-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FfoZagYvWe75mRM74okXxBCmO8wvfuQ1qWiL+SnY24AC8eGEw6S4UZEjqGqG/WUs ZS5pj/zeaiLesG8fTnZ2wQ== 0001047469-99-013422.txt : 19990405 0001047469-99-013422.hdr.sgml : 19990405 ACCESSION NUMBER: 0001047469-99-013422 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOSSIL INC CENTRAL INDEX KEY: 0000883569 STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873] IRS NUMBER: 752018505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19848 FILM NUMBER: 99586505 BUSINESS ADDRESS: STREET 1: 2280 NORTH GREENVILLE AVE CITY: RICHARDSON STATE: TX ZIP: 75082 BUSINESS PHONE: 9722342525 MAIL ADDRESS: STREET 1: 2280 N GREENVILLE CITY: RICHARDSON STATE: TX ZIP: 75082 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-19848 FOSSIL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2018505 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2280 N. GREENVILLE AVENUE RICHARDSON, TEXAS 75082 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (972) 234-2525 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- The aggregate market value of Common Stock held by nonaffiliates of the registrant, based on the sale trade price of the Common Stock as reported by the Nasdaq National Market on March 30, 1999, was $339,326,309. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant. As of March 30, 1999, 20,937,580 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement in connection with the Annual Meeting of Stockholders to be held May 26, 1999, to be filed with the Commission pursuant to Regulation 14A, and the Company's Annual Report to Stockholders are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS GENERAL Fossil, Inc. (the "Company") is a Delaware corporation formed in December 1991 and is the successor to a Texas corporation formed in 1984. In 1993, the Company completed an initial public offering (the "Offering") of 2,760,000 shares of common stock, par value $.01 (the "Common Stock"). On March 4, 1998, the Board of Directors of the Company declared a three-for-two stock split of the Company's Common Stock which was effected in the form of a stock dividend paid on April 8, 1998 to stockholders of record on March 25, 1998. On May 11, 1998, the Company completed a secondary offering of 2,150,000 shares of Common Stock (plus an additional 152,500 shares on June 9, 1998 pursuant to an underwriter's over-allotment allocation) for an aggregate of 2,302,500 shares. The Company's principal executive offices are located at 2280 N. Greenville Avenue, Richardson, Texas 75082, and its telephone number at such address is (972) 234-2525. The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion watches and accessories. The Company developed the FOSSIL-Registered Trademark- brand name to convey a distinctive fashion, quality and value message and a brand image reminiscent of "America in the 1950s" that suggests a time of fun, fashion and humor. Since its inception in 1984, the Company has grown from its original flagship FOSSIL watch product into a diversified company offering an extensive line of fashion watches that includes its RELIC-Registered Trademark- and FSL-TM- brands as well as complementary lines of small leather goods, belts, handbags and sunglasses under certain of the Company's brands. In addition to developing its own brands, the Company leverages its development and production expertise by designing and manufacturing private label products for some of the most prestigious companies in the world, including national retailers, entertainment companies and theme restaurants. The Company's successful expansion of its product lines has contributed to its increasing net sales and operating profits. The Company has further capitalized on the increasing awareness of the FOSSIL brand by entering into various license agreements for other categories of fashion accessories and apparel, such as men's underwear and lounge wear and, most recently, outerwear and optical frames under the FOSSIL brand. In addition, the Company licenses the brands of other companies in order to further leverage its infrastructure. For example, in 1997 the Company entered into a multi-year license agreement with Giorgio Armani to design, manufacture, distribute and market a line of EMPORIO ARMANI-Registered Trademark- watches. The Company sells its products in approximately 15,000 retail locations in the United States through a diversified distribution network that includes approximately 2,000 department store doors, such as Federated/Macy's, May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears for its RELIC brand, as well as approximately 13,000 specialty retail locations. The Company also sells its products through a network of 37 Company-owned stores within the United States, with nine retail stores located in premier retail malls and 28 outlet stores located in major outlet malls. The Company's products are sold to department stores and specialty retail stores in over 80 countries worldwide through Company-owned foreign sales subsidiaries and through a network of approximately 50 independent distributors. The Company's foreign operations include a presence in Europe, South and Central America, the Caribbean, Canada, the Far East, Australia and the Middle East. In addition, 1 the Company's products are offered at retail locations in major airports in the United States, on cruise ships and in independently-owned, authorized FOSSIL retail stores and kiosks in certain international markets. The Company conducts substantially all of its United States operations through Fossil Partners, L.P. ("Partners"), a Texas limited partnership formed in August 1994, of which the Company is the sole general partner. The sole limited partner of Partners is Fossil Trust, a Delaware business trust, an indirect wholly owned subsidiary of the Company, formed in August 1994. The Company's outlet stores are leased and operated by Fossil Stores I, Inc., a Delaware corporation, a wholly owned subsidiary of the Company formed in November 1994. The Company's retail stores are leased and operated by Fossil Stores II, Inc., a Delaware corporation, a wholly owned subsidiary of Fossil Stores I, Inc., formed in November 1994. In addition, certain merchandising activities of the Company are conducted through Arrow Merchandising, Inc., a Texas corporation, a wholly owned subsidiary of the Company formed in August 1992. The Company's operations in Hong Kong relating to the procurement of watches from various manufacturing sources are conducted by Fossil (East) Limited ("Fossil East"), a wholly owned subsidiary of the Company organized under the laws of Hong Kong and acquired by the Company in 1992. Fossil Europe B.V. ("Fossil B.V."), a Netherlands holding company established in May 1993, is a wholly owned subsidiary of the Company. Fossil Europe GmbH ("Fossil GmbH") is a wholly owned German subsidiary of Fossil B.V., which markets and resells the Company's products throughout Europe. Fossil Italia, S.r.l. ("Fossil Italy"), a wholly owned Italian subsidiary of Fossil B.V., was formed in June 1994 and markets and sells the Company's products in Italy. Fossil France EURL, S.a.r.l. ("Fossil France"), a wholly owned subsidiary of Fossil B.V., was formed in 1995 to market and sell the Company's products in France. Fossil Spain, S. A. ("Fossil Spain"), a wholly owned subsidiary of Fossil B.V., was formed in 1996 and markets and sells the Company's products in Spain. Fossil Singapore, Ltd. ("Fossil Singapore"), a majority owned subsidiary of the Company, was formed in 1998 and markets and sells the Company's products in Singapore. FORWARD-LOOKING INFORMATION The statements contained in this Annual Report on Form 10-K ("Annual Report") that are not historical facts, including, but not limited to, statements found in this Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in the Annual Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: general economic conditions, competition, government regulation and possible future litigation, as well as the risks and uncertainties discussed in this Annual Report, including, without limitation, the portions referenced above, and the risks and uncertainties set forth on the Company's Current Report on Form 8-K dated March 30, 1999. INDUSTRY OVERVIEW WATCH PRODUCTS The Company believes that the current market for watches in the United States can be divided into four segments. One segment of the market consists of fine watches characterized by internationally known 2 brand names such as Concord, Piaget and Rolex. Watches offered in this segment are usually made of precious metals or stainless steel and may be set with precious gems. These watches are often manufactured in Switzerland and are sold by trade jewelers and in the fine jewelry departments of better department stores and other purveyors of luxury goods at retail prices ranging from $1,500 to $20,000. A second segment of the market consists of fine premium branded and designer watches manufactured in Switzerland and the Far East such as Gucci, Rado, Raymond Weil, Seiko and Swiss Army. These watches are sold at retail prices generally ranging from $150 to $1,500. The Company's EMPORIO ARMANI line generally competes in this market segment. A third segment of the market consists of watches sold by mass marketers, which include certain watches sold under the Timex brand name as well as certain watches sold by Armitron under various brand names and labels. Retail prices in this segment range from $5 to $40. The fourth segment of the market consists of moderately priced watches characterized by contemporary fashion and well known brand names. Moderately priced watches are typically manufactured in Japan or Hong Kong and are sold by department stores and specialty stores at retail prices ranging from $40 to $150. This market segment is targeted by the Company and its principal competitors, including the companies that market watches under the Guess?, Anne Klein II, Kenneth Cole and Swatch brand names, whose products attempt to reflect emerging fashion trends in accessories and apparel. Some of the watches in this sector are manufactured under license agreements with companies that market watches under various brand names, including Guess?, Anne Klein II and Kenneth Cole. The Company believes that one reason for the growth of this sector has been that fashion-conscious consumers have increasingly come to regard branded fashion watches not only as time pieces but also as fashion accessories. This trend has resulted in consumers owning multiple watches that may differ significantly in terms of style, features and cost. FASHION ACCESSORIES The Company believes that the fashion accessories market in the United States includes products such as small leather goods, handbags, belts, eyewear, neckwear, underwear, lounge wear, costume jewelry, gloves, hats, hosiery and socks. The Company believes that one reason for the growth in this line of business is that consumers are becoming more aware of accessories as fashion statements, and as a result, are purchasing brand name, quality items that complement other fashion items. These fashion accessory products are generally marketed through mass merchandisers, department stores and specialty shops, depending upon price and quality. Higher price point items include products offered by Coach, Dooney & Burke, Ralph Lauren and Donna Karan. Moderately priced fashion accessories are typically marketed in department stores and are characterized by contemporary fashion and well known brand names at reasonable price points, such as FOSSIL and RELIC. The Company currently offers small leather goods, handbags, belts, eyewear for both men and women and men's underwear and lounge wear through department stores and specialty retailers in the moderate to upper-moderate price range. Companies such as Calvin Klein, Tommy Hilfiger, Guess?, Nine West, Kenneth Cole and Liz Claiborne currently operate in this market. BUSINESS STRATEGY The Company's long-term goal is to capitalize on the strength of its growing consumer brand recognition and capture an increasing share of a growing number of markets by providing consumers with fashionable, high quality, value-driven products. In pursuit of this goal, the Company has adopted operating and growth strategies that provide the framework for the Company's future growth, while maintaining the consistency and integrity of its brands. 3 OPERATING STRATEGY - - FASHION ORIENTATION AND DESIGN INNOVATION. The Company is able to market its products to consumers with differing tastes and lifestyles by offering a wide range of product categories at a variety of price points. The Company attempts to stay abreast of emerging fashion and lifestyle trends affecting accessories and apparel, and it responds to these trends by making adjustments in its product lines several times each year. The Company differentiates its products from those of its competitors principally through innovations in fashion details, including variations in the treatment of dials, crystals, cases, straps and bracelets for the Company's watches and innovative treatments and details in its other accessories. - - COORDINATED PRODUCT PROMOTION. The Company coordinates in-house product design, packaging, advertising and in-store presentations to more effectively and cohesively communicate to its target markets the themes and images associated with its brands. For example, many of the Company's FOSSIL brand products and certain of its accessory products are packaged in metal tins decorated with nostalgic "America in the 1950s" designs consistent with the Company's marketing strategy and product image. In addition, the Company generally markets its fashion accessory lines through the same distribution channels as its watch lines, using similar in-store presentations, graphics and packaging. - - PRODUCT VALUE. The Company's products provide value to the consumer by offering fashionable, high quality components and features at suggested retail prices generally below those of competitive products of comparable quality. The Company is able to offer its watches at a reasonable price point by manufacturing them principally in the Far East at lower cost than comparable quality watches manufactured in Switzerland. In addition, the Company is able to offer its accessories at reasonable prices because of its close relationships with manufacturers in the Far East. Unlike certain of its principal competitors, the Company does not pay royalties on most of its products, which the Company believes allows it to enjoy certain cost advantages that enhance its ability to achieve attractive profit margins. - - CAPTIVE SUPPLIERS. The Company owns a majority interest in a number of watch assemblers with locations in Hong Kong and China. In addition, the Company maintains close relationships with accessory manufacturers in the Far East. The Company believes these relationships create a significant competitive advantage, as they allow the Company to produce quality products, reduce the delivery time to market and improve overall operating margins. - - ACTIVELY MANAGE RETAIL SALES. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category and style, primarily through EDI, and by assisting retailers in the conception, development and implementation of their marketing programs. As a result, the Company believes it enjoys close relationships with its principal retailers, often allowing it to influence the mix, quantity and timing of customer purchasing decisions. - - CENTRALIZED DISTRIBUTION. The Company distributes substantially all of its products sold in the United States and certain of its products sold in international markets from its warehouse and distribution center in Richardson, Texas. The Company also distributes its products to international markets from warehouse and distribution centers located in Germany, Italy, Hong Kong and Japan. The Company believes its centralized distribution capabilities enable it to reduce inventory risk, increase flexibility 4 in meeting the delivery requirements of its customers and maintain significant cost advantages as compared to its competitors. GROWTH STRATEGY - - INTRODUCE NEW PRODUCTS. The Company continually introduces new products within its existing brands and through brand extensions to attract a wide range of consumers with differing tastes and lifestyles. For example, in mid-1996 the Company introduced its FOSSIL BLUE line of watches, its FOSSIL Steel line in mid-1997, its BLUE TEQ line in late 1997 and its BIG TIC brand in the fall of 1998. In addition, the Company introduced its line of RELIC leather goods in 1997, its line of nylon bags and FSL sport bags in early 1998 and FOSSIL STEEL and FOSSIL BLUE sunwear in 1998. - - EXPAND INTERNATIONAL BUSINESS. The Company increased its efforts to align its FOSSIL brand watches sold internationally with its successful domestic assortments. The Company believes these efforts will increase its global brand recognition and allow it to leverage this recognition to successfully market the Company's accessory lines in international markets. - - ENTER INTO LICENSE AGREEMENTS. The Company leverages its brand recognition and its design and marketing expertise to expand the scope of its product offerings through the selective licensing of new product categories that complement its existing products. For example, the Company entered into license agreements with London Fog Industries in 1998 to offer FOSSIL outerwear beginning with the fall line in 1999 and with Safilo Group in 1999 to offer FOSSIL optical frames in the United States and Canada and optical frames and sunglasses in Italy later in 1999. - - EXPAND RETAIL LOCATIONS. The Company is currently expanding its Company-owned FOSSIL retail and outlet locations to further strengthen its brand image. The Company currently operates 37 retail and outlet stores and plans to open an additional six retail stores and five outlet stores in 1999. The Company also intends to continue to offer its products through additional independently-owned, authorized FOSSIL retail stores in airports, on cruise ships and in international markets. - - LEVERAGE INFRASTRUCTURE. The Company believes it has the design, marketing, manufacturing and distribution infrastructure in place to allow it to manage and grow its businesses. The Company continues to develop additional products and brands and seeks additional businesses and products to complement its existing business and allow it to leverage its existing infrastructure. PRODUCTS The Company designs, develops, markets and distributes fashion watches and accessories, including sunglasses, small leather goods, belts and handbags, principally under the FOSSIL, RELIC and FSL brand names. WATCH PRODUCTS In 1986, the Company introduced FOSSIL watches, its flagship product. The Company introduced its RELIC watches in 1990 and introduced its FSL watches in 1995. Since 1986, the Company has also contracted with retailers and other customers for the manufacture of watches primarily for sale under private labels. Sales of the Company's watches for fiscal years 1998, 1997 and 1996 accounted for approximately 75.5%, 72.4% and 71.9%, respectively, of the Company's gross sales. 5 The following table sets forth certain information with respect to the Company's watches:
SUGGESTED PRICE DISTRIBUTION WATCH BRANDS POINT RANGE AVERAGE PRICE CHANNELS BRAND NAMES - ------------ ----------- ------------- -------- ----------- FOSSIL $55-120 $73 Major dept. stores (Dayton BLUE TEQ, Dress, DRT, F2, FOSSIL Hudson Corp., Dillard's, Steel, FOSSIL BLUE, BIG TIC, Federated/Macy's, May Dept. FOSSIL Sterling, DEFENDER, Stores, Mercantile Stores Limited Edition, Skeleton, Company, Inc., Nordstrom, Vintage Inc. and Profitts) RELIC $45-75 $58 Major retailers (Ames Dept. Dressy, Metal Sport, Moon, Stores, Bealls Dept. Stores, Novelty, Pendant, Pocket, JCPenney, Kohl's Department RELIC Wet, RELIC Stores, Inc., Montgomery Adjust-A-Link, RELIC Ward & Co., Sears, Service Stainless Steel, Skeleton, Merchandise Co., Inc., SRI, Sport Uptons) FSL $30-150 $60 Major dept. stores, specialty FSL gift and apparel and sport specialty stores
PRIVATE LABEL AND PREMIUM PRODUCTS. The Company designs, markets and arranges for the manufacture of watches on behalf of certain retailers, entertainment companies, theme restaurants and other corporate customers such as Warner Bros. and Disney, as private label products or as premium and incentive items for use in various corporate events. Under this arrangement, the Company performs design and product development functions as well as acts as a sourcing agent for its customers by contracting for the manufacture of watches, managing the manufacturing process, inspecting the finished watches, purchasing the watches and arranging for their shipment to the United States. Participation in the private label and premium businesses provide the Company with certain advantages, including increased manufacturing volume, which may reduce the costs of manufacturing the Company's other watch products, and the strengthening of business relationships with its manufacturing sources. These lines provide income to the Company with reduced inventory risks and certain other carrying costs. EMPORIO ARMANI OROLOGI. In 1997, the Company entered into a multi-year, worldwide license agreement with Giorgio Armani for the manufacture, distribution and sale for a line of EMPORIO ARMANI watches. These products are sold through major department stores, specialty retailers and jewelry stores at retail prices generally ranging from $125 to $500 with an average price of $238. LICENSED WATCHES. The Company has entered into a number of license agreements for the sale of collectible watches under the Company's brands. Under these agreements, the Company designs, manufactures and markets the goods bearing the trademarks, trade names and logos of various entities through major department stores within the Company's channels of distribution. Sales of collectible watches 6 in 1998 included Felix the Cat, Mickey & Co., the X Files, Pink Panther, Peanuts, the Simpsons and I Love Lucy. FASHION ACCESSORIES In order to leverage the Company's design and marketing expertise and its close relationships with its principal retail customers, the Company has developed a line of sunglasses, men's and women's small leather goods, men's and women's belts, and handbags under the FOSSIL brand and selected fashion accessories under the RELIC and FSL brands. The Company currently sells its fashion accessories through a number of its existing major department store and specialty retail store customers. The Company generally markets its fashion accessory lines through the same distribution channels as its watch business, using similar in-store presentations, graphics and packaging. These fashion accessories are typically sold in locations adjacent to watch departments, which may lead to purchases by persons who are familiar with the Company's watches. Sales of the Company's accessory lines for fiscal years 1998, 1997 and 1996 accounted for approximately 23.5%, 26.4% and 26.5%, respectively of the Company's gross sales. SUNGLASSES. In 1995, the Company introduced a line of sunglasses sold under the FOSSIL brand name. The FOSSIL Sunwear collection offers designs for both men and women. The sunglass line features optical quality lenses in both plastic and metal frames, with classic and fashion styling similar to other FOSSIL products. Suggested retail prices for the Company's FOSSIL brand sunglasses generally range from $28 to $75 with an average price of $35. SMALL LEATHER GOODS AND BELTS. In 1992, the Company introduced a line of small leather goods and belts for women sold under the FOSSIL brand name. In July 1993, the Company introduced a line of small leather goods for men under the FOSSIL brand name and expanded the men's line to include belts in April 1994. These small leather goods are made of fine leathers and include items such as mini-bags, coin purses, key chains and wallets. Retail prices for the Company's FOSSIL brand small leather goods generally range from $15 to $70, with an average price of $35. Retail prices for the Company's FOSSIL brand men's and women's belts generally range from $20 to $40 with an average price of $26. In addition, the Company has introduced a line of small leather goods and belts under the RELIC brand name, with suggested retail prices generally ranging from $14 to $24. HANDBAGS. In 1996, the Company introduced a line of FOSSIL handbags and recently introduced an additional line of handbags under the FSL brand name. The Company's handbags are made of a variety of fine leathers and other materials. These products emphasize classic styles and incorporate a variety of creative designs. Suggested retail prices for the Company's handbags generally range from $35 to $170 with an average price of $85. LICENSED PRODUCTS In order to complement the Company's existing line of products and to increase consumer awareness of the FOSSIL brand, the Company has entered into various license agreements for other categories of fashion accessories and apparel. These license agreements provide for royalty income to the Company based on a percentage of net sales and are subject to certain guaranteed minimum royalties. MEN'S UNDERWEAR AND LOUNGE WEAR. The Company entered into a multi-year license agreement with Tugaloo River Boxer Co. for the manufacture, marketing and sale of men's underwear, sleepwear and 7 lounge wear in the United States under the FOSSIL brand. This product line was introduced in December 1997 and is available at better department stores and specialty retailers in the United States. APPAREL. The Company entered into a multi-year license agreement with London Fog in 1998 for the manufacture, marketing and sale of outerwear in the United States under the FOSSIL brand. This line is currently scheduled to be introduced in the fall of 1999. The Company also entered into a multi-year license agreement with Itochu Fashion Systems Co., Ltd. for the manufacture, marketing and sale of casual shirts, knit tops, pants, jackets and related separates for everyday wear in Japan under the FOSSIL brand. FUTURE PRODUCTS. In March 1999, the Company entered into a multi-year license agreement with the Safilo Group for the manufacture, marketing and sale of optical frames under the FOSSIL brand in the United States and Canada and optical frames and sunglasses in Italy. The line is currently scheduled for introduction to optical stores later in 1999. In addition, the Company continually evaluates opportunities to expand its product offerings in the future to include other accessory or apparel lines that would complement its existing product. DESIGN AND DEVELOPMENT The Company's products are created and developed by its in-house design staff in cooperation with various outside sources, including its manufacturing sources and component suppliers. Product design ideas are drawn from various sources and are reviewed and modified by the design staff to ensure consistency with the Company's existing product offerings and the themes and images that it associates with its products. Senior management is actively involved in the design process. In order to respond effectively to changing consumer preferences, the Company attempts to stay abreast of emerging lifestyle and fashion trends affecting accessories and apparel. In addition, the Company attempts to take advantage of the constant flow of information from the Company's customers regarding the retail performance of its products. The design staff reviews weekly sales reports provided by a substantial number of the Company's customers containing information with respect to sales and inventories by product category and style. Once a trend in the retail performance of a product category or style has been identified, the design and marketing staffs review their product design decisions to ensure that key features of successful products are incorporated into future designs. Other factors having an influence on the design process include the availability of components, the capabilities of the factories that will manufacture the products and the anticipated retail prices of and profit margins for the products. The Company differentiates its products from those of its competitors principally by incorporating into its product designs innovations in fashion details, including variations in the treatment of dials, crystals, cases and straps for the Company's watches and details and treatments of its other accessories. In certain instances, the Company believes that such innovations have allowed it to achieve significant improvements in consumer acceptance of its product offerings with only nominal increases in manufacturing costs. The Company believes that the substantial experience of its design staff will assist it in maintaining its current leadership position in watch design and in expanding the scope of its product offerings. MARKETING AND PROMOTION The Company's current FOSSIL brand advertising themes aim at evoking nostalgia for the simpler values and more optimistic outlook of the 1950s through the use of images of cars, trains, airliners and consumer products that reflect the classic American tastes of the period. These images are carefully 8 coordinated in order to convey the flair for fun, fashion and humor that the Company associates with its products. The Company's nostalgic "America in the 1950s" tin packaging concept for many of its watch products and certain of its accessories is an example of these marketing themes. The tins have become a signature piece to the FOSSIL image and have become popular with collectors. The Company participates in cooperative advertising programs with its major retail customers, whereby it shares the cost of certain of their advertising and promotional expenses. An important aspect of the marketing process involves the use of in-store visual support and other merchandising materials, including packages, signs, posters and fixtures. Through the use of these materials, the Company attempts to differentiate the space used to sell its products from other areas of its customers' stores. In addition, the Company frequently offers promotional gifts, such as T-shirts and caps, to consumers who purchase its products. The Company also provides its customers with a large number of preprinted, customized advertising inserts and from time to time stages promotional events designed to focus public attention on its products. The Company's in-house advertising department designs, develops and implements all aspects of the packaging, advertising, marketing and sales promotion of the Company's products. The advertising staff uses computer-aided design techniques to generate the images presented on product packaging and other advertising materials. The Company believes that the use of computers encourages greater creativity and reduces the time and cost required to incorporate new themes and ideas into effective product packaging and other advertising materials. Senior management is involved in monitoring the Company's advertising and promotional activities to ensure that themes and ideas are communicated in a cohesive manner to the Company's target audience. The Company advertises, markets and promotes its products to potential consumers through a variety of media, including catalog inserts, billboards and print media. The Company has advertised from time to time with billboards and other outdoor advertisements including bus panels in major metropolitan areas. The Company also periodically advertises in national fashion magazines such as GQ and GLAMOUR, as well as in trade publications such as WOMEN'S WEAR DAILY and DAILY NEWS RECORD. SALES AND CUSTOMERS The Company sells its products in approximately 15,000 retail locations in the United States through a diversified distribution network that includes approximately 2,000 department store doors, such as Federated/Macy's, May Department Stores and Dillard's for its FOSSIL brand and JCPenney and Sears for its RELIC brand, as well as approximately 13,000 specialty retail locations. The Company also sells its product at Company-owned FOSSIL retail stores located at retail malls in the United States and sells certain of its products at Company-owned FOSSIL outlet stores located at major outlet malls throughout the United States. The Company also sells its products at retail locations in major airports in the United States, on cruise ships and in independently-owned, authorized FOSSIL retail stores and kiosks in certain international markets. The Company generally does not have long-term contracts with any of its retail customers. All transactions between the Company and its retail customers are conducted on the basis of purchase orders, which generally require payment of amounts due to the Company on a net 30-day basis. DEPARTMENT STORES. For fiscal years 1998, 1997 and 1996, domestic department stores accounted for approximately 48.4%, 45.2% and 46.6% of the Company's net sales, respectively. In addition, in the same periods, the Company's 10 largest customers represented approximately 47.0%, 45.0% and 47.0% of net sales, respectively. For fiscal year 1996, Dillard's accounted for approximately 10.0% of the Company's 9 net sales. No other customer accounted for more than 10% of the Company's net sales in fiscal years 1998, 1997 and 1996. Certain of the Company's customers are under common ownership. Sales to the department store group under common ownership by Federated Department Stores accounted for approximately 10.0%, 10.8% and 11.1% of the Company's net sales in fiscal years 1998, 1997 and 1996, respectively. No other customer, when considered as a group under common ownership, accounted for more than 10% of the Company's net sales in fiscal years 1998, 1997 and 1996. INTERNATIONAL SALES. The Company's products are sold to department stores and specialty retail stores in over 80 countries worldwide through Company-owned foreign sales subsidiaries and through a network of approximately 50 independent distributors. The Company's foreign operations include a presence in Europe, South and Central America, the Caribbean, Canada, the Far East, Australia and the Middle East. Foreign distributors generally purchase products at uniform prices established by the Company for all international sales and resell them to department stores and specialty retail stores. The Company generally receives payment from its foreign distributors in United States currency. During the fiscal years 1998, 1997 and 1996, international and export sales accounted for approximately 29%, 31% and 30% of net sales, respectively. COMPANY-OWNED FOSSIL STORES. In 1995, the Company commenced operations of FOSSIL outlet stores at selected major outlet malls throughout the United States. The Company operated 28 outlet stores at the end of fiscal year 1998. These stores, which operate under the FOSSIL name, enable the Company to liquidate excess inventory and increase brand awareness. The Company's products in such stores are generally sold at discounts from 25% to 50% off the suggested retail price. The Company intends to open five additional outlet stores in 1999. In 1996, the Company commenced operations of full priced FOSSIL retail stores at some of the most prestigious retail malls in the United States in order to broaden the recognition of the FOSSIL brand name. The Company currently operates nine retail stores, located at Scottsdale Fashion Square (Scottsdale, Arizona), Universal Studios City Walk (Los Angeles, California), Aventura Mall (Aventura, Florida), the Galleria (Dallas, Texas and Houston, Texas), The Mall at Short Hills (Millburn, New Jersey), The Mall of America (Minneapolis, Minnesota), Tuttle Crossing (Columbus, Ohio) and Woodfield Mall (Schaumburg, Illinois). These stores, which operate under the FOSSIL name, carry a full assortment of FOSSIL merchandise which is generally sold at the suggested retail price. The Company intends to open six additional retail stores in 1999. INTERNET SALES. In November 1995, the Company began offering various products for sale to consumers through America Online's Market Place. The Company currently offers products through a "storefront" on America Online that is connected to the Company's website. These products include selected FOSSIL watches, sunglasses and leather goods, as well as NFL and NBA licensed watches. In November 1996, the Company established its own website at www.fossil.com. In addition to offering selected FOSSIL products, the Company also provides Company news and information, product announcements and promotional contests on the website. SALES PERSONNEL. The Company historically has relied on in-house sales personnel for the FOSSIL brand. The Company utilizes independent sales representatives to help develop the market for the FSL watch line into sports specialty stores and to expand the distribution of RELIC watches to selected retailers and to promote the sale of the Company's leather goods to certain specialty retailers. As of the end of fiscal year 1998, the Company had 75 in-house sales and customer service employees and 40 independent sales representatives. The Company's in-house sales personnel receive a salary and, in some cases, a commission 10 based on a percentage of gross sales attributable to specified accounts. Independent sales representatives generally do not sell competing product lines and are under contracts with the Company that are generally terminable by either party upon 30 days' prior notice. These independent contractors are compensated on a commission basis. CUSTOMER SERVICE. During the past several years, the retail industry has undergone significant consolidation. As a result of these developments, department stores and other major retailers have generally become more dependent on the resources and market expertise of their suppliers. The Company believes that this dependence has created opportunities for suppliers that provide superior service to their retail customers and are able to manage the retail sales process effectively. In order to take advantage of the opportunities presented by this increasing dependence, the Company has developed an approach to managing the retail sales process that involves monitoring its customers' sales and inventories by product category and style, primarily through EDI, and assisting in the conception, development and implementation of their marketing programs. For example, the Company reviews weekly selling reports prepared by certain of its principal customers and has established an active EDI program with certain of its customers. The Company also places significant emphasis on the establishment of cooperative advertising programs with its major retail customers. The Company believes that its management of the retail sales process has resulted in close relationships with its principal customers, often allowing it to influence the mix, quantity and timing of their purchasing decisions. The Company believes that its sales approach achieves high retail turnover in its products, which can result in attractive profit margins for its retail customers. The Company believes that the resulting profit margins for its retail customers encourage them to devote greater selling space to its products within their stores and enable the Company to work closely with buyers in determining the mix of products any store should carry. In addition, the Company believes that the buyers' familiarity with the Company's sales approach should facilitate the introduction of new products through its existing distribution network. The Company permits the return of damaged or defective products. In addition, although it has no obligation to do so, the Company accepts limited amounts of product returns from its customers in certain other instances. Accordingly, the Company provides allowances for the estimated amount of product returns. The allowances for product returns for the fiscal years 1998, 1997 and 1996 were $13,966,000, $10,576,000 and $8,854,000, respectively. Since 1990, the Company has not experienced any returns in excess of the aggregate allowances therefor. BACKLOG For fiscal year 1998, the Company had unfilled customer orders of approximately $22,237,000 compared to $16,223,000 and $15,852,000 for fiscal years 1997 and 1996, respectively. It is the practice of a substantial number of the Company's customers not to confirm orders by delivering a formal purchase order until a relatively short time prior to the shipment of goods. As a result, the amounts shown above include confirmed orders and orders that the Company believes will be confirmed by delivery of a formal purchase order. A majority of such amounts represent orders that have been confirmed. The remainder of such amounts represent orders that the Company believes, based on industry practice and prior experience, will be confirmed in the ordinary course of business. The Company's backlog at a particular time is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. 11 MANUFACTURING The Company's products are manufactured to its specifications by independent contractors and by companies in which the Company holds a majority interest. Substantially all of the Company's watches are manufactured by approximately 29 factories located primarily in Hong Kong and China, and to a lesser extent in Japan. The Company believes that its policy of outsourcing products allows it to achieve increased production flexibility while avoiding significant capital expenditures, build-ups of work-in-process inventory and the costs of managing a substantial production work force. The principal components used in the manufacture of the Company's watches are cases, crystals, dials, movements and straps. These components are obtained by the Company's manufacturing sources from a large number of suppliers located principally in Hong Kong, Japan, China, Taiwan, Italy and Korea. The Company estimates that the majority of the movements used in the manufacture of the Company's watches are supplied by two principal vendors. No other single component supplier accounted for more than 10% of component supplies in 1998. Although the Company does not normally engage in direct transactions with component suppliers, in some cases it actively reviews the performance of such suppliers and makes recommendations to its manufacturing sources regarding the sourcing of components. The Company does not believe that its business is materially dependent on any single component supplier. The Company believes that it has established and maintains close relationships with a number of watch manufacturers located in Hong Kong and Japan. In 1998, three separate watch manufacturers in which the Company holds a majority interest, each accounted for 10% or more of the Company's watch supplies. The loss of any one of these manufacturers could temporarily disrupt shipments of certain of the Company's watches. However, as a result of the number of suppliers from which the Company purchases its watches, the Company believes that it could arrange for the shipment of goods from alternative sources within approximately 30 days on terms that are not materially different from those currently available to the Company. Accordingly, the Company does not believe that the loss of any single supplier would have a material adverse effect on the Company's business. In general, however, the future success of the Company will depend upon its ability to maintain close relationships with its current suppliers and to develop long-term relationships with other suppliers that satisfy the Company's requirements for price and production flexibility. The Company's products are manufactured according to plans that reflect management's estimates of product performance based on recent sales results, current economic conditions and prior experience with manufacturing sources. The average lead time from the commitment to purchase products through the production and shipment thereof ranges from two to three months in the case of watches, from three to six months in the case of sunglasses and from three to four months in the case of leather goods. The Company believes that the close relationships that it has established and maintains with its principal manufacturing sources constitute a significant competitive advantage and allow it to quickly and efficiently introduce innovative product designs and alter production in response to the retail performance of its products. QUALITY CONTROL The Company's quality control program attempts to ensure that its products meet the standards established by its design staff. Samples of products are inspected by the Company prior to the placement of orders with manufacturing sources to ensure compliance with its specifications. The operations of the Company's manufacturing sources located in Hong Kong are monitored on a periodic basis by Fossil (East). 12 Substantially all of the Company's watches and certain of its other accessories are inspected by personnel of Fossil East or by the manufacturer prior to shipment to the Company. In addition, the Company performs quality control checks on its products upon receipt at the Company's facility. DISTRIBUTION Upon completion of manufacturing, the Company's products are shipped to its warehousing and distribution centers in Richardson, Texas, Italy, Japan, Hong Kong and Germany from which they are shipped to customers in selected markets. Since July 1997, the Company has owned and operated a new warehouse and distribution facility in Richardson, Texas, adjacent to the Company's headquarters, to maximize the Company's inventory management and distribution capabilities. The Company's warehouse and distribution facility is operated in a special purpose subzone established by the United States Department of Commerce Foreign Trade Zone Board. As a result of the establishment of the subzone, the Company enjoys certain economic and operational advantages: (i) the Company may not have to pay duty on imported merchandise until it leaves the subzone and enters the United States market, (ii) the Company does not pay any United States duty on merchandise if the imported merchandise is subsequently re-exported, and (iii) the Company does not pay local property tax on inventory located within the subzone. MANAGEMENT INFORMATION SYSTEMS INVENTORY CONTROL. The Company maintains inventory control systems at its facilities that enable it to track each item of merchandise from receipt from its manufacturing sources, through shipment to its customers. To facilitate this tracking, a significant number of products sold by the Company are pre-ticketed and bar coded prior to shipment to its retail customers. The Company's inventory control systems report shipping, sales and individual SKU level inventory information. The Company manages the retail sales process by monitoring customer sales and inventory levels by product category and style, primarily through EDI. The Company believes that its distribution capabilities enable it to reduce inventory risk and increase flexibility in responding to the delivery requirements of its customers. The Company's management believes that its EDI efforts will continue to grow in the future as customers focus further on increasing operating efficiencies. In addition, the Company maintains systems that are designed to track inventory movement through the FOSSIL retail and outlet stores. Detailed sales transaction records are accumulated on each store's UNIX-based point-of-sale ("POS") system and polled nightly by the Company on a system that runs on an IBM RS/6000 system. YEAR 2000. Beginning in 1997, the Company initiated a program to evaluate whether internally developed and purchased computer programs that utilize embedded date codes could experience operational problems when the year 2000 is reached. The results of this program indicated that certain of the Company's systems and the systems of certain of its customers and vendors require remediation to properly address the Year 2000 problem. The Company plans to complete all remediation efforts for its critical systems prior to the year 2000. Based upon its evaluation to date, management currently believes that while the Company will incur internal and external costs to address the Year 2000 problem, such costs will not have a material impact on the operations, cash flows or financial condition of the Company in future years. SEE Management's Discussion and Analysis of Financial Condition and Results of Operation contained in the Company's Annual Report to Stockholder which is an exhibit to this Annual Report on Form 10-K. 13 WARRANTY AND REPAIR The Company's FOSSIL watch products are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase. The Company's sunglass line is covered by a one year limited warranty against defects in materials or workmanship. Defective products returned by consumers are processed at the Company's warehousing and distribution centers. In most cases, defective products under warranty are repaired by the Company's personnel. Products under warranty that cannot be repaired in a cost-effective manner are replaced by the Company at no cost to the customer. The Company also performs watch repair services on behalf of certain of its private label customers. GOVERNMENTAL REGULATIONS IMPORTS AND IMPORT RESTRICTIONS. Most of the Company's products are manufactured overseas. As a result, the United States and the countries in which the Company's products are manufactured or sold may from time to time modify existing or impose new quotas, duties, tariffs or other restrictions in a manner that adversely affects the Company. For example, the Company's products imported to the United States are subject to United States customs duties and, in the ordinary course of its business, the Company may from time to time be subject to claims by the United States Customs Service for duties and other charges. Factors which may influence the modification or imposition of these restrictions include the determination by the United States Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to United States firms that rely on intellectual property, trade disputes between the United States and a country that leads to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably by the government of the United States. The Company cannot predict the effect, if any, these events would have on its operations, especially in light of the concentration of its manufacturing operations in Hong Kong and China. GENERAL. The Company's sunglass products are subject to regulation by the United States Food and Drug Administration as medical devices. The Company does not believe that compliance with such regulations is material to its operations. In addition, the Company is subject to various state and federal regulations generally applicable to similar businesses. TRADEMARKS The Company has registered the FOSSIL and RELIC trademarks for use on the Company's watches, leather goods and other fashion accessories, and has applied for registration of the FSL trademark for use on the Company's watches and other accessories in the United States. The Company has also registered or applied for the registration of certain other marks used by the Company in conjunction with the sale and marketing of its products and services. In addition, the Company has registered certain of its trademarks, including FOSSIL, RELIC and FSL, in certain foreign countries, including a number of countries located in Europe, the Far East, the Middle East, South America and Central America. The Company also has certain trade dress rights in, and has applied for registration of, the distinctive rectangular tins in which the Company packages the majority of its FOSSIL watch products. The Company regards its trademarks and trade dress as valuable assets and believes that they have significant value in the marketing of its products. The Company intends to protect its trademarks and trade dress rights vigorously against infringement. 14 COMPETITION There is intense competition in each of the businesses in which the Company competes. The Company's watch business competes with a number of established manufacturers, importers and distributors such as Guess? Anne Klein II, Kenneth Cole and Swatch. In addition, the Company's leather goods and sunglass businesses compete with a large number of established companies that have significantly greater experience than the Company in designing, developing, marketing and distributing such products. In all of its businesses, the Company competes with numerous manufacturers, importers and distributors who have significantly greater financial, distribution, advertising and marketing resources than the Company. The Company's competitors include distributors that import watches and accessories from abroad, domestic companies that have established foreign manufacturing relationships and companies that produce accessories domestically. The Company competes primarily on the basis of style, price, value, quality, brand name, advertising, marketing and distribution. In addition, the Company believes that its ability to identify and respond to changing fashion trends and consumer preferences, to maintain existing relationships and develop new relationships with manufacturing sources, to deliver quality merchandise in a timely manner and to manage the retail sales process are important factors in its ability to compete. The Company considers that the risk of significant new competitors is mitigated to some extent by barriers to entry such as high startup costs and the development of long-term relationships with customers and manufacturing sources. During the past few years, it has been the Company's experience that better department stores and other major retailers have been increasingly unwilling to source products from suppliers who are not well capitalized or do not have a demonstrated ability to deliver quality merchandise in a timely manner. There can be no assurance, however, that significant new competitors will not emerge in the future. EMPLOYEES As the end of fiscal year 1998, the Company (excluding the Company's foreign subsidiaries) had 535 full-time employees, including 75 in executive or managerial positions and the balance in design, advertising, sales, quality control, distribution, clerical and other office positions. As of the end of fiscal year 1998, the Company's foreign subsidiaries had 293 full-time employees, including 21 in managerial positions. The Company has not entered into any collective bargaining agreements with its employees. The Company believes that its relations with its employees are generally good. ITEM 2. PROPERTIES In July 1994, the Company completed construction of its current corporate headquarters located in a 150,000 square foot facility in Richardson, Texas. In July 1997, the Company completed construction of a 138,000 square foot distribution center located on land immediately adjacent to its headquarters. These facilities contain the general office, warehousing and distribution functions of the Company and are located on approximately 20 acres of land. The Company owns both facilities and the land on which each is located. As of the end of fiscal year 1998, the Company had entered into 10 lease agreements for retail space at prime locations in the United States for the sale of its full assortment of products. The leases, 15 including renewal options, expire at various times from 2003 to 2010 and provide for minimum annual rentals above specified net sales amounts and for the payment of additional rent based on a percentage of sales ranging from 6% to 9%. The Company is also required to pay its pro rata share of the common area maintenance costs at each retail mall, including, real estate taxes, insurance, maintenance expenses and utilities. The Company also leases retail space at selected outlet centers throughout the United States for the sale of its products. As of the end of fiscal year 1998, the Company had entered into 28 such leases. The leases, including renewal options, expire at various times from 2002 to 2010, and provide for minimum annual rentals and for the payment of additional rent based on a percentage of sales above specified net sales amounts ranging from 4% to 6%. The Company is also required to pay its pro rata share of the common area maintenance costs at each outlet center, including, real estate taxes, insurance, maintenance expenses and utilities. The Company also leases showrooms in Atlanta, Chicago, Los Angeles and New York City, which are used to display the Company's products to its retailers. The Company leases approximately 37,600 square feet of office, warehouse and assembly space in Hong Kong pursuant to a lease agreement that expires in December 1999. The Company leases approximately 12,000 square feet of office and warehouse space in Erlstatt, Germany pursuant to a lease agreement that expires in 2002. The Company leases approximately 2,800 square feet of office space in Vicenza, Italy and an additional 3,100 square feet of warehouse and storage space. The Company also leases warehouse and office space in Tokyo, Japan. The Company believes that its existing facilities are well maintained, in good operating condition and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company is a party or to which its properties are subject, other than routine litigation incident to the Company's business which is not material to the Company's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year 1998. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq National Market under the symbol "FOSL." Quotation of the Company's Common Stock began on the Nasdaq National Market on April 8, 1993. The following table sets forth the range of quarterly high and low sales prices per share of the Company's Common Stock on the Nasdaq National Market for the fiscal years ended January 2, 1999 and January 3, 1998. Such prices have been adjusted to reflect a three-for-two stock split (the "3 for 2 Stock Split") of the Company's Common Stock effected as a fifty percent (50%) stock dividend declared on March 4, 1998, paid on April 8, 1998 to all stockholders of record on March 25, 1998.
HIGH LOW ---- --- Fiscal year beginning January 3, 1998: First Quarter $ 21 2/3 $ 14 1/2 Second Quarter 27 3/8 17 7/8 Third Quarter 27 13 Fourth Quarter 30 5/8 13 Fiscal year beginning January 1, 1997: First Quarter $ 9 3/4 $ 7 Second Quarter 11 7/8 8 1/4 Third Quarter 15 1/2 11 Fourth Quarter 17 5/8 11
As of March 30, 1999, the Company estimates that there were approximately 2,600 beneficial owners of the Company's Common Stock, represented by approximately 132 holders of record. DIVIDEND POLICY. The Company expects that it will retain all available earnings generated by its operations for the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. Any future determination as to dividend policy will be made in the discretion of the Board of Directors of the Company and will depend on a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. The Company declared the 3 for 2 Stock Split on March 4, 1998, effected as a fifty percent (50%) stock dividend paid on April 8, 1998 to all stockholders of record on March 25, 1998. ITEM 6. SELECTED FINANCIAL DATA The information appearing under "Financial Highlights" beginning on page 5 of the Fossil, Inc. 1998 Annual Report is incorporated herein by reference. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under "Management's Discussion and Analysis " beginning on page 18 of the Fossil, Inc. 1998 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under "Management's Discussion and Analysis" and "Financial Information" beginning on pages 18 and 37, respectively, of the Fossil, Inc. 1998 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The information appearing under "Financial Information" beginning on page 37 of the Fossil, Inc. 1998 Annual Report is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company has had no disagreements with its accountants to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this Item is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of Report. 1. FINANCIAL STATEMENTS: The Financial Statements appearing under "Financial Information" beginning on page 37 of the Fossil, Inc. 1998 Annual Report are incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULE: The following Financial Statement Schedule and related Auditor's Report are contained herein on pages S-1 and S-2 of this Report. Schedule II - Valuation and Qualifying Accounts 3. EXHIBITS: 3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, registration no.33-45357, filed with the Securities and Exchange Commission). 3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.4 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.4(2) Description of Bonus Program (incorporated herein by reference to Exhibit 10.4 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 19 10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit 10.12 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992 between Fossil, Inc. and Fossil East Ltd. (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the principal amount of $5,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994 (incorporated by reference to Exhibit 10.7 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners, L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.8 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.10 Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.11 Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to Exhibit 10.13 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 Services and Operations Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil Stores I, Inc. dated December 1, 1994 (incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995 by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.17 Joint Development Agreement entered into on December 25, 1995 by and between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 20 10.18 Joint Venture Agreement entered into on December 22, 1994 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18, 1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick (incorporated by reference to Exhibit 10.32 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1996). 10.21 Stock Purchase Agreement dated February 1, 1997, by and between Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the transition period from January 1, 1997 to April 5, 1997). 10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.24(1,2)Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan. 10.25(1,2)Fossil, Inc. and Affiliates Deferred Compensation Plan. 10.26 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 13(1) Fossil, Inc. 1998 Annual Report to Stockholders. 21.1(1) Subsidiaries of Fossil, Inc. 23.1(1) Consent of Independent Auditors. 27 (1) Financial Data Schedule.
(1) Filed herewith. (2) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The Company did not file any report on Form 8-K during the last quarter of the period covered by this Report. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Richardson, State of Texas, on April 1, 1999. FOSSIL, INC. /s/ Tom Kartsotis -------------------------------------------- TOM KARTSOTIS, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE /s/ Tom Kartsotis Chairman of the Board, Chief Executive April 1, 1999 - ------------------------------- Officer and Director TOM KARTSOTIS (Principal Executive Officer) /s/ Kosta N. Kartsotis President and Chief Operating Officer April 1, 1999 - ------------------------------- and Director KOSTA N. KARTSOTIS /s/ Randy S. Kercho Executive Vice President, Chief Financial April 1, 1999 - ------------------------------- Officer and Treasurer RANDY S. KERCHO (Principal Financial and Accounting Officer) /s/ Michael W. Barnes Executive Vice President and Director April 1, 1999 - ------------------------------- MICHAEL W. BARNES /s/ Jal S. Shroff Director April 1, 1999 - ------------------------------- JAL S. SHROFF /s/ Kenneth W. Anderson Director April 1, 1999 - ------------------------------- KENNETH W. ANDERSON /s/ Alan J. Gold Director April 1, 1999 - ------------------------------- ALAN J. GOLD /s/ Donald J. Stone Director April 1, 1999 - ------------------------------- DONALD J. STONE
22 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Fossil, Inc.: We have audited the consolidated financial statements of Fossil, Inc. and subsidiaries as of January 2, 1999 and January 3, 1998 and for each of the three years in the period ended January 2, 1999 and have issued our report thereon dated February 19, 1999, which report expressed an unqualified opinion; such consolidated financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audit also included the consolidated financial statement schedule of Fossil, Inc. and subsidiaries listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Dallas, Texas February 19, 1999 S-1 SCHEDULE II FOSSIL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Fiscal Years 1996, 1997, and 1998
Additions --------- Charged Deductions Balance at (Credited) to -------------- Beginning of Costs and Actual Returns Balance at End Classification Period Expenses or Writeoffs of Period - -------------- ------ -------- ------------ --------- Fiscal Year 1996: Accounts receivable allowances: Sales returns 9,034,124 12,524,626 (12,704,297) 8,854,453 Bad debts 2,856,066 2,103,499 (667,419) 4,292,146 Cash discounts 106,118 218,500 (110,747) 213,871 Inventory in transit for estimated customer returns (4,827,000) (6,330,967) 6,694,021 (4,463,946) Fiscal Year 1997: Accounts receivable allowances: Sales returns 8,854,453 17,399,057 (15,677,328) 10,576,181 Bad debts 4,292,146 2,024,647 (1,616,962) 4,699,831 Cash discounts 213,871 204,448 (229,722) 188,597 Inventory in transit for estimated customer returns (4,463,946) (9,715,573) 8,484,687 (5,694,831) Fiscal Year 1998: Accounts receivable allowances: Sales returns 10,576,181 22,967,297 (19,577,057) 13,966,421 Bad debts 4,699,831 4,004,929 (1,840,395) 6,864,365 Cash discounts 188,597 248,965 (209,335) 228,227 Inventory in transit for estimated customer returns (5,694,831) (12,595,116) 10,804,762 (7,485,185)
S-2 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 3.1 Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, registration no.33-45357, filed with the Securities and Exchange Commission). 3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 3.5 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 3.6 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.1 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.4(2) Description of Bonus Program (incorporated herein by reference to Exhibit 10.4 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.5 Non-Competition Agreement dated December 31, 1992 between Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by reference to Exhibit 10.12 of the Company's Registration Statement of Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.6 Amended and Restated Buying Agent Agreement dated March 21, 1992 between Fossil, Inc. and Fossil East Ltd. (incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 Commercial/Real Estate Note dated as of August 31, 1994, in the principal amount of $5,000,000 executed by Fossil Partners, L.P. and payable to the order of First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.8 Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994 (incorporated by reference to Exhibit 10.7 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 10.9 Indemnity Agreement dated as of August 31, 1994 from Fossil Partners, L.P. and Fossil, Inc. to First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.8 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.10 Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to Exhibit 10.12 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.11 Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to Exhibit 10.13 of the Company's Report on Form 10-Q for the quarterly period ended September 30, 1994). 10.12 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.33 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 Services and Operations Agreement by and between Fossil Partners, L.P. and Fossil New York, Inc. dated October 1, 1994 (incorporated by reference to Exhibit 10.34 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.14 Overhead Allocation Agreement by and between Fossil Partners, L.P. and Fossil Stores I, Inc. dated December 1, 1994 (incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.15 Second Amended and Restated Loan Agreement entered into on May 2, 1995 by and between First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.16 Stock Pledge Agreement entered into on May 2, 1995 by and between Fossil, Inc. and First Interstate Bank of Texas, N.A. (incorporated by reference to Exhibit 10.3 of the Company's Report on Form 10-Q for the quarterly period ended June 30, 1995). 10.17 Joint Development Agreement entered into on December 25, 1995 by and between Fossil, Inc., Seiko Instruments, Inc, and Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.18 Joint Venture Agreement entered into on December 22, 1994 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (without exhibits) (incorporated by reference to Exhibit 10.44 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.19 Amendment No. 1 to Joint Venture Agreement entered into on January 18, 1995 by and between Fossil, Inc., Fossil Europe B.V., Enrico Margaritelli, Zuglia, S.r.l. and Bluewhale Holding, S.a. (incorporated by reference to Exhibit 10.45 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.20(2) Letter Agreement dated October 4, 1995 between Fossil, Inc. and Mark D. Quick (incorporated by reference to Exhibit 10.32 of the Company's Annual Report on Form 10-K for the year-ended December 31, 1996). EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 10.22 Stock Purchase Agreement dated February 1, 1997, by and between Bluewhale Holding S.a., and Fossil Europe B.V. (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the transition period from January 1, 1997 to April 5, 1997). 10.22(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.23(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 10.24(1,2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan. 10.25(1,2) Fossil, Inc. and Affiliates Deferred Compensation Plan. 10.26 Third Amended and Restated Loan Agreement dated June 29, 1998, by and among Wells Fargo Bank (Texas), National Association, a national banking association formerly known as First Interstate Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc., and Fossil Stores II, Inc. (without exhibits) (incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarterly period ended July 4, 1998). 13(1) Fossil, Inc. 1998 Annual Report to Stockholders. 21.1(1) Subsidiaries of Fossil, Inc. 23.1(1) Consent of Independent Auditors. 27 (1) Financial Data Schedule. (1) Filed herewith. (2) Management contract or compensatory plan or arrangement. EX-10.21 2 EXHIBIT 10.21 AMENDMENT NUMBER ONE TO THE 1993 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN OF FOSSIL, INC. The following Amendment to the 1993 Nonemployee Director Stock Option Plan of Fossil, Inc. (the "Plan"), as authorized by the Board of Directors of Fossil, Inc. (the "Company"), is adopted as of the effective date specified herein: Notwithstanding the provisions of paragraph 13 of the Plan, grants of Options under the Plan commencing on January 1, 1999, shall not be adjusted for the 3-for-2 split of the Common Stock of the Company effected as a stock dividend on April 8, 1998 to all stockholders of record on March 25, 1998. All other terms and conditions of the Plan shall remain in full force and effect. This amendment shall become effective as of December 31, 1998 Fossil, Inc. By: ------------------------------------ Tom Kartsotis Chairman and Chief Executive Officer EX-10.25 3 EXHIBIT 10.25 FOSSIL, INC. AND AFFILIATES DEFERRED COMPENSATION PLAN TABLE OF CONTENTS SECTION ONE DEFINITIONS 1 1.1 "ADDENDUM(s)" 1 1.2 "ACCOUNT(s)" 1 1.3 "INSTALLMENT PAYMENT" 1 1.4 "APPLICABLE INTEREST RATE" 1 1.5 "BENEFICIARY" 1 1.6 "BENEFIT" 1 1.7 "BOARD" 1 1.8 "BONUS" 1 1.9 "BUSINESS DAY" 2 1.10 "CHANGE OF CONTROL" 2 1.11 "CODE" 2 1.12 "COMMITTEE" 2 1.13 "COMPANY" 2 1.14 "CONTRIBUTIONS" 3 1.15 "DEFERRED PAYMENTS" 3 1.16 "DEFERRED PAYMENT DATE" 3 1.17 "DESIGNATED AFFILIATE" 3 1.18 "EARNINGS" 3 1.19 "EFFECTIVE DATE" 3 1.20 "ELECTION FORM" 3 1.21 "ELIGIBLE INDIVIDUAL" 3 1.22 "EMPLOYEE" 3 1.23 "EMPLOYER" 3 1.24 "EMPLOYER CONTRIBUTION" 3 1.25 "EMPLOYER ACCOUNT" 3 1.26 "ENTRY DATE" 4 1.27 "ERISA" 4 1.28 "FINAL DEFERRAL FILING DATE" 4 1.29 "INVESTMENT DATE" 4 1.30 "LUMP SUM" 4 1.31 "MEASUREMENT PREFERENCES" 4 1.32 "PARTICIPANT" 4 1.33 "PLAN" 4 1.34 "PLAN YEAR" 4 1.35 "QUARTER" 4 1.36 "RULES OF GENERAL APPLICATION" 4 1.37 "THIRD-PARTY RECORDKEEPER" 4 1.38 "SALARY" 4 1.39 "SALARY DEFERRAL CONTRIBUTIONS" 4 1.40 "SALARY DEFERRAL ACCOUNT" 5 1.41 "SEPARATES" OR "SEPARATION" 5 1.42 "TRUST" 5 1.43 "VALUATION DATE" 5 1.44 "VEST" OR "VESTING" 5 SECTION TWO ADMINISTRATION 5 2.1 APPOINTMENT OF COMMITTEE. 5 2.2 EMPLOYER DUTIES 5 2.3 AUTHORITY OF COMMITTEE. 5 2.4 ACTION BY COMMITTEE. 5 2.5 MEETINGS OF COMMITTEE. 5 2.6 POWERS OF COMMITTEE AND COMPANY. 6 2.7 INDEMNIFICATION. 6 2.8 BOND AND EXPENSES. 6 2.9 RELIANCE ON TABLES 6 SECTION THREE PARTICIPATION 6 SECTION FOUR CONTRIBUTIONS 7 4.1 SALARY DEFERRAL CONTRIBUTIONS. 7 4.2 CREDITING OF SALARY DEFERRAL CONTRIBUTIONS. 7 4.3 EMPLOYER CONTRIBUTIONS. 8 4.4 DISPOSITION OF CONTRIBUTIONS. 8 SECTION FIVE PARTICIPANT'S ACCOUNTS AND INVESTMENTS 8 5.1 ESTABLISHMENT OF ACCOUNT. 8 5.2 EARNINGS CREDITED TO ACCOUNTS. 8 5.3 INVESTMENT DIRECTION. 8 5.4 STATEMENTS. 9 SECTION SIX VESTING 9 6.1 SALARY DEFERRAL ACCOUNT. 9 6.2 EMPLOYER ACCOUNT. 9 SECTION SEVEN DISTRIBUTION OF BENEFIT 9 7.1 FORM AND TIMING OF DISTRIBUTION. 9 7.2 ELECTION OF DEFERRED PAYMENTS. 10 7.3 INSTALLMENT PAYMENTS. 10 7.4 CHANGE IN CONTROL. 10 7.5 HARDSHIP DISTRIBUTION. 10 7.6 IN-SERVICE WITHDRAWAL. 11 7.7 SOURCE OF DISTRIBUTION. 11 SECTION EIGHT DESIGNATION OF BENEFICIARIES 11 8.1 DESIGNATION BY PARTICIPANT 11 8.2 LACK OF DESIGNATION. 11 SECTION NINE AMENDMENT AND TERMINATION 12 SECTION TEN GENERAL PROVISIONS 12 10.1 NO ASSIGNMENT. 12 10.2 INCAPACITY. 12 10.3 CLAIMS PROCEDURE. 12 10.4 FINAL RESOLUTION OF DISPUTES RELATING TO PLAN 13 10.5 INFORMATION REQUIRED. 13 10.6 COMMUNICATIONS BY, AND INFORMATION FROM, PARTICIPANT. 13 10.7 NO RIGHTS IMPLIED. 14 10.8 COMMUNICATIONS BY COMMITTEE OR EMPLOYER. 14 10.9 INTERPRETATIONS AND ADJUSTMENTS. 14 10.10 NO LIABILITY FOR GOOD FAITH DETERMINATIONS. 14 10.11 NO EMPLOYMENT RIGHTS. 14 10.12 WITHHOLDING OF TAXES. 14 10.13 WAIVERS. 15 10.14 RECORDS. 15 10.15 SECURITIES LAWS. 15 10.16 SEVERABILITY. 15 10.17 CAPTIONS AND GENDER. 15 10.18 CHOICE OF LAW. 15 10.19 EFFECTIVE DATE AND TERMINATION DATE. 15
FOSSIL, INC. AND AFFILIATES DEFERRED COMPENSATION PLAN Fossil, Inc. hereby establishes the Fossil, Inc. And Affiliates Deferred Compensation Plan to give a select group of highly compensated employees the opportunity to defer a portion of their compensation and possibly receive deferred employer contributions. For purposes of the Code, the Employers intend this Plan to be an unfunded, unsecured promise to pay on the part of each Employer. For purposes of ERISA, the Employers intend this Plan to be an unfunded plan solely for the benefit of a select group of management or highly compensated employees of the Employers for the purpose of qualifying the Plan for the "top hat" plan exception under sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. SECTION ONE DEFINITIONS 1.1 "ADDENDUM(s)" shall mean, collectively, the pages which are attached to this Plan document, and incorporated by reference, on which shall be reflected the information described in SECTION 4.3. 1.2 "ACCOUNT(s)" shall mean, collectively, the Salary Deferral Account, and the Employer Account, maintained for each Participant, except that when it shall be appropriate to refer to a particular Account, reference shall be to that Account. 1.3 "INSTALLMENT PAYMENT" shall mean an annual distribution, in cash, of the Participant's Account balance over a period of years as provided for in SUBSECTIONS 7.2 AND 7.3. 1.4 "APPLICABLE INTEREST RATE" shall mean, for each day during a period of reference (but computed without compounding), a percentage equal to the product of (i), (ii) and (iii), where (i) is the sum of the one (1) year London Interbank Offered Rate ("LIBOR") as reported in the Wall Street Journal as of (x) the first Business Day, plus (y) the last Business Day, occurring during such period of reference, (ii) is fifty percent (50%), and (iii) is a quotient of 1 divided by 360. 1.5 "BENEFICIARY" shall mean the person(s), entity or entities designated by the Participant as the beneficiary of balance of his Benefit. 1.6 "BENEFIT" shall mean the Vested amount credited to the Participant's Account at the time of reference. 1.7 "BOARD" shall mean the Board of Directors of the Company. 1.8 "BONUS" shall mean amounts of compensation paid by an Employer which is not regular salary, wages or commissions, and which is determined to be a Bonus by the Committee. 1.9 "BUSINESS DAY" shall mean, with respect to each Measurement Preference, a day on which the exchange on which it is traded is operating. 1.10 "CHANGE OF CONTROL" shall mean the first to occur of the following: (a) a dissolution or liquidation of the Company; or (b) a merger or consolidation (other than a merger effecting a re-incorporation of the Company in another state or any other merger or a consolidation in which the shareholders of the surviving corporation and their proportionate interests therein immediately after the merger or consolidation are substantially identical to the shareholders of the Company and their proportionate interests therein immediately prior to the merger or consolidation) in which the Company is not the surviving corporation (or survives only as a subsidiary of another corporation as a result of a transaction in which the shareholders of the parent of the Company and their proportionate interests therein immediately after the transaction are not substantially identical to the shareholders of the Company and their proportionate interests therein immediately prior to the transaction; provided, however, that the Board may at any time prior to such a merger or consolidation provide by resolution that there has been no Change in Control and that the foregoing provisions of this parenthetical shall not apply if a majority of the Board of Directors of such parent immediately after the transaction consists of individuals who constituted a majority of the Board immediately prior to the transaction); (c) a transaction in which any person becomes the owner of fifty percent (50%) or more of the total combined voting power of all classes of stock of the Company (provided, however, that the Board may at any time prior to such transaction provide by resolution that there has been no Change in Control and that this subparagraph (c) shall not apply if such acquiring person is a corporation and a majority of the Board of Directors of the acquiring corporation immediately after the transaction consists of individuals who constituted a majority of the Board immediately prior to the acquisition of such fifty percent (50%) or more total combined voting power); or (d) any other transaction or series of transactions which the Board determines has the effect of a Change in Control. 1.11 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.12 "COMMITTEE" shall mean those persons designated to administer the Plan pursuant to SECTION TWO. 1.13 "COMPANY" shall mean Fossil, Inc., a Delaware corporation, and its successors and assigns. 1.14 "CONTRIBUTIONS" shall mean, collectively, the Salary Deferral Contributions, and the Employer Contributions, with respect to each Participant, except that when it shall be appropriate to refer to a particular Contribution, reference shall be to that Contribution. 1.15 "DEFERRED PAYMENTS" shall mean the payment of a Participant's Benefits as described in SECTION 7.2. 1.16 "DEFERRED PAYMENT DATE" shall mean the date as of which a Participant's Deferred Payments are made or commenced. 1.17 "DESIGNATED AFFILIATE" shall mean Fossil Partners, L.P., and each other entity of which fifty percent (50%) or more of its value or, in the case of a corporation, of the total combined voting power of all classes of stock, are held by the Company or another subsidiary, whether or not such entity now exists or is hereafter organized or acquired by the Company or another subsidiary, and which has been designated for participation herein by the Committee. 1.18 "EARNINGS" shall mean the amounts notationally credited or debited to a Participant's Account based on changes in the value (including, without limitation, unrealized appreciation or depreciation) of the Participant's Measurement Preferences, plus the amount, if any, attributable to the crediting of the Applicable Interest Rate, all determined in accordance with Rules of General Application. 1.19 "EFFECTIVE DATE" shall mean December 30, 1998. 1.20 "ELECTION FORM" shall mean a written form on which the Participant may specify his (i) Salary Deferral Contribution for the Plan Year, (ii) Measurement Preferences, (iii) form and timing of distribution of his Benefit, and (iv) such other matters as shall be determined by the Committee at the time of reference. 1.21 "ELIGIBLE INDIVIDUAL" shall mean an employee of an Employer who is (i) a member of a select group of management or highly compensated employees, and (ii) designated by the Committee as eligible to participate in the Plan. 1.22 "EMPLOYEE" shall mean a common law employee of the Employer. 1.23 "EMPLOYER" shall mean, collectively, the Company and each of its Designated Affiliates. 1.24 "EMPLOYER CONTRIBUTION" shall mean the amount, if any, credited under the Plan by an Employer to an Eligible Participant, and evidenced by an Addendum. 1.25 "EMPLOYER ACCOUNT" shall mean the account maintained for each Participant who has received an Employer Contribution, and which will reflect the amount of such Employer Contribution and appropriate adjustments as provided herein. 1.26 "ENTRY DATE" shall mean February 1, 1999 for the 1999 Plan Year, and January 1st for each subsequent Plan Year; except that, where the Employee is not an Eligible Individual on such February 1, 1999 or a later January 1st, it also shall mean July 1st; provided, without limitation, that each Eligible Individual shall have a single Entry Date with respect to each Plan Year. 1.27 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.28 "FINAL DEFERRAL FILING DATE" shall mean the date that precedes the date on which a Participant's Deferred Payment is scheduled to begin by 24 months. 1.29 "INVESTMENT DATE" shall mean the first Business Day in each Quarter, except that it also shall mean an Entry Date (except that if the Entry Date is not a Business Day, then the first Business Day following an Entry Date) with respect to each Eligible Employee who first becomes a Participant on such Entry Date. 1.30 "LUMP SUM" shall mean a single distribution, in cash, of a Participant's Benefit. 1.31 "MEASUREMENT PREFERENCES" shall mean the preferences described in SUBSECTION 5.3. 1.32 "PARTICIPANT" shall mean an Eligible Individual who participates in the Plan pursuant to SECTION THREE. 1.33 "PLAN" shall mean the Fossil, Inc. and Affiliates Deferred Compensation Plan, as set forth in this document and subsequent amendments. 1.34 "PLAN YEAR" shall mean calendar year. 1.35 "QUARTER" shall mean calendar quarter. 1.36 "RULES OF GENERAL APPLICATION" shall mean those rules promulgated by the Committee, in its sole discretion, from time to time with respect to the matter of reference, but which will be applied in a similar manner to Participants similarly situated. 1.37 "THIRD-PARTY RECORDKEEPER" shall mean the person or entity selected by the Committee to maintain the records necessary to the administration of the Plan. 1.38 "SALARY" shall mean Participant's regular salary, wages, and commissions paid by an Employer, plus any amounts deferred under sections 125 or 401(k) of the Code, plus any amounts under this Plan, but excludes Bonuses, expense reimbursements and fringe benefits. 1.39 "SALARY DEFERRAL CONTRIBUTIONS" shall mean the amounts described in SUBSECTION 4.1. 1.40 "SALARY DEFERRAL ACCOUNT" shall mean the amount credited under the Plan as a result of the Participant's Salary Deferral Contributions, and appropriate adjustments as provided herein. 1.41 "SEPARATES" OR "SEPARATION" or similar shall mean a Participant's termination of employment with an Employer for any reason (including death or disability). 1.42 "TRUST" shall mean a trust which substantially conforms to the model rabbi trust provided in section 5 of the Internal Revenue Service's Revenue Procedure 92-64, 1992-2 C.B. 422, that may be established between the Company and the trustee(s) named in the Trust. 1.43 "VALUATION DATE" shall mean the last Business Day of each Quarter. 1.44 "VEST" OR "VESTING" or similar, shall mean the portion of a Participant's Employer Account which is nonforfeitable at the time of reference. SECTION TWO ADMINISTRATION 2.1 APPOINTMENT OF COMMITTEE. The Board shall appoint the Committee. The Board may change Committee membership at any time without cause, and a member may resign by providing written notice to the Company. Any vacancy in the membership of the Committee may be filled by the Board. 2.2 EMPLOYER DUTIES. An Employer shall, upon request or as may be specifically required under the Plan, furnish or cause to be furnished all of the information or documentation in its possession or control that is necessary or required by the Committee to perform its duties and functions under the Plan. 2.3 AUTHORITY OF COMMITTEE. The Committee shall have the exclusive authority and responsibility for administering the Plan in accordance with its terms. All exercises of authority by the Committee under this Plan shall be final, conclusive and binding, unless found by a court of competent jurisdiction to be arbitrary and capricious. 2.4 ACTION BY COMMITTEE. The Committee may elect a chairman who shall be a member of the Committee and a secretary who may, but need not, be a member of the Committee. Any and all acts and decisions of the Committee shall be by at least a majority of the then members, but the Committee may delegate to any one or more of its members the authority to sign notices or other documents on its behalf or to perform ministerial acts for it, in which event any person may accept such notice, document or act without questioning its having been authorized by the Committee. 2.5 MEETINGS OF COMMITTEE. The Committee shall hold meetings upon such notice, at such place or places, and at such time or times as it may from time to time determine; provided, however, any decisions made or action taken pursuant to written approval of a majority of the then members shall be sufficient; and provided, further, and without limitation, that the Committee may take actions which have retroactive effect. 2.6 POWERS OF COMMITTEE AND COMPANY. The Committee shall have all powers and discretion as may be necessary to discharge its duties and responsibilities under this Plan, including, without limitation, the power, exercisable in its sole discretion, (i) to interpret or construe the Plan, (ii) to make rules and regulations for the administration of the Plan, (iii) to determine all questions of eligibility, status and other rights of Participants, beneficiaries and other persons, (iv) to confirm or reject each Participants selection of Measurement Preferences, and (v) to resolve any dispute which may arise under this Plan involving Participants or beneficiaries. The Committee may engage agents to assist it and may engage legal counsel, who may be counsel for the Company. No member of the Committee shall vote or act upon any matter which relates exclusively to his own rights or benefits under this Plan, and if all members of the Committee shall be disqualified, with regard to one or more matters, the President of the Company shall appoint one or more qualifying persons to be the Committee with regard to such matters. 2.7 INDEMNIFICATION. Without limitation, including SECTION 10.10, the members of the Committee shall be indemnified by the Company against any and all liabilities arising by reason of any act, or failure to act, pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any claim relating to the Plan, even if the same is judicially determined to be due to such member's negligence, but not when the same is judicially determined to be due to the gross negligence or willful misconduct of such member. 2.8 BOND AND EXPENSES. The Committee shall serve without bond unless state or federal statutes require otherwise, in which event the Company shall pay the premium. The expenses of the Committee shall be paid by the Company. Such expenses shall include all expenses incident to the functioning of the Committee, including, without limitation, litigation costs, fees of accountants, counsel and other specialists and other costs of administering the Plan. 2.9 RELIANCE ON TABLES. In administering the Plan, the Committee shall be entitled to the extent permitted by law to rely conclusively on all tables, valuations, certificates, opinions and reports which are furnished by accountants, legal counsel or other experts employed or engaged by the Committee. SECTION THREE PARTICIPATION An Eligible Individual will become a Participant either by filing an Election Form prior to his Entry Date, or by being credited with an Employer Contribution, and will remain a Participant until he receives the payment of his entire Benefit. Being designated as an Eligible Individual for one Plan Year does not entitle such Employee to continued status as an Eligible Individual for subsequent Plan Years, but such person will remain an Eligible Individual until notified in writing by the Committee of his removal from that status and, following such removal, such Employee shall not be able to elect Salary Deferral Contributions on any Entry Date on which he is not an Eligible Individual. SECTION FOUR CONTRIBUTIONS 4.1 SALARY DEFERRAL CONTRIBUTIONS. An Employee who is an Eligible Individual on his Entry Date with respect to a Plan Year may elect to defer from Salary any amount which is not less than Five Thousand Dollars ($5,000) (prorated based on the remaining portion of the Plan Year if the Participant's Entry Date is not February 1, 1999 or a subsequent January 1st) and not more than fifty percent (50%) of his Salary; and may elect to defer from his Bonus up to one hundred percent (100%) of his Bonus, in each case payable during the portion of the Plan Year following such Entry Date, by filing an Election Form with the Committee prior to such Entry Date. Unless otherwise determined by the Committee, the election to defer Salary must be designated as a fixed dollar amount, and the election to defer with respect to the Bonus may be designated in either a fixed dollar, or a percentage, amount. Each Election Form shall continue to apply to each later Entry Date until a new Election Form is filed; provided, further, that only the last Election Form filed prior to an Entry Date shall be effective. If an Eligible Individual has not filed an Election Form deferring a portion of his Salary and/or Bonus on or before the Entry Date of reference, such Eligible Individual shall be deemed to have elected not to defer any portion of his Salary and/or Bonus with respect to the Plan Year in which such Entry Date occurs. Notwithstanding any provision hereof to the contrary, the Committee may designate a special Entry Date with respect to one or more Participants solely for purposes of permitting each such Participant to elect to defer an additional amount from each such Participant's Bonus; provided, further, that such special Entry Date shall have no other effect hereunder. 4.2 CREDITING OF SALARY DEFERRAL CONTRIBUTIONS. The amount of a Participant's Salary Deferral Contributions will be deducted (i) from a Participant's Salary on each payroll date during the Plan Year of reference in an amount equal to the total Salary Deferral Contribution divided by the number of payroll dates during the Plan Year of reference following the Entry Date of reference, and (ii) from a Bonus on the date of its payment in the full amount of Salary Deferral Contribution elected to be deducted from such Bonus payments. The portion of the Salary Deferral Contribution amount which will be deducted from Salary shall be credited to the Participant's Salary Deferral Account as of the first Business Day following the Entry Date or, if communicated to the Participant in writing on or before such Entry Date, as of the payroll date on which deducted; and the full amount of the Salary Deferral Contribution to be deducted from the Bonus shall be credited to the Participant's Salary Deferral Account on the date the Bonus is (or would have been) paid. In the event a Participant's Salary Deferral Account is credited with a Salary Deferral Contribution before such amount is actually deducted from the Participant's Salary, and the Participant terminates employment during the Plan Year of reference, such Participant shall forfeit an amount from his Salary Deferral Account equal to the excess of (iii) the amount of Salary Deferral Contribution credited to his Account with respect to such Plan Year, over (iv) the aggregate amount of Salary Deferral Contribution actually deducted from his Salary during such Plan Year, and such forfeited amount shall inure to the benefit of the Employer in the manner determined by the Committee. 4.3 EMPLOYER CONTRIBUTIONS. At any time on or after the Effective Date, in addition to the amount described in SECTIONS 4.1 and 4.2, an Employer may credit a Participant's Employer Account with such amount as it shall determine in its sole discretion. The name of the Participant, the amount to be credited, the date as of which it is to be credited, the rate of Vesting, and such other matters as are required to be set forth (as determined by the Employer in its sole discretion), shall be set forth on an Addendum; provided that 100% of such amounts contributed for a Participant, and related Earnings, shall be forfeited on such Participant's Separation unless otherwise expressly provided in an Addendum expressly relating to such Employer Contribution. 4.4 DISPOSITION OF CONTRIBUTIONS. All Contributions shall be delivered to the Trust; provided, however, that such delivery may cease, and the funds retained by the Employer, effective with respect to Contributions made with respect to a Plan Year beginning after delivery of written notice of such change to each Participant. SECTION FIVE PARTICIPANT'S ACCOUNTS AND INVESTMENTS 5.1 ESTABLISHMENT OF ACCOUNT. The Committee shall establish separate Accounts for each Participant, to which shall be credited or debited the Participant's share of Contributions and Earnings, and to which shall be debited the Account's share of expenses and distributions. 5.2 EARNINGS CREDITED TO ACCOUNTS. Earnings on amounts credited to an Account shall be credited or debited to such Account on each Business Day based on the value of the Account's Measurement Preferences on such Business Day, all in the manner determined by the Committee in accordance with Rules of General Application. 5.3 INVESTMENT DIRECTION. Effective as of each Investment Date, in accordance with Rules of General Application, each Participant may select investments ("Measurement Preferences") from among the different investment alternatives which are made available by the Committee, for existing balances in his Account and for future Contributions, such selection of Measurement Preferences to be made in increments of 5%, and such percentages to apply equally to the amount credited to the Participant's Account on the immediately preceding Valuation Date, and to Contributions credited to such Account subsequent to such Valuation Date. No actual investments shall be made by Participants. The Measurement Preferences, and the Applicable Interest Rate, are only for the purpose of determining the Employer's payment obligation under the Plan and such Measurement Preferences do not control any actual investments made by the Employer or the Trustee. A participant may change Measurement Preferences on the next Investment Date by contacting the Third-Party Recordkeeper, either through filing a written Election Form or, if available under the Rules of General Application, through the Third-Party Recordkeeper's voice response system not later than the 15th day of the month preceding the month in which such Investment Date occurs. Regardless of the method used to change the Measurement Preferences, the Third-Party Recordkeeper shall send a confirmation to the Committee verifying the new Measurement Preferences. The final Election Form (or its equivalent) timely filed by the Participant prior to the Investment Date of reference shall be controlling with respect to such Investment Date. If a Participant has not timely filed an Election Form with respect to some or all of the funds in his Account with respect to an Investment Date, he will be credited with interest at the Applicable Interest Rate on such amount until the first Investment Date with respect to which he has filed a timely Election Form with respect to such amount. Notwithstanding the forgoing, the Committee shall have the power to reject some or all of the selections of Measurement Preferences by any one or more Participants by advising the affected Participant(s) and the Third-Party Recordkeeper in writing of such rejection within 3 days of being receiving the notice described in the preceding paragraph. If the Committee rejects a selection, notwithstanding any provision hereof to the contrary, the portion of such Account(s) subject to such rejection shall earn interest at the Applicable Interest Rate from the date specified in such written rejection until the date as of which an approved investment in a Measurement Preference is made. 5.4 STATEMENTS. As soon as administratively practicable following the close of each Quarter, the Committee shall furnish each Participant with a statement setting forth (i) the amount in his Account, (ii) the amount of Contributions, separately showing the Salary Deferral Contributions and Employer Contributions, credited to his Account during such Quarter, (iii) the Earnings credited or debited to his Account for such Quarter, and (iv) any debited charges to, or distributions from, his Account during such Quarter. SECTION SIX VESTING 6.1 SALARY DEFERRAL ACCOUNT. Participant shall always be 100% Vested in the amounts credited to his Salary Deferral Account. 6.2 EMPLOYER ACCOUNT. Participant shall Vest in the amount credited to his Employer Account in accordance with the Vesting Schedule set forth on the Addendum which evidences such Employer Contribution, and otherwise shall be zero (0) Vested. Notwithstanding any other provision in this Plan, a Participant's Employer Account will become one hundred percent (100%) Vested upon the date of a Change of Control. SECTION SEVEN DISTRIBUTION OF BENEFIT 7.1 FORM AND TIMING OF DISTRIBUTION. Unless a Participant is entitled to a Deferred Payment, upon a Participant's Separation he shall receive a Lump Sum distribution within a reasonable period of time, not to exceed sixty (60) days, after the Valuation Date next following his Separation. The amount of such Lump Sum distribution shall be equal to his Benefit determined as of the Valuation Date preceding the date of distribution. 7.2 ELECTION OF DEFERRED PAYMENTS. A Participant shall be entitled to a Deferred Payment if his Separation is not by reason of his death, and if on his date of Separation (i) he has attained the age of 55 and completed at least 5 Years of Service, and (ii) has filed an Election Form on which he has (x) selected a Deferred Payment Date, and (y) selected a form of payment. A Participant's Deferred Payments may be made or commenced at any time, after age 55 and prior to the later of age 65 or his Separation, and may be paid either in a Lump Sum or in 5, 10, or 15 Installment Payments, as the Participant shall select on the Election Form in effect on his Final Deferral Filing Date, and only the last Election Form filed on or before such Final Deferral Filing Date shall be effective. Installment Payments shall be paid at such time, during the first 30 days of each Plan Year, as shall be determined by the Committee. If a Participant receiving an Installment Payment shall be reemployed, all such Installment Payments shall cease during the period of his reemployment, and shall resume (iii) during the first 30 days of the Plan Year following his Separation, and (iv) shall be paid out in the same number of installments as were remaining to be paid on the date of his reemployment. 7.3 INSTALLMENT PAYMENTS. If Participant elects a Deferred Payment in the form of Installment Payments, each installment shall be equal to the product of (i) his Benefit on the Valuation Date next preceding the date of payment, multiplied by (ii) a fraction, the numerator of which is one (1), and the denominator of which is the total number of installments originally elected less the number of installments previously paid. 7.4 CHANGE IN CONTROL. Notwithstanding any other provision to the contrary, upon a Change of Control, all Benefits hereunder (including, without limitation, Benefits subject to Deferred Payment elections or which are being paid in Installment Payments), shall be distributed to Participants in a Lump Sum as soon as reasonably possible, but not more than 30 days, after such Change of Control. Notwithstanding the foregoing, at any time prior to the date of a Change of Control, or with respect to each Participant who is not notified in writing of an impending Change of Control at least 14 days prior to the date of Change in Control, for a period of 14 days after the date of notice of such Change of Control, a Participant may elect to waive the provisions of this SECTION 7.4 with respect to such Change of Control and his Benefits will continue to be deferred under the Plan as if such Change of Control had not occurred. 7.5 HARDSHIP DISTRIBUTION. Upon the Committee's determination (following petition by the Participant) that the Participant has suffered a "severe financial hardship", the Committee shall distribute to Participant that portion of such Participant's Benefit as requested by the Participant and approved by the Committee, but in no event shall the Committee approve a distribution which is greater than is necessary to relieve the financial hardship. A "severe financial hardship" means an unforeseeable event resulting from a sudden and unexplained illness or accident experienced by either the Participant or his dependents, the loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant's control, which the Participant is unable to satisfy through available or attainable assets. Without limitation, the definition of severe financial hardship does not include the need to send a child to college or the desire to purchase a home. The Committee shall evaluate the facts and circumstances of each hardship request and may rely on the written representations of the Participant unless it has reason to know such representations are false. The Participant shall receive a Lump Sum cash payment of the amount approved by the Committee as soon as possible following the next succeeding Valuation Date (or, upon the Participant's request, on such earlier date and under such rules as shall be determined by the Committee), and such amount shall be deducted from his Measurement Preferences in accordance with Rules of General Application. If a Participant receives a hardship distribution he shall be ineligible to elect Salary Deferral Contributions for the following Plan Year. 7.6 IN-SERVICE WITHDRAWAL. Prior to a Participant's Separation, in accordance with Rules of General Application, a Participant may elect to receive a distribution of all (subject to the forfeiture), or a portion of his Benefit. If a Participant elects to receive such a distribution, he shall permanently and irrevocably forfeit from his Benefit an amount equal to 20 percent (20%) of the amount so distributed and such Participant shall be ineligible to elect Salary Deferral Contributions for the following Plan Year. The amount forfeited shall inure to the benefit of the Employer in the manner determined by the Committee, and such amount shall be deducted from his Measurement Preferences in accordance with Rules of General Application. 7.7 SOURCE OF DISTRIBUTION. All payments of Benefits shall be in cash from the funds in the Trust or, in the discretion or the Employer, from the Employer's funds held outside of the Trust. Nothing contained in the Plan, nor any action taken pursuant to the provisions of the Plan, shall create or be construed to create a fiduciary relationship between the Company, an Employer, Participant, Beneficiary, or Employee or other person. To the extent that any person acquires a right to be paid Benefits, such right shall be no greater than the right of an unsecured general creditor of his Employer. SECTION EIGHT DESIGNATION OF BENEFICIARIES 8.1 DESIGNATION BY PARTICIPANT. Participant's written designation of one or more persons or entities as his Beneficiary shall operate to designate the Participant's Beneficiary under this Plan. The Participant shall file with the Committee a copy of his Beneficiary designation under the Plan. The last such designation received by the Committee shall be controlling, and no designation, or change or revocation of a designation shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. 8.2 LACK OF DESIGNATION. If no Beneficiary designation is in effect at the time of Participant's death, if no designated Beneficiary survives the Participant or if the otherwise applicable Beneficiary designation conflicts with applicable law, the Participant's estate shall be the Beneficiary. The Committee may direct the Employer or Trustee to retain any unpaid Benefits, without crediting for either Measurement Preferences or Applicable Interest Rate, until all rights to the unpaid Benefits are determined. Alternatively, the Committee may direct the Employer or Trustee to pay the Benefits into any court of appropriate jurisdiction. Any such payment shall completely discharge each Employer, the Trustee, and the Committee from any liability under the Plan. SECTION NINE AMENDMENT AND TERMINATION The Plan, without cause and without prior notice, may be terminated, in whole or in part, by the Board, in which case the Employer Account of any affected Participant shall become 100% Vested on such date of termination and, notwithstanding any provisions of the Plan to the contrary, the Benefits of such affected Participant will be distributed in a Lump Sum as soon as reasonably possible following such termination. The Plan may be amended at any time by the Board or the Committee and, without limiting the generality of any other provision hereof, if the Committee determines that an amendment to the Plan would result in a substantial prospective reduction in either the rights or benefits of one or more Participants with respect to their Benefit determined as of the effective date of such amendment, the Committee must give each affected Participant notice of the amendment not less than 5 days prior to the earlier of its adoption or its effective date, and allow each such Participant to waive the right to elect an immediate distribution and, in the absence of such timely waiver, each such Participant shall have the right, for a period of 90 days commencing on the earlier of the adoption, or the effective date, of such amendment, to elect, in a writing filed with the Committee, to have all (but not less than all) of his Benefit distributed to him as soon as reasonably possible. SECTION TEN GENERAL PROVISIONS 10.1 NO ASSIGNMENT. The right of any Participant to Benefits shall not be assigned, transferred, pledged or encumbered, either voluntarily or by operation of law, except as provided in SECTION EIGHT with respect to designations of Beneficiaries. 10.2 INCAPACITY. If the Committee shall find that any person to whom any Benefit is payable under the Plan is unable to care for his affairs because of illness or accident or is a minor, any payment due shall be paid to the duly appointed guardian, committee or other legal representative for such person. Any such payment shall be a complete discharge of the liabilities of each Employer, the Trustee and the Committee as to the amount paid. 10.3 CLAIMS PROCEDURE. The Committee will make all determinations as to the rights of any Employee, Participant, Beneficiary or other person under the terms of this Plan. Any Employee, Participant, Beneficiary, or person claiming under them, may make a claim for benefits under this Plan by filing written notice with the Committee setting forth the substance of the claim. If a claim is wholly or partially denied, the claimant will have the opportunity to appeal the denial upon filing with the Committee a written request for review within 60 days after receipt of notice of denial. In making an appeal the claimant may examine pertinent Plan documents and may submit issues and comments in writing. Denial of a claim or a decision on review will be made in writing by the Committee delivered to the claimant within 60 days after receipt of the claim or request for review, unless special circumstances require an extension of time for processing the claim or review, in which event the Committee's decision must be made as soon as possible thereafter but not beyond an additional 60 days. If no action on an initial claim is taken within 120 days, the claims will be deemed denied for purposes of permitting the claimant to proceed to the review stage. The denial of a claim or the decision on review will specify the reasons for the denial or decision and will make reference to the pertinent Plan provisions upon which the denial or decision is based. The denial of a claim will also include a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of the claim review procedure herein described. The Committee will serve as an agent for service of legal process with respect to the Plan unless the Employer, through written resolution, appoints another agent. 10.4 FINAL RESOLUTION OF DISPUTES RELATING TO PLAN. If, after the exhaustion of the claims procedure set forth in SECTION 10.3, one or more disputes remain with regard to the rights under the Plan of any Employee, Participant, Beneficiary or person claiming under them, such person(s) and the Committee (collectively, "Interested Parties") agree to attempt to resolve same by telephone conference with an agreed mediator. If the Interested Parties cannot resolve their differences by such telephone conference, then the Interested Parties agree to schedule a one day mediation with a mediator who is mutually agreeable to the Interested Parties, within thirty (30) days to resolve the disputes and to share equally the costs of such mediation. If one of the Interested Parties refuses to mediate, then such Interested Party thereby waives any recovery for attorneys' fees or costs incurred in any arbitration brought to construe or enforce the provisions of this Plan. If the Interested Parties are unable to resolve their dispute by mediation, the Interested Parties may institute an arbitration proceeding under the auspices of the American Arbitration Association to construe or enforce the provisions of the Plan. THE INTERESTED PARTIES HEREBY WAIVE THEIR RIGHT TO INSTITUTE LITIGATION IN A COURT OF LAW TO RESOLVE A DISPUTE CONCERNING THE CONSTRUCTION OR ENFORCEMENT OF THIS PLAN. The Interested Party prevailing in any such arbitration shall recover from the adverse party its actual damages and reasonable costs and expenses, including, without limitation, reasonable attorneys' fees incurred in connection with such dispute and arbitration. 10.5 INFORMATION REQUIRED. Each Participant shall file with the Committee such pertinent information concerning himself and his Beneficiary as the Committee may specify, and no Participant or Beneficiary or other person shall have any rights or be entitled to any benefits under the Plan, unless such information is properly filed. 10.6 COMMUNICATIONS BY, AND INFORMATION FROM, PARTICIPANT. All elections, selections, designations, requests, notices, instructions and other communications to the Committee, Third-Party Recordkeeper, Company, or Employer required or permitted under the Plan shall be (i) in such form as is prescribed from time to time by the Committee, (ii) shall be (x) mailed by first-class mail, or (y) delivered, to such location as shall be specified by the Committee and shall be deemed to have been given and delivered only on actual receipt by the person to be charged at such location. If the Committee notifies the Participant or Beneficiary by registered mail (return receipt requested) at his last known address that he is entitled to a distribution and also notifies him of the provisions of this paragraph, and the Participant or Beneficiary fails to claim his benefits under the Plan or provide his current address to the Committee within one year after such notification, his Benefit will be forfeited and inure to the benefit of the Employer in the manner determined by the Committee. If the Participant or Beneficiary is subsequently located, such Benefit will be restored, but without Earnings being credited subsequent to the date of the forfeiture. 10.7 NO RIGHTS IMPLIED. Without limitation, nothing contained in this Plan, nor any modification or amendment to the Plan, nor the creation of any Account on the books of the Company, shall give any Employee or Participant any legal or equitable right against the Company or any officer, director, or Employee of the Company, except as expressly provided by the Plan. 10.8 COMMUNICATIONS BY COMMITTEE OR EMPLOYER. All notices, statements, reports and other communications from the Committee or any Employer to any person required or permitted under the Plan shall be deemed to have been duly given when delivered to, or when mailed first-class mail, postage prepaid and addressed to, such person at his address last appearing on the records of the most recent Employer. 10.9 INTERPRETATIONS AND ADJUSTMENTS. To the extent permitted by law, each interpretation of the Plan and each decision on any matter relating to the Plan made by the Board, the Company, or the Committee, within their scope of their authority hereunder, shall be made in their sole discretion and shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the person responsible shall make such adjustment on account thereof as he considers equitable and practicable. 10.10 NO LIABILITY FOR GOOD FAITH DETERMINATIONS. Neither the Company, the Board, nor the Committee shall be liable for any act, omission, or determination taken or made with respect to the Plan which is not judicially determined to be due to willful misconduct, and members of the Board, and the Committee, shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Company, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of willful misconduct) arising therefrom to the full extent permitted by law and under any directors' and officers' liability or similar insurance coverage that may from time to time be in effect. 10.11 NO EMPLOYMENT RIGHTS. Neither the Plan nor any action taken under the Plan shall be construed as giving to any Employee the right to be retained in the employ of an Employer or as affecting the right of an Employer to dismiss any Employee at any time, with or without cause. 10.12 WITHHOLDING OF TAXES. An Employer shall deduct from Participant's Salary or the amount of any payment made pursuant to this Plan any amounts required to be paid or withheld by the federal government or any state or local government. By his participation in the Plan, the Participant agrees to all such deductions. 10.13 WAIVERS. Any waiver of any right granted pursuant to this Plan shall not be valid unless the same is in writing and signed by the party waiving such right. Any such waiver shall not be deemed to be a waiver of any other rights. 10.14 RECORDS. Records of the Company, and of the Committee, as to any matters relating to this Plan will be conclusive on all persons. 10.15 SECURITIES LAWS. The Plan intends to comply with and be exempt under The Securities Act of 1933, as amended. The Participants under the Plan are final purchasers and not underwriters or conduits to other beneficial owners or subsequent purchasers. 10.16 SEVERABILITY. In case any one or more of the provisions contained in this Plan shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions in this Plan shall not in any way be affected or impaired. 10.17 CAPTIONS AND GENDER. The captions preceding the Sections and Subsections of this Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of this Plan. Where the context admits or requires, words used in the masculine gender shall be construed to include the feminine and the neuter also, the plural shall include the singular, and the singular shall include the plural. 10.18 CHOICE OF LAW. THE PLAN AND ALL RIGHTS UNDER THIS PLAN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT PREEMPTED BY ERISA. 10.19 EFFECTIVE DATE AND TERMINATION DATE. The Plan is effective on the Effective Date and shall terminate on the date no further Benefits are credited hereunder, or on such earlier date as the Plan is terminated pursuant to SECTION NINE. IN WITNESS WHEREOF, the Company has executed this Plan on this the 22nd day of December, 1998. FOSSIL, INC. By: /s/ Randy Kercho ------------------------------- Its: CFO ----------------------------- EX-13 4 EXHIBIT 13 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 [Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products and artistic designs] 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
[Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products and artistic designs] 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 [Collage of various FOSSIL brand products and artistic designs] 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. [Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products and artistic designs] 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. [Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products 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. [Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products and artistic designs] 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, [Collage of various FOSSIL brand products and artistic designs] 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 [Collage of various FOSSIL brand products and artistic designs] [Collage of various FOSSIL brand products 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. EX-21.1 5 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF FOSSIL, INC. AS OF JANUARY 2, 1999
PLACE PERCENT NAME OF SUBSIDIARY OF INCORPORATION PARENT COMPANY OWNERSHIP - ------------------------------------------------------------------------------------------------------------------ Fossil Intermediate, Inc. Delaware Fossil, Inc. 100 Fossil Stores I, Inc. Delaware Fossil, Inc. 100 Fossil New York, Inc. Delaware Fossil, Inc. 100 Arrow Merchandising, Inc. Texas Fossil, Inc. 100 Fossil East Limited Hong Kong Fossil, Inc. 100 Fossil Europe B.V. The Netherlands Fossil, Inc. 100 Fossil Japan, K.K. Japan Fossil, Inc. 81 Fossil Trust Delaware Fossil Intermediate, Inc. 100 Fossil Stores II, Inc. Delaware Fossil Stores I, Inc. 100 Newtime, Ltd. Hong Kong Fossil East, Ltd. 100 Pulse Time Center Company, Ltd. Hong Kong Fossil East, Ltd. 60 Amazing Time, Ltd. Hong Kong Fossil East, Ltd. 100 Trylink International, Ltd. Hong Kong Fossil East, Ltd. 51 Fossil Trading, Ltd Hong Kong Fossil East, Ltd. 100 Fossil Europe GmbH Germany Fossil Europe B.V. 100 Fossil Italia, S.r.l. Italy Fossil Europe B.V. 100 Fossil France Eurl, S.a.r.l. France Fossil Europe B.V. 100 Fossil Spain, S.A. Spain Fossil Europe B.V. 100
EX-23.1 6 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-65980, Registration Statement No. 33-77526 on Form S-8 and the Post-Effective Amendment No. 1 thereto and Registration Statement No. 333-70477 on Form S-8 of our reports dated February 19, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of Fossil, Inc. for the fiscal year ended January 2, 1999. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Dallas, Texas April 2, 1999 EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PART IV ITEM 14 FINANCIAL STATEMENTS OF FOSSIL, INC. AND SUBSIDIARIES AS OF AND FOR THE FIFTY-TWO WEEKS ENDED JANUARY 2, 1999 FILED ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 57,263,132 0 49,446,607 6,864,365 57,294,668 166,333,487 36,771,041 13,654,203 194,077,842 57,293,933 0 0 0 209,321 134,919,473 194,077,842 304,743,425 304,743,425 154,239,588 249,373,852 0 2,164,534 210,672 54,728,969 22,568,000 0 0 0 0 32,160,969 1.55 1.48
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