily
indicative of results for any future period.
FISCAL YEAR 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1ST QTR 2ND QTR 3RD QTR 4TH QTR
Net sales ...................................... $ 56,885 $ 64,363 $ 82,393 $101,102
Gross profit ................................... 27,901 31,905 40,433 50,265
Operating expenses ............................. 20,051 22,019 24,828 28,236
Operating income ............................... 7,850 9,886 15,605 22,029
Income before income taxes ..................... 7,882 9,697 15,456 21,694
Provision for income taxes ..................... 3,216 3,993 6,400 8,959
Net income ..................................... 4,666 5,704 9,056 12,735
Basic earnings per share ....................... 0.23 0.28 0.43 0.61
Diluted earnings per share ..................... 0.22 0.26 0.41 0.58
Gross profit as a percentage of net sales ...... 49.0% 49.6% 49.1% 49.7%
Operating expenses as a percentage of net sales. 35.2% 34.2% 30.1% 27.9%
Operating income as a percentage of net sales .. 13.8% 15.4% 18.9% 21.8%
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
FISCAL YEAR 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1ST QTR 2ND QTR 3RD QTR 4TH QTR
Net sales ........................................ $47,449 $56,932 $61,013 $79,404
Gross profit ..................................... 23,195 26,305 29,690 38,338
Operating expenses ............................... 17,735 19,527 19,875 25,781
Operating income ................................. 5,460 6,778 9,815 12,557
Income before income taxes ....................... 5,041 6,137 9,303 11,670
Provision for income taxes ....................... 2,067 2,503 3,793 4,846
Net income ....................................... 2,974 3,634 5,510 6,824
Basic earnings per share ......................... 0.15 0.18 0.27 0.34
Diluted earnings per share ....................... 0.15 0.18 0.26 0.32
Gross profit as a percentage of net sales ........ 48.9% 46.2% 48.7% 48.3%
Operating expenses as a percentage of net sales... 37.4% 34.3% 32.6% 32.5%
Operating income as a percentage of net sales..... 11.5% 11.9% 16.1% 15.8%
While the majority of the Company's products are not seasonal in nature, a
significant portion of the Company's net sales and operating income are
generally derived in the second half of the year. The Company's fourth quarter,
which includes the Christmas season, on average generates in excess of 35% of
the Company's annual operating income, while the first quarter generally
accounts for less than 16% 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 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 1998 were not substantially above or below targeted levels and
therefore should not significantly impact retailers restocking orders in the
first quarter of 1999. As the Company increases the amount of owned outlet and
retail stores, it would generally amplify the Company's seasonality by
decreasing the Company's operating income in the first quarter and increasing
the operating income in the fourth quarter. The results of operations for a
particular quarter may also vary due to a number of factors, including retail,
economic and monetary conditions, timing of orders or holidays and the mix of
the products sold by the Company. During the 1997 second quarter, gross profit
margins decreased principally as a result of the low gross profit margin
realized on the significant sale of the non-branded watches used as a premium
incentive.
[Collage of various
FOSSIL brand products
and artistic designs]
FINANCIAL INFORMATION 37
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of Fossil, Inc.:
We have audited the accompanying consolidated balance sheets of Fossil, Inc. and
subsidiaries as of January 2, 1999 and January 3, 1998 and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended January 2, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Fossil, Inc. and subsidiaries at
January 2, 1999 and January 3, 1998, and the results of their operations and
their cash flows for each of the three years in the period ended January 2,
1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- ----------------------------
Deloitte & Touche LLP
Dallas, Texas
February 19, 1999
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and other information
contained in this Annual Report have been prepared by management. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include amounts that are based upon our best estimates and
judgements.
To help assure that financial information is reliable and that assets are
safeguarded, management maintains a system of internal controls and procedures
which it believes is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The consolidated financial statements and related notes thereto have been
audited by Deloitte & Touche LLP, independent auditors. The accompanying
auditors' report expresses an independent professional opinion on the fairness
of presentation of management's financial statements.
The Audit Committee of the Board of Directors is composed of the Company's
outside directors, and is responsible for selecting the independent auditing
firm to be retained for the coming year. The Audit Committee meets periodically
with the independent auditors, as well as with management, to review internal
accounting controls and financial reporting matters. The independent auditors
also meet privately on occasion with the Audit Committee, to discuss the scope
and results of their audits and any recommendations regarding the system of
internal accounting controls.
/s/ Tom Kartsotis /s/ Randy S. Kercho
- -------------------------- ------------------------------
Tom Kartsotis Randy S. Kercho
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
38 FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
January 2, 1999 January 3, 1998
---------------------------------
Assets
Current assets:
Cash and cash equivalents.................................... $ 57,263,132 $ 21,103,581
Accounts receivable-net...................................... 42,582,242 34,237,526
Inventories.................................................. 57,294,668 51,382,160
Deferred income tax benefits................................. 5,655,002 4,503,749
Prepaid expenses and other current assets.................... 3,538,443 2,432,282
-------------------------------
Total current assets..................................... 166,333,487 113,659,298
Property, plant and equipment - net.......................... 23,116,838 21,073,333
Intangible and other assets.................................. 4,627,517 4,837,259
-------------------------------
$ 194,077,842 $ 139,569,890
-------------------------------
-------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - Banks........................................ $ 4,537,150 $ 7,862,145
Accounts payable............................................. 14,511,758 9,609,805
Accrued expenses:
Co-op advertising........................................ 13,311,276 8,700,696
Compensation............................................. 3,245,888 2,665,485
Other.................................................... 11,201,038 8,714,067
Income taxes payable......................................... 10,486,823 5,504,304
-------------------------------
Total current liabilities................................ 57,293,933 43,056,502
-------------------------------
Commitments (Note 9)
Minority interest in subsidiaries................................. 1,864,436 1,250,405
Stockholders' equity:
Common stock, shares issued and outstanding -
20,932,091 and 20,308,503, respectively...................... 209,321 203,085
Additional paid-in capital................................... 34,345,061 26,021,255
Retained earnings............................................ 102,858,657 71,257,176
Accumulated other comprehensive income....................... (1,037,181) (2,218,533)
Treasury stock at cost, 103,679 shares....................... (1,456,385) -
-------------------------------
Total stockholders' equity............................... 134,919,473 95,262,983
-------------------------------
$ 194,077,842 $ 139,569,890
-------------------------------
-------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FINANCIAL INFORMATION 39
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FISCAL YEAR 1998 1997 1996
Net sales.......................................... $ 304,743,425 $ 244,797,532 $ 205,899,262
Cost of sales...................................... 154,239,588 127,269,749 107,861,291
--------------------------------------------
Gross profit.................................. 150,503,837 117,527,783 98,037,971
Operating expenses:
Selling and distribution...................... 67,871,709 58,065,138 50,638,117
General and administrative.................... 27,262,555 24,852,550 23,026,895
--------------------------------------------
Total operating expenses.................. 95,134,264 82,917,688 73,665,012
--------------------------------------------
Operating income................................... 55,369,573 34,610,095 24,372,959
Interest expense................................... (210,672) (956,182) (1,205,233)
Other income (expense)--net......................... (429,932) (1,502,806) (127,619)
--------------------------------------------
Income before income taxes......................... 54,728,969 32,151,107 23,040,107
Provision for income taxes......................... 22,568,000 13,209,000 9,449,000
Net income .................................. 32,160,969 18,942,107 13,591,107
--------------------------------------------
Currency translation adjustment........... 1,181,352 (1,572,600) (839,914)
--------------------------------------------
Other comprehensive income.................... $ 33,342,321 $ 17,369,507 $ 12,751,193
--------------------------------------------
--------------------------------------------
Basic earnings per share...................... $ 1.55 $ 0.94 $ 0.69
--------------------------------------------
Diluted earnings per share ................... $ 1.48 $ 0.91 $ 0.68
--------------------------------------------
--------------------------------------------
Weighted average common and common equivalent shares outstanding:
Basic .................................... 20,702,694 20,135,540 19,783,172
Diluted .................................. 21,724,064 20,833,431 20,067,653
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40 FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED TREASURY STOCK
ADDITIONAL OTHER TOTAL
PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME SHARES AMOUNT EQUITY
Balance, January 1,
1996 .................. 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 -- -- -- -- 106,758
Common stock issued
for purchase of
additional B.V.
ownership ............. 50,000 500 440,125 -- -- -- -- 440,625
Net income .............. -- -- -- 13,591,107 -- -- -- 13,591,107
Currency translation
adjustment ............ -- -- -- -- (839,914) -- -- (839,914)
----------------------------------------------------------------------------------------------------
Balance, December 31,
1996 .................. 13,242,994 132,430 22,766,468 52,315,069 (645,933) -- -- 74,568,034
Common stock issued upon
exercise of stock
options ............... 167,899 1,679 1,622,711 -- -- -- -- 1,624,390
Tax benefit derived from
exercise of stock
options ............... -- -- 464,000 -- -- -- -- 464,000
Common stock issued for
purchase of additional
Italy ownership ....... 128,109 1,281 1,235,771 -- -- -- -- 1,237,052
Three-for-two stock
split ................. 6,769,501 67,695 (67,695) -- -- -- -- --
Net income .............. -- -- -- 18,942,107 -- -- -- 18,942,107
Currency translation
adjustment ............ -- -- -- -- (1,572,600) -- -- (1,572,600)
----------------------------------------------------------------------------------------------------
Balance, January 3,
1998 .................. 20,308,503 203,085 26,021,255 71,257,176 (2,218,533) -- -- 95,262,983
Common stock issued upon
exercise of stock
options ............... 408,588 4,086 2,876,692 -- -- -- -- 2,880,778
Tax benefit derived
from exercise of
stock options ......... -- -- 1,495,000 -- -- -- -- 1,495,000
Secondary offering,
net of offering
costs ................. 215,000 2,150 3,610,686 -- -- -- -- 3,612,836
Purchase of treasury
stock ................. -- -- -- -- -- (188,500) (2,647,272) (2,647,272)
Reissuance of treasury
stock upon exercise of
stock options ......... -- -- -- (559,488) -- 84,821 1,190,887 631,399
Net income .............. -- -- -- 32,160,969 -- -- -- 32,160,969
Currency translation
adjustment ............ -- -- -- -- 1,181,352 -- -- 1,181,352
Other ................... -- -- 341,428 -- -- -- -- 341,428
----------------------------------------------------------------------------------------------------
Balance, January 2,
1999 .................. 20,932,091 $ 209,321 $ 34,345,061 $102,858,657 $(1,037,181) (103,679) $(1,456,385) $134,919,473
----------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
FINANCIAL INFORMATION 41
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR 1998 1997 1996
Operating Activities:
Net income ........................................ $ 32,160,969 $ 18,942,107 $ 13,591,107
Noncash items affecting net income:
Minority interest in subsidiaries............... 1,003,607 343,879 362,084
Depreciation and amortization................... 4,395,319 3,047,329 3,125,598
Increase in allowance for doubtful accounts..... 2,164,534 407,686 1,424,243
Increase in allowance for returns -
net of related inventory in transit........... 2,052,597 784,300 183,382
Deferred income tax benefits.................... (1,151,253) (837,405) (375,925)
Changes in assets and liabilities:
Accounts receivable............................. (13,899,490) (6,113,976) (5,384,069)
Inventories..................................... (4,574,865) (662,178) (6,353,919)
Prepaid expenses and other current assets....... (1,106,161) (489,491) 82,839
Accounts payable................................ 5,830,676 1,392,915 1,574,382
Accrued expenses................................ 7,677,954 2,136,363 3,989,332
Income taxes payable............................ 6,477,519 4,129,648 (992,803)
--------------------------------------------
Net cash from operations.................. 41,031,406 23,081,177 11,226,251
Investing Activities:
Net assets acquired in business combination/
consolidation, net of cash received........... - (384,614) (634,734)
Additions to property, plant and equipment...... (6,307,218) (7,363,440) (4,260,546)
Cash received from sale of property and
equipment..................................... 263,623 - -
Decrease (increase) in intangible and other
assets........................................ (69,875) 272,002 (391,669)
--------------------------------------------
Net cash used in investing activities..... (6,113,470) (7,476,052) (5,286,949)
Financing Activities:
Issuance of common stock........................ 6,493,614 1,624,390 547,383
Net purchase of treasury stock.................. (2,015,873) - -
Distribution of minority interest earnings...... (389,576) (498,784) (83,774)
Repayment of notes payable - affiliates......... - (1,000,744) (127,830)
Repayments of notes payable - banks............. (3,324,995) (5,993,255) (62,396)
Other........................................... 341,428 - -
--------------------------------------------
Net cash from(used in) financing
activities.............................. 1,104,598 (5,868,393) 273,383
Effect of exchange rate changes on cash
and cash equivalents.......................... 137,017 (614,397) (211,974)
--------------------------------------------
Net increase in cash and cash equivalents.......... 36,159,551 9,122,335 6,000,711
Cash and cash equivalents:
Beginning of year......................... 21,103,581 11,981,246 5,980,535
--------------------------------------------
End of year............................... $ 57,263,132 $ 21,103,581 $ 11,981,246
--------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
42 FINANCIAL INFORMATION
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
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.
Beginning January 1, 1997, the Company changed its fiscal year to reflect the
retail-based calendar (containing 4-4-5 week calendar quarters). Due to this
change, the first quarter of fiscal 1997 contained an additional one-half
week for the transition period. This change had an immaterial impact on
comparability to the prior fiscal year.
CASH EQUIVALENTS are considered all highly liquid investments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE are stated net of allowances of $13,966,421 and
$10,576,181 for estimated customer returns and $6,864,365 and $4,699,831 for
doubtful accounts at the close of fiscal year 1998 and 1997, 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
incurred net foreign currency transaction losses of approximately $427,000,
$733,000 and $308,000 for fiscal years 1998, 1997 and 1996, respectively,
which have been included in other income (expense).
FINANCIAL INFORMATION 43
FORWARD CONTRACTS are entered into by the Company principally to hedge the
payment of intercompany inventory transactions with its non-U.S.
subsidiaries. Currency exchange gains or losses resulting from the
translation of the related accounts, along with the offsetting gains or
losses from the hedge, are deferred until the inventory is sold or the
forward contract is completed. At January 2, 1999, the Company had hedge
contracts to sell (i) 24,000,000 German Marks for approximately $13.9
million, expiring through December 1999, (ii) 199,199,000 Japanese Yen for
approximately $1.4 million, expiring through March 1999 and (iii)
2,266,000,000 Italian Lira for approximately $1.4 million, expiring through
March 1999.
REVENUES are recognized as sales when merchandise is shipped. The Company
permits the return of damaged or defective products and accepts limited
amounts of product returns in certain other instances. Accordingly, the
Company provides allowances for the estimated amounts of these returns at the
time of revenue recognition.
ADVERTISING COSTS for in-store and media advertising as well as co-op
advertising and promotional allowances are expensed as incurred. Advertising
expenses for fiscal years 1998, 1997 and 1996 were approximately $16,986,000,
$14,255,000 and $14,919,000, respectively.
In fiscal year 1998, the Company adopted the following Statements of
Financial Accounting Standards ("SFAS"):
"REPORTING COMPREHENSIVE INCOME" (SFAS No. 130), requires the componenets of
comprehensive income to be disclosed in the financial statements.
"DISCLOSURES ABOUT SEGEMENTS OF AN ENTERPRISE AND RELATED INFORMATION" (SFAS
No. 131), requires disclosures of certain information about the Company's
operating segments on a basis consistent with the way in which the Company is
managed and operated.
NEW ACCOUNTING STANDARDS. In June 1998 SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued which establishes
new accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires the recognition of all derivatives as either assets
or liabilities in the statement of financial position and the measurement of
those instruments at fair value. This pronouncement will require such
disclosures in the Company's financial statements for all reporting periods
beginning fiscal year 2000. The Company is currently analyzing the effect of
this standard and does not expect it to have a material effect on the
Company's consolidated statements of financial position, income and cash
flows.
MINORITY INTEREST IN SUBSIDIARIES, included within other income (expense)
represents the minority stockholders' share of the net income (loss) of
various consolidated subsidiaries. The minority interest in the consolidated
balance sheets reflects the proportionate interest in the equity of these
consolidated subsidiaries.
EARNINGS PER SHARE is based on the weighted average number of common and
common equivalent shares outstanding during each period.
44 FINANCIAL INFORMATION
The following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
FISCAL YEAR END 1998 1997 1996
Basic EPS computation:
Numerator:
Net income..................................... $32,160,969 $ 18,942,107 $13,591,107
-----------------------------------------
Denominator:
Weighted average common shares outstanding..... 20,747,242 13,423,693 13,188,781
Three-for-two stock split paid April 1998...... - 6,711,847 6,594,391
Treasury stock................................. (44,548) - -
-----------------------------------------
20,702,694 20,135,540 19,783,172
-----------------------------------------
Basic EPS............................................ $ 1.55 $ 0.94 $ 0.69
-----------------------------------------
Diluted EPS computation:
Numerator:
Net income..................................... $32,160,969 $ 18,942,107 $13,591,107
-----------------------------------------
Denominator:
Weighted average common shares outstanding..... 20,747,242 13,423,693 13,188,781
Stock option conversion........................ 1,021,370 465,261 189,654
Three-for-two stock split paid April 1998...... - 6,944,477 6,689,218
Treasury stock................................. (44,548) - -
-----------------------------------------
21,724,064 20,833,431 20,067,653
-----------------------------------------
Diluted EPS.......................................... $ 1.48 $ 0.91 $ 0.68
-----------------------------------------
DEFERRED INCOME TAXES are provided for under the asset and liability method for
temporary differences in the recognition of certain revenues and expenses for
tax and financial reporting purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS are estimated to approximate the related
book values, unless otherwise indicated, based on market information
available to the Company. Reclassification of certain 1996 and 1997 amounts
have been made to conform to the 1998 presentation.
2. ACQUISITIONS
Effective April 1997, Fossil (East) Limited acquired the remaining 35% of
capital stock of Amazing Time, Ltd. from its minority stockholder in exchange
for approximately $380,000 in cash. The acquisition of this Hong Kong-based
watch assembly factory has been accounted for as a purchase and,in connection
therewith, the Company recorded goodwill of approximately $210,000. Effective
April 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
FINANCIAL INFORMATION 45
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. Effective February 1997, Fossil B.V. acquired the
remaining 40% of Fossil Italy's outstanding common stock from it's minority
stockholders for 192,164 shares of the Company's Common Stock, of which
approximately $300,000 was recorded as goodwill. Fossil B.V. also formed a
wholly owned subsidiary 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:
FISCAL YEAR END 1998 1997
Components and parts..................................... $ 3,402,058 $ 2,751,719
Work-in-process.......................................... 1,444,665 2,064,623
Finished merchandise on hand............................. 40,344,158 35,707,813
Merchandise at Company stores............................ 5,339,798 5,484,479
Merchandise in-transit from customer returns............. 6,763,989 5,373,526
-------------------------
$ 57,294,668 $51,382,160
-------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
FISCAL YEAR END 1998 1997
Land....................................................... $ 2,535,361 $ 2,535,361
Building................................................... 9,912,879 9,209,315
Furniture and fixtures..................................... 11,291,941 6,720,046
Equipment.................................................. 5,485,666 4,905,291
Computer software.......................................... 2,517,824 1,382,537
Leasehold improvements..................................... 5,035,370 6,790,409
------------------------
36,779,041 31,542,959
Less accumulated depreciation and amortization............. 13,662,203 10,469,626
------------------------
$23,116,838 $21,073,333
------------------------
5. INTANGIBLE AND OTHER ASSETS
Intangibles and other assets consist of the following:
FISCAL YEAR END 1998 1997
Costs in excess of tangible net assets acquired............ $4,545,098 $ 4,545,098
Noncompete agreement....................................... 475,000 475,000
Trademarks................................................. 554,851 547,573
Deposits................................................... 478,707 430,503
Other...................................................... 217,567 203,174
-----------------------
6,271,223 6,201,348
Less accumulated amortization.............................. 1,643,706 1,364,089
-----------------------
$4,627,517 $ 4,837,259
-----------------------
46 FINANCIAL INFORMATION
6. DEBT
BANK: U.S.-BASED. In August 1994, the Company signed a $5.0 million financing
agreement with its primary bank ("Long-term revolver") to partially finance
the Company's facilities construction costs and for other general corporate
purposes. The financing agreement was for a ten-year revolving term loan with
quarterly payments equal to 1% of the stated principal amount of the
facility. The interest rate was the lender's prime rate (8.50% at January 3,
1998) and was payable quarterly with an unused fee of 0.5% per annum. The
financing agreement additionally allowed for interest to be calculated at the
London Interbank Offered Rate ("LIBOR") (5.82% at January 3, 1998), plus
1.25%. The amount outstanding under this facility was $4.35 million at the
end of fiscal year 1997. The Company paid the Long-term revolver in full in
January 1998 from available cash on hand, therefore the funds outstanding
under the facility were classified as short-term debt as of January 3, 1998.
In May 1997, the Company extended the maturity date of its short-term
revolving credit facility with its primary bank ("U.S. short-term revolver").
In June 1997, the Company renewed the U.S. short-term revolver and amended it
to increase the funds available under the facility to $40 million, an
increase of $10 million over the previous facility, not subject to any
borrowing base calculation. The facility was also amended to eliminate
Japanese Yen currency borrowings and replace them with a stand-by letter of
credit for 540 million Japanese Yen (approximately $4.8 million) as
collateral for Company borrowings from any Japan-based bank. In June 1998,
the Company renewed the U.S. short-term revolver for one year and amended the
interest rate the Company pays on LIBOR based borrowings. All borrowings
under the U.S. short-term revolver accrue interest at the bank's prime rate
less 0.5% or LIBOR plus 1.00% (LIBOR plus 1.25% prior to June 29, 1998) and
is collateralized by substantially all the Company's assets and requires the
maintenance of specific levels of net worth, quarterly income, working
capital and financial ratios. There were no borrowings under the U.S.
short-term revolver as of fiscal year end 1998 or 1997. Interest expense
under these credit facilities was $5,630, $835,275 and $1,077,713 for fiscal
years 1998, 1997 and 1996, respectively. At fiscal year-end 1998, 1997 and
1996, the Company had outstanding letters of credit of approximately
$3,200,000, $1,225,000 and $2,695,000, respectively, to vendors for the
purchase of merchandise.
BANKS: FOREIGN-BASED. Fossil GmbH has short-term credit facilities with two
Germany-based banks with combined borrowing capacity of 5,000,000 deutsche
marks (approximately $3.0 million as of fiscal year-end 1998). No borrowings
were outstanding under the combined credit facilities at the end of fiscal
1998 or 1997. Outstanding borrowings under the facilities bear interest at
approximately 6% and are collateralized by substantially all of Fossil GmbH's
assets. During August 1997, Fossil Japan restructured its short-term credit
facility with a Japan-based bank allowing borrowings of up to 540 million
Japanese Yen. All outstanding borrowings under the facility bore interest at
the Euroyen rate (1.02% at January 2, 1999) plus 1.8%. In connection with
the financing agreement, Fossil Japan agreed to pay an origination fee equal
to 0.12% of the amount available under the facility and an unused fee of 0.5%
per annum. The facility is collateralized by a stand-by letter of credit
issued by the Company's primary U.S. bank. Japan-based borrowings, in U.S.
dollars, under the facilities were approximately $4.5 million and $3.5
million as of fiscal year-end 1998 and 1997, respectively. Interest expense
under these credit facilities was $83,004, $21,188 and $27,427 for fiscal
years 1998, 1997 and 1996, respectively.
FINANCIAL INFORMATION 47
7. OTHER INCOME (EXPENSE) - NET
Other income (expense) - net consists of the following:
FISCAL YEAR 1998 1997 1996
Interest income........................ $ 1,159,862 $ 335,528 $ 235,098
Minority interest in subsidiaries...... (1,003,607) (343,879) (362,084)
Currency loss.......................... (427,240) (732,614) (308,249)
Legal settlements...................... (266,586) (661,365) 50,000
Royalty income......................... 44,799 106,100 -
Duty drawback ......................... - - 321,836
Insurance proceeds above book value ... 93,345 - 101,814
Loss on sale of fixed assets........... (83,888) - -
Other income (expense)................. 53,383 (206,576) (166,034)
-------------------------------------------
$ (429,932) $(1,502,806) $ (127,619)
-------------------------------------------
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:
FISCAL YEAR END 1998 1997
Deferred tax assets:
Bad debt allowance.................................... $ 2,193,068 $ 1,514,158
Returns allowance..................................... 4,283,415 3,359,383
263(A) capitalization of inventory.................... 503,438 418,355
Miscellaneous tax asset items......................... 1,005,850 1,033,373
Deferred tax liabilities:
In-transit returns inventory........................... (2,330,769) (1,821,520)
---------------------------
Net current deferred tax benefits........................ $ 5,655,002 $ 4,503,749
---------------------------
Management believes that no valuation allowance against net deferred tax
benefits is necessary. The resulting provision for income taxes consists of
the following:
FISCAL YEAR 1998 1997 1996
Current provision:
United States...................... $ 11,773,253 $ 9,026,405 $ 6,776,925
Foreign............................ 11,946,000 5,020,000 3,048,000
Deferred provision - United States... (1,151,253) (837,405) (375,925)
-----------------------------------------------
Provision for income taxes........... $ 22,568,000 $13,209,000 $ 9,449,000
-----------------------------------------------
48 FINANCIAL INFORMATION
A reconciliation of income tax computed at the u.s. Federal statutory income
tax rate of 35% to the provision for income taxes is as follows:
FISCAL YEAR 1998 1997 1996
Tax at statutory rate................ $ 19,155,139 $11,252,887 $ 8,064,037
State, net of federal tax benefit.... 363,779 378,005 194,312
Other................................ 3,049,082 1,578,108 1,190,651
-----------------------------------------------
Provision for income taxes........... $ 22,568,000 $13,209,000 $ 9,449,000
-----------------------------------------------
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 $3,520,743,
$1,703,245 and $1,365,579 in fiscal years 1998, 1997 and 1996, respectively.
These amounts are included in the Company's cost of sales and selling
expenses. The Company has several agreements in effect at the end of fiscal
year 1998 which expire on various dates from January 1999 and require the
Company to pay royalties ranging from 5% to 15.5% of defined net sales.
Future minimum royalty commitments under such license agreements at the close
of fiscal year 1998 are as follows:
1999...................................................... $ 3,700,000
2000...................................................... -
2001...................................................... 10,000
------------
$ 3,710,000
------------
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 $5,118,310, $4,387,821 and $3,698,981 for fiscal years 1998,
1997 and 1996, respectively. Contingent rent expense has been minimal in
each of the last three fiscal years. Future minimum rental commitments under
such leases at the close of fiscal year 1998, are as follows:
1999...................................................... $ 4,993,795
2000...................................................... 4,241,915
2001...................................................... 3,225,614
2002...................................................... 2,727,764
2003...................................................... 2,095,377
Thereafter................................................ 5,544,223
-----------
$22,828,688
-----------
FINANCIAL INFORMATION 49
10. STOCKHOLDERS' EQUITY AND BENEFIT PLANS
COMMON AND PREFERRED STOCK. On March 4, 1998, the Board of Directors declared
a three-for-two stock split of the Company's Common Stock to be effected in
the form of a stock dividend payable on April 8, 1998 to stockholders of
record on March 25, 1998. Retroactive effect has been given to the stock
split in all share and per share data in the accompanying financial
statements.
The Company has 50,000,000 shares of authorized Common Stock, with 20,932,091
and 20,308,503 shares issued and outstanding at the close of fiscal year-end
1998 and 1997, respectively. The Company has 1,000,000 shares of authorized
$0.01 par value preferred stock with none issued or outstanding. Rights,
preferences and other terms of preferred stock will be determined by the
Board of Directors at the time of issuance.
TREASURY STOCK. On September 18, 1998, the Company's Board of Directors
authorized management to repurchase up to 500,000 shares of the Company's
Common Stock in the open market or privately negotiated transactions (the
"Repurchase Program"). During fiscal year 1998, the Company repurchased
188,500 shares of treasury stock under the Repurchase Program at a cost of
$2,647,272. During fiscal year 1998, 84,821 shares of treasury stock were
reissued in connection with the Company's 1993 Long-Term Incentive Stock
Option Plan ("Incentive Plan").
SAVINGS PLAN. The Company has a savings plan in the form of a defined
contribution plan (the "401(k) plan") for substantially all full-time
employees of the Company. Employees are eligible to participate in the 401(k)
plan after one year of service. The Company matches 50% of employee
contributions up to 3% of their compensation and 25% of the employee
contributions between 3% and 6% of their compensation. The Company also has
the right to make certain additional matching contributions not to exceed 15%
of employee compensation. The Company's Common Stock is one of several
investment alternatives available under the 401(k) plan. Matching
contributions made by the Company to the 401(k) plan totaled $197,501,
$156,575 and $129,035 for fiscal years 1998, 1997 and 1996, respectively.
LONG-TERM INCENTIVE PLAN. An aggregate of 1,725,000 shares of Common Stock
were reserved for issuance pursuant to the Incentive Plan, adopted April
1993. An additional 900,000 shares were reserved in each of 1995 and 1998 for
issuance under the Incentive Plan. Designated employees of the Company,
including officers and directors, are eligible to receive (i) stock options,
(ii) stock appreciation rights, (iii) restricted or 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 period ranging from three to five years 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 $10.33 or above for
a pro-rata number of options at a $6.67 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 $6.67 by the optionees's previous exercise price. A
total of 366,487 options with exercise prices ranging from $10.33 to $19.00
were canceled in exchange for 196,191 options with an exercise price of
$6.67. The weighted average fair value of the stock options granted during
fiscal years 1998, 1997 and 1996 was $9.40, $5.36 and $3.29, respectively.
50 FINANCIAL INFORMATION
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. An aggregate of 150,000 shares of
Common Stock were reserved for issuance pursuant to this nonqualified stock
option plan, adopted April 1993. During the first year an individual
waselected as a nonemployee director of the Company, they received a grant of
7,500 nonqualified stock options. In addition, on the first day of each
subsequent calendar year, each nonemployee director automatically received a
grant of an additional 4,500 nonqualified stock options. Effective January 1,
1999, grants of options under the Plan were reduced for nonemployee directors
to 5,000 nonqualified stock option in their first year of service and 3,000
nonqualified stock options in each subsequent year as long as the person is
serving as a nonemployee director. Pursuant to this plan, 50% of the options
granted will become exercisable on the first anniversary of the date of grant
and in two additional installments of 25% on the second and third
anniversaries. The exercise prices of options granted under this plan were
not less than the fair market value of the Common Stock at the date of grant.
The weighted average fair value of the stock options granted during fiscal
years 1998, 1997 and 1996 was $17.89, $7.95 and $3.45, respectively.
The fair value of options granted under the Company's stock option plans
during fiscal years 1998, 1997 and 1996 were estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used: no dividend yield, expected volatility of
approximately 63% to 65%, risk free interest rate of 4.75% to 6.11%, and
expected life of 5 to 6 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 for grant
--------- --------- ----------- --------- ---------
Balance, Fiscal 1995 ..... $ 5.00 -$19.00 $ 9.262 1,094,912 $ 9.475 1,444,838
Granted.............. $ 4.417 -$10.583 $ 5.323 828,291 - (828,291)
Exercised............ $ 5.00 -$ 9.083 $ 6.676 (15,992) - -
Canceled............. $ 4.417 -$19.00 $11.594 (450,311) - 450,311
Exercisable.......... - - - - -
-------------------------------------------------------------------------------
Balance, Fiscal 1996...... $ 4.417 -$17.167 $ 6.521 1,456,900 $ 6.953 1,066,858
Granted.............. $ 8.334 -$16.792 $ 8.651 506,588 - (506,588)
Exercised............ $ 4.417 -$11.917 $ 6.344 (243,971) - -
Canceled............. $ 4.417 -$14.75 $ 7.842 (54,758) - 54,758
Exercisable.......... $ 4.417 -$19.00 - - - -
-------------------------------------------------------------------------------
Balance, Fiscal 1997 ..... $ 4.417 -$19.00 $ 7.173 1,664,759 $ 6.975 615,028
Additional options
available for grant - - - - 900,000
Granted.............. $ 13.00 -$29.75 $15.117 422,307 - (422,307)
Exercised............ $ 4.417 -$12.917 $ 7.051 (493,409) - -
Canceled............. $ 4.417 -$22.25 $11.263 (51,133) - 51,133
Exercisable.......... $ 4.417 -$19.00 - - - -
-------------------------------------------------------------------------------
Balance, Fiscal 1998...... $ 4.417 -$29.75 $ 9.280 1,542,524 $ 7.150 1,143,854
-------------------------------------------------------------------------------
There were 760,301, 876,180 and 618,381 options available for exercise under
the Incentive Plan at fiscal year end 1998, 1997 and 1996, respectively.
FINANCIAL INFORMATION 51
NONEMPLOYEE DIRECTOR PLAN
weighted weighted
average average
exercise exercise exercise
price price price available
per share per share outstanding per share for grant
--------- --------- ----------- --------- ---------
Balance, Fiscal 1995...... $5.00 -$12.667 $ 8.548 57,000 $ 7.191 93,000
Granted.............. $5.583 $ 5.583 18,000 - (18,000)
Exercisable.......... $5.00 -$12.667 - - - -
------------------------------------------------------------
Balance, Fiscal 1996...... $5.00 -$12.667 $ 7.837 75,000 $ 7.945 75,000
Granted.............. $9.00 -$16.667 $12.833 27,000 - (27,000)
Exercised............ $5.583-$11.417 $ 9.750 (7,875) - -
Canceled............. $5.583-$11.417 $ 8.235 (4,125) - 4,125
Exercisable.......... $5.00 -$12.667 - - - -
------------------------------------------------------------
Balance, Fiscal 1997...... $5.00 -$16.667 $ 9.150 90,000 $ 7.818 52,125
Granted.............. $28.75 $28.750 9,000 - (9,000)
Exercisable.......... $5.00 -$16.667 - - - -
------------------------------------------------------------
Balance, Fiscal 1998...... $5.00 -$ 28.75 $10.932 99,000 $ 8.521 43,125
------------------------------------------------------------
There were 79,875, 66,375 and 43,125 options available for exercise under the
Nonemployee Director Plan at fiscal year end 1998, 1997 and 1996, respectively.
Additional weighted average information for options outstanding and
exercisable as of fiscal year end 1998:
options outstanding options exercisable
------------------- -------------------
weighted weighted weighted
average average average
range of exercise remaining exercise
exercise number price contractual number price
prices of shares per share life of shares per share
------ --------- --------- ---- --------- ---------
Long-Term
Incentive Plan:......... $ 4.417-$ 8.50 895,662 $ 6.544 7.2 years 546,492 $ 6.253
$ 8.51 -$29.75 646,862 $13.067 8.1 years 213,809 $ 9.442
Nonemployee
Director Plan:.......... $ 5.00 -$ 8.50 36,000 $ 5.219 5.3 years 36,000 $ 5.219
$ 8.51 -$28.75 63,000 $14.196 7.4 years 43.875 $11.231
52 FINANCIAL INFORMATION
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. SFAS No. 123, "Accounting for Stock-Based
Compensation, "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 No. 123 in fiscal years
1998, 1997 and 1996 are presented below. Because the SFAS No. 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.
FISCAL YEAR 1998 1997 1996
Net income:
As reported............................. $ 32,160,969 $ 18,942,107 $ 13,591,107
Pro forma............................... $ 30,047,917 $ 17,177,727 $ 12,254,598
Basic earnings per share:
As reported............................. $ 1.55 $ 0.94 $ 0.69
Pro forma............................... $ 1.45 $ 0.85 $ 0.62
Diluted earnings per share:
As reported............................. $ 1.48 $ 0.91 $ 0.68
Pro forma............................... $ 1.38 $ 0.82 $ 0.61
11. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The components of other comprehensive income for
fiscal years 1998, 1997 and 1996 consist of the following:
Balance, January 1, 1995.......................... $ 193,981
Currency translation adjustment.................. (839,914)
-------------
Balance, December 31, 1996........................ (645,933)
Currency translation adjustment.................. (1,572,600)
-------------
Balance, January 3, 1998.......................... (2,218,533)
Currency translation adjustment.................. 1,181,352
-------------
Balance, January 2, 1999.......................... $ (1,037,181)
-------------
FINANCIAL INFORMATION 53
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows:
FISCAL YEAR 1998 1997 1996
Cash paid during the year for:
Interest................................. $ 81,908 $ 923,635 $ 1,117,107
Income taxes............................. 18,388,246 10,641,735 11,614,532
Acquisition of minority interest in
subsidiary in exchange for common
stock...................................... - 1,237,052 -
Reduction in income tax payable resulting
from exercise of employee stock options.... 1,495,000 464,000 -
13. 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:
FISCAL YEAR 1998 1997 1996
Customer A........................................ 10% 11% 11%
Customer B........................................ 9% 9% 10%
The Company's majority owned facilities operate primarily in four geographic
regions. The Company operates in a single industry, as a designer, developer,
marketer and distributor of fashion watches and other accessories, except in
the United States where the Company has an additional reportable segment:
Company Stores. Company Stores consist of outlet and mall-based retail stores
selling the Company's product direct to the consumer. Specific information
related the Company's reportable segments and geographic areas are contained
in the following table. Intercompany sales of products between geographic
areas are referred to as 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.
54 FINANCIAL INFORMATION
FISCAL YEAR END 1998 NET SALES OPERATING INCOME LONG-LIVED ASSETS TOTAL ASSETS
United States - exclusive of Company Stores... $ 213,959,462 $ 23,757,392 $17,849,365 $124,132,894
Stores........................................ 26,116,514 1,178,696 5,359,602 14,940,541
Europe........................................ 62,568,178 10,148,534 2,028,024 31,756,226
Far East...................................... 126,292,290 21,032,467 2,361,287 18,245,468
Japan......................................... 7,667,348 (747,516) 146,078 5,002,713
Intergeographic items......................... (131,860,367) - - -
------------------------------------------------------------------
Consolidated.................................. $ 304,743,425 $ 55,369,573 $27,744,356 $194,077,842
------------------------------------------------------------------
FISCAL YEAR END 1997 NET SALES OPERATING INCOME LONG-LIVED ASSETS TOTAL ASSETS
United States - exclusive of Company Stores... $ 169,554,476 $ 18,844,130 $16,836,120 $ 81,816,784
Stores........................................ 20,036,131 1,557,988 4,721,960 13,940,707
Europe........................................ 46,032,760 2,552,650 1,965,430 24,743,975
Far East...................................... 89,214,060 12,369,973 2,260,976 14,333,258
Japan......................................... 9,613,533 (714,646) 126,106 4,735,166
Intergeographic items......................... (89,653,428) - - -
------------------------------------------------------------------
Consolidated.................................. $ 244,797,532 $ 34,610,095 $25,910,592 $139,569,890
------------------------------------------------------------------
FISCAL YEAR END 1996 NET SALES OPERATING INCOME LONG-LIVED ASSETS TOTAL ASSETS
United States - exclusive of Company Stores... $ 144,261,483 $ 16,687,274 $12,490,119 $ 67,694,188
Stores........................................ 13,897,787 1,054,437 3,885,803 10,608,153
Europe........................................ 45,926,815 1,781,220 2,650,722 27,842,878
Far East...................................... 66,270,186 5,008,243 2,239,817 8,335,684
Japan......................................... 6,266,671 (158,215) 85,709 4,497,166
Intergeographic items......................... (70,723,680) - - -
------------------------------------------------------------------
Consolidated.................................. $ 205,899,262 $ 24,372,959 $21,352,170 $118,978,069
------------------------------------------------------------------
COPORATE INFORMATION
EXECUTIVE OFFICERS AND DIRECTORS
Tom Kartsotis Randy S. Kercho Kenneth W. Anderson
Chairman of the Board and Executive Vice President Director
Chief Executive Officer and Chief Financial Officer
Kosta N. Kartsotis Mark D. Quick Alan J. Gold
President, Executive Vice President Director
Chief Operating Officer
and Director
Michael W. Barnes T.R.Tunnell Donald J. Stone
Executive Vice President Senior Vice President, Development Director
and Director Chief Legal Officer and Secretary
Richard H. Gundy Jal S. Shroff
Executive Vice President Managing Director-
Fossil East and Director
CORPORATE INFORMATION
Transfer Agent and Registrar Independent Auditors Corporate Counsel
Chase Mellon 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 internet address of
www.fossil.com. Certain product, event, press release and collector club
information concerning the Company is available at the site.
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held on Wednesday, May 26, 1999,
at 4:00 pm at the Company's headquarters, 2280 N. Greenville Ave.,
Richardson, Texas.
COMPANY INFORMATION
A copy of the Company's Annual Report on Form 10-k and the Annual Report to
Stockholders, as filed with the Securities and Exchange Commission, in
addition to other Company information, is available to stockholders without
charge upon written request to Fossil, Investor Relations, 2280 N. Greenville
Ave., Richardson, Texas 75082-4412.