Fossil Group
Annual Report 2001

Plain-text annual report

COMPANY PRO F IL E Fossil is a design, development, marketing and requirements of its customers and maintain sig- into license agreements to manufacture, market distribution company that specializes in consumer nificant cost advantages compared to its compet- and sell watches bearing internationally recog- products predicated on fashion and value. The itors. To further leverage the Company’s infra- nized brands of other companies as well as design Company’s principal offerings include an exten- structure, including design, development and and develop private label products for some of the sive line of fashion watches sold under the FOSSIL production expertise, the Company has entered most distinguished companies in the world. and RELIC brands as well as complementary lines of small leather goods, belts, handbags, jew- elry and sunglasses. The Company’s products are sold in department stores and specialty retail stores in over 90 countries around the world, in addition to the Company’s e-commerce website at www.fossil.com. The Company also offers a line of FOSSIL brand apparel at 19 Company-owned retail stores and over the Company’s website. 3 those of its competitors principally through innova- The Company differentiates its products from tions in fashion details. These innovations include variations in the treatment of watch dials, crys- tals, 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, adver- tising and in-store presentations to more effec- tively and cohesively communicate 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 website. Utilizing several wholly and majority-owned watch assembly facilities and centralized distribution points enables the Company to reduce its inventory risk, increase flexibility in meeting the delivery FINA NCIAL H IGH LI G HTS Fiscal Year IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000 1999 1998 1997 Net sales ........................................................................... Gross profit ....................................................................... $ 545,541 271,850 Operating income ............................................................ Income before income taxes............................................. Net income........................................................................ Pro forma net income (1) ................................................. Earnings per share: (2) Basic ............................................................................. Diluted .......................................................................... Pro forma earnings per share: (1)(2) Basic ............................................................................. Diluted .......................................................................... 76,854 72,804 43,683 46,548 1.45 1.40 1.54 1.49 Weighted average common shares outstanding: (2) Basic ............................................................................. Diluted .......................................................................... 30,167 31,240 Working capital ............................................................... Total assets ....................................................................... Long-term debt................................................................. $ 163,280 380,863 – Stockholders’ equity ......................................................... 264,023 Return on average stockholders’ equity ......................... 18.3% $ 504,285 255,746 93,821 94,717 55,883 n/a 1.76 1.71 n/a n/a 31,689 32,675 $ 169,792 307,591 – 220,699 26.9% $ 418,762 212,887 87,449 87,841 51,826 n/a 1.63 1.55 n/a n/a 31,900 33,428 $ 155,198 269,364 – 191,197 32.2% $ 304,743 150,504 55,370 54,729 32,161 n/a 1.04 0.99 n/a n/a 31,054 32,586 $ 109,040 194,078 – 134,919 29.3% $ 244,798 117,528 34,610 32,151 18,942 n/a 0.63 0.61 n/a n/a 30,203 31,250 $ 70,603 139,570 – 95,263 23.1% (1) Pro forma information excludes a $4.8 million one-time pre-tax charge in fiscal 2001 which reflects the write-off of the carrying value of the Company’s investment in SII Marketing International, Inc. as a result of the Company’s decision to terminate its equity participation in the joint venture. (2) All share and per share data has been adjusted to reflect three-for-two stock splits effected in the form of a stock dividend paid on April 8, 1998 and August 17, 1999. STOCK INFORMATION The Company’s common stock prices are published daily in The Wall Street Journal and other publica- tions 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. Stock prices have been adjusted in cer- tain cases to the nearest traded amount. 2001 2000 High Low High Low First quarter............................ $ 20.250 $ 13.750 $ 26.750 $ 15.813 Second quarter ....................... Third quarter .......................... Fourth quarter ....................... 23.350 22.300 22.600 16.510 14.110 16.150 25.125 20.500 16.438 16.625 11.563 10.500 4 LET TE R TO TH E ST O C KH OLDERS Dear Stockholders, 2001 was a challenging year in all respects. An development teams and inventory planners who of our total business, but offers us a meaningful act of hatred forced the nation, organizations and use this information to develop more competitive growth opportunity in the short to medium term. individuals to dig-down deep inside to try and product offerings in the right quantities. The end refocus on building for the future. We are proud result is a strong, resilient and adaptive Company. Each year, FOSSIL continues to invest in the future. to report that your Company and its employees New initiatives do not always bring returns as showed incredible resiliency in 2001 and delivered Further stability and diversification is achieved by quickly as we would like, but we are proud of our an operating margin of 14% on $546 million in applying these same operating practices to other track record of building for the future utilizing the net sales. Investments made in previous years in categories of fashion accessories. In 2001, 25% of cash that is generated by a strong core business. FOSSIL’s international diversification helped us in our total sales volume came from products other We are focused on the need to invest for future 2001 as the strength of our international business than watches. Our leather and eyewear businesses years but have our eyes wide open to our stock- counter-balanced a domestic business that was represent significant opportunities for growth as holders’ expectations for profitability today. We soft. Despite a difficult retail environment, our FOSSIL increases in brand recognition and as we hope you are pleased with the manner in which we domestic business improved toward the end of the increasingly become more capable in effectively have balanced both important aspects of operat- year and we are well-positioned for 2002. supplying our retail partners with accessory prod- ing your Company in 2001. We would like to thank FOSSIL’s resiliency during this difficult environ- of the fastest growing pieces of our business as for their incredible effort and focus during a very ucts under other brands. The RELIC brand is one all of our dedicated employees around the world 5 ment is a testament to our strategy of investing we expand our offerings beyond watches and into trying 2001. in the core elements of our business – our design, leather products and eyewear. sourcing and production infrastructure and our Sincerely, global watch distribution network. Through the FOSSIL is well positioned to deliver growth in sales years, our product development teams have devel- and earnings as we further apply our resources oped flexible design and sourcing systems that within our core—the watch business. Investments are adaptive to changes in the buying habits of made in 2001 are positioning us for growth in our global customers. Our factories produce qual- future years as we enter the higher-priced Swiss ity products that provide those customers with an watch business. Internationally, our business con- excellent value. Our manufacturing arm is flex- tinues to expand representing 35% of our total ible and adaptive and quickly adjusts production revenue in 2001. We have achieved critical mass levels based on changes in market demand. We in Europe but still believe that we have plenty control our global distribution in all major mar- of room to grow in the future. We are working kets and the managers of those distribution net- toward structuring our European operations in a works are getting better and better at responding manner that will increase efficiencies and enable to consumer demands. This insight into consumer us to grow sales and profitability. Our business in preference is communicated back to our product Asia currently represents a very small percentage Tom Kartsotis Chairman of the Board Kosta Kartsotis President & Chief Executive Officer COMPANY OVE RVIE W Fossil Watches: Fossil Leather Goods And Sunwear: The Company’s FOSSIL BLUE, ARKITEKT and F2 The FOSSIL accessories division exhibited strong lines continued to represent the core product offer- sales growth in 2001 with sales increases of over ings under the FOSSIL watch brand. Despite sales 13%. Handbags gained market share at retail fur- decreases in the Company’s domestic watch busi- ther enhancing the visibility and sales of the other ness during 2001, certain new FOSSIL styles intro- accessory categories including small leather goods duced during the second half of the year were well and belts. Innovative designs, incorporating new received at retail, including the KALEIDO line fea- treatments and colors, developed in FOSSIL eye- turing color changing dials. During the year, the wear during 2001 further positioned the Company Company began the development of technology- for continued growth in the U.S. and Germany. enhanced watches, including the Wrist PDA™ and Wrist PDA/PC™ scheduled for launch in the Spring of 2002. 7 International: Licensed Brands: Sales of the Company’s licensed watch brands, The Company’s licensed watch business continued including EMPORIO ARMANI, DKNY and DIESEL, to grow in 2001. Sales and distribution of the and the expanded distribution of FOSSIL brand Company’s EMPORIO ARMANI, DKNY and DIESEL jewelry led the growth in the Company’s interna- lines increased worldwide. The Company’s DKNY tional business. Acquisitions in 2001, including line was especially strong with an increase in net The Avia Watch Company and the Company’s sales of 30% to $42 million worldwide. Pursuant French and Australian distributors, provide oppor- to a worldwide license agreement, the Company tunities to further penetrate additional markets anticipates launching the BURBERRY line of Swiss- with the Company’s various brands. The FOSSIL made timepieces beginning in late 2002. brand is available in over 90 countries around the world through the Company’s subsidiary oper- ations, joint ventures and a network of 51 indepen- dent distributors. RELIC Products: Fossil Stores: The RELIC brand gained market share in the lead- The Company operated 20 accessory stores in the ing national chain department stores in 2001. United States and six internationally at the end of The market share and brand recognition brought 2001. These stores continue to provide an exciting about by the presence of RELIC watches has format in which to display the Company’s increas- resulted in expansion into other accessory catego- ing product assortment and to convey the FOSSIL ries. Growth in RELIC brand leather goods, includ- brand image. In 2000, the Company opened the ing handbags, men’s and women’s belts and small first of its 19 jeans wear stores. These stores offer leather goods, and the initial launch of RELIC eye- a selection of FOSSIL casual wear and jeans in wear resulted in net sales gains for the year. addition to the Company’s watches and fashion accessories. The Company also operated 44 outlet stores coast-to-coast at the end of 2001. The outlet stores allow the Company to control the timely liq- uidation of discontinued styles while maintaining the integrity of the FOSSIL brand. 8 Private Label and Premiums: In addition to building its own brands, the Company also designs and manufactures private label and premium products for some of the most prestigious companies in the world, including national retailers, entertainment companies and theme restaurants. The Company leverages its sourcing, design and development expertise to support these comprehensive incentive programs. 14 MA NAGE ME N T’S D IS CU S SI ON AN D AN A LY SI S SIGNIFICANT ACCOUNTING POLICIES & ESTIMATES Fossil is a design, development, marketing and The Company’s products are sold primarily to The preparation of financial statements in confor- distribution company that specializes in con- department stores and specialty retail stores in mity with accounting principles generally accepted sumer products predicated on fashion and value. over 90 countries through Company-owned for- in the United States of America requires manage- The FOSSIL brand name was developed by the eign sales subsidiaries and through a network of ment to make estimates and assumptions that Company to convey a distinctive fashion, quality 51 independent distributors. The Company’s for- affect the reported amounts of assets and liabili- and value message and a brand image reminis- eign operations, including distributors, include a ties and the disclosure of contingent assets and lia- cent of “America in the 1950s” that suggests a presence in Africa, Asia, Australia, Canada, the bilities at the date of the financial statements and time of fun, fashion and humor. Since its inception Caribbean, Europe, Japan, Central and South the reported amounts of revenues and expenses in 1984, the Company has grown from its origi- America and the Middle and Far East. In addition, during the reporting period. On an on-going basis, nal flagship FOSSIL watch product into a company the Company’s products are offered at Company- management evaluates its estimates and judge- offering a diversified range of accessories mar- owned retail stores primarily located in the United ments, including those related to product returns, keted worldwide. The Company’s principal offer- States and in independently-owned, authorized bad debts and inventories. Management bases its ings include an extensive line of watches sold FOSSIL retail stores and kiosks located in several estimates and judgements on historical experience under the FOSSIL and RELIC brands as well major airports, on cruise ships and in certain and on various other factors that are believed to be as complementary lines of small leather goods, international markets. The Company’s successful reasonable under the circumstances, the results of belts, handbags, sunglasses, jewelry and FOSSIL expansion of its product lines worldwide and lever- which form the basis for making judgements about 35 brand apparel. In addition to developing its own aging of its infrastructure have contributed to its the carrying values of assets and liabilities that brands, the Company leverages its infrastructure increasing net sales and operating profits over the are not readily apparent from other sources. Actual by designing, producing and distributing licensed last five fiscal years. and private label products for some of the most prestigious companies in the world, including fash- ion designers, national retailers and entertain- ment companies. results may differ from these estimates under dif- ferent assumptions or conditions. Management believes the following critical accounting policies require the most significant estimates and judge- ments. COMPANY HIGHLIGHTS Revenues. Revenues are recognized as sales when Company’s expectations and the provisions estab- Sales Growth merchandise is shipped and title transfers to lished, future credit losses may differ from those the customer. The Company permits the return experienced in the past. of damaged or defective products and accepts •The Company’s strategy of diversifying its prod- uct assortment and geographical distribution was instrumental in delivering net sales increases for limited amounts of product returns in certain Inventories. Inventories are stated at the lower of 2001 against one of the most challenging economic other instances. Accordingly, the Company pro- average cost, including any applicable duty and vides allowances for the estimated amounts of freight charges, or market. The Company writes down these returns at the time of revenue recognition its inventory for estimated obsolescence or unmar- environments in years. •Net sales from the Company’s international seg- ment grew $35 million (23%) over fiscal year 2000, based on historical experience. While such returns ketable inventory equal to the difference between led by continuing increases from licensed watch have historically been within management’s expec- the average cost of inventory and the estimated fair and FOSSIL jewelry sales and $16.6 million of tations and the provisions established, future market value based upon assumptions about future sales generated from acquired businesses. return rates may differ from those experienced in demand and market conditions. If actual future the past. Any significant increase in product dam- demand or market conditions are less favorable than •Net sales from the Company’s domestic retail stores increased 33% as a result of new store open- ages or defects could have an adverse impact on those projected by management, additional inventory ings. The Company operated 83 retail locations the operating results for the period or periods in write-downs may be required. which such returns materialize. consisting of 44 outlet, 20 accessory and 19 jeans wear stores at the end of 2001 compared to 71 Long-Lived Assets. The Company periodically reviews stores (39 outlet, 18 accessory and 14 jeans wear) 36 Accounts Receivable. The Company performs ongo- the estimated useful lives of its depreciable assets ing credit evaluations of its customers and adjusts based on factors including historical experience, credit limits based upon payment history and the expected beneficial service period of the asset, at the end of 2000. •Domestic watch sales decreased 11% as a result of decreases in private label watches and an 8% the customer’s current credit worthiness, as deter- the quality and durability of the asset and the decrease in FOSSIL and RELIC brands. The extent mined by the review of their current credit Company’s maintenance policy including periodic of the decline in the Company’s domestic watch information. The Company continuously monitors upgrades. Changes in useful lives are made on a pro- category lessened throughout the year as certain collections and payments from its customers and spective basis, unless factors indicate the carrying new FOSSIL styles introduced during the second maintains a provision for estimated credit losses amounts of the assets may not be recoverable and an half of the year were well received at retail. based upon historical experience and any specific impairment write-down is necessary. customer collection issues identified. While such credit losses have historically been within the •Other domestic sales increased 11% as a result of growth in both FOSSIL and RELIC brand leather products. New Products and Acquisitions Philippe Starck and Paul Frank lines during 2001. Infrastructure Additions •The Company introduced the FOSSIL KALEIDO watch, providing consumers the flexibility to Additional licenses with Columbia Sportswear and Frank Gehry were signed during the year with •The Company acquired a new 517,500 square foot distribution facility during 2001 that will be fully instantly change the color of their watch dial with product launches scheduled in 2002. operational in 2002. This facility will enable the the push of a button. •The Company believes its ability to introduce new watch products utilizing various technologies and •The Company acquired The Avia Watch Company, Ltd., headquartered outside of London, England, Company to consolidate multiple distribution facil- ities currently in place and will support its strate- componentry allows it to be the leader in the fash- watches and serves as a distributor of licensed ion watch market. During 2001, newness brought and private label watches throughout the United into the product line included degrade dials, laser Kingdom. that designs, markets and distributes AVIA brand gic growth initiatives for many years. •The Company re-launched its B2B website allow- ing for more efficient means for its smaller cus- tomers to order product and view the Company’s crystals and the Chinese Tic. •FOSSIL jewelry, tested in Germany during holi- day 2000, was launched during 2001 and achieved •The Company acquired FSLA Pty. Limited, its Australian distributor and Vedette Industries, SA (“Vedette”), its French distributor. Vedette mar- product offering. •The Company added key senior management in its distribution operations and international seg- net sales exceeding $8 million. Additionally, the kets and distributes various non-Fossil brand ment to assist in further leveraging the Company’s Company continues further testing of this prod- watches and is one of the largest suppliers of infrastructure and businesses worldwide. 37 States. uct category in Europe, Canada and the United clocks in France. •Wrist PDA™ and Wrist PDA/PC™ – the ultimate companions for PALM Powered™ or PocketPC handheld devices were introduced. These prod- Swiss Initiatives •The Company acquired the worldwide rights to the ZODIAC brand name which has a 120 year his- •The Company began to roll out its “connected store” concept to all Company-owned retail loca- tions providing more efficient means to gather retail data as well as provide each store with better connectivity to the Company’s central infor- ucts are the first high-tech devices in the FOSSIL tory in Swiss-made timepieces. mation systems. line providing the convenience and portability of a watch with the storage capability of a handheld •The Company acquired three businesses located in Bienne, Switzerland which provide design, sourc- device. •RELIC branded accessories doubled in sales as a result of further penetration of RELIC leather products and the launch of RELIC eyewear during ing and production capabilities necessary to man- ufacture and market Swiss-made timepieces. •The Company entered into a worldwide license agreement with Burberry Limited (“BURBERRY”) 2001. for the production of Swiss-made timepieces. •The Company continued to expand its licensed watch product offerings with the launch of the Under the terms of the agreement, the Company will handle the design, manufacturing, distribu- tion and merchandising of the new BURBERRY timepiece collection. RESULTS OF OPERATIONS The following table sets forth, for the periods indi- cated, (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. Fiscal Year 2001 2000 2000 Percentage change from Percentage change from 1999 1999 Net sales ........................................................... 100.0% 8.2% 100.0% 20.4% 100.0% Cost of sales ..................................................... Gross profit ...................................................... Operating expenses ......................................... Operating income ............................................ 50.2 49.8 35.7 14.1 Interest expense .............................................. 0.1 Other (expense) income – net ......................... (0.7) Income before income taxes............................. 13.3 Income taxes .................................................... 5.3 10.1 6.3 20.4 (18.1) 150.3 (464.3) (23.1) (25.0) 49.3 50.7 32.1 18.6 – 0.2 18.8 7.7 Net income ....................................................... 8.0% (21.8)% 11.1% 20.7 20.1 29.1 7.3 – 101.2 7.8 7.8 7.8% 49.2 50.8 29.9 20.9 – 0.1 21.0 8.6 12.4% 38 The following table sets forth certain components of the Company’s consolidated net sales and the percentage relationship of the components to con- solidated net sales for the fiscal year indicated: Fiscal Year 2001 2000 1999 2001 2000 1999 Amount in millions Percent of total International: Europe ......................................................... $ 132.0 $ 99.5 $ 86.7 24.2% 19.7% 20.7% Other ............................................................ 56.1 Total international ................................... 188.1 53.3 152.8 41.6 128.3 10.3 34.5 10.6 30.3 9.9 30.6 Domestic: Watch products ............................................ 180.6 Other products ............................................. 110.3 Total ......................................................... 290.9 Stores ........................................................... 66.5 Total domestic .......................................... 357.4 202.7 99.0 301.7 49.8 351.5 180.7 72.1 252.8 37.7 290.5 33.1% 40.2% 43.2% 20.2 53.3 12.2 65.5 19.6 59.8 9.9 69.7 17.2 60.4 9.0 69.4 39 Total net sales .......................................... $ 545.5 $ 504.3 $ 418.8 100.0% 100.0% 100.0% Fiscal 2001 Compared to Fiscal 2000 recurrence of the $8.3 million sale that carried a Operating Income. The increase in operating Net Sales. Net sales increases were led by con- gross margin lower than the Company’s historical expenses as a percentage of net sales combined tinued sales volume growth in the Company’s consolidated gross margin. Excluding the effects with a decrease in gross margins, resulted in international businesses, increased sales from the of this sale, gross margins decreased approxi- the reduction of the Company’s operating profit Company’s retail stores, due to an increase in mately 140 basis points. The gross profit margins margin to 14.1% for 2001 in comparison to 18.6% the number of stores, and further penetration of were impacted from a higher mix of lower margin in the prior year. Management believes the effects the Company’s leather products in the United domestic leather sales versus domestic watch sales, of acquired businesses, whose operating structures States market. Excluding the impact of acqui- increased markdowns, lower margins generated are not as well leveraged as the Company, and sitions, which contributed $16.6 million to net by the Company’s outlet stores and lower mar- continued investment in infrastructure in 2002, sales, international sales increased 12% over prior gins on European sales, primarily due to the Euro including the Company’s new distribution facility, year. This increase was primarily a result of sales being weaker during the first three quarters will result in annual operating margins consistent volume increases from licensed watch products of the year. Positively effecting gross margins with fiscal 2001. Management believes long-term and continued growth in the FOSSIL jewelry line. was a greater mix of sales from the Company’s sustainable operating margins in the 17% range The Company’s leather product line increased pre- international business and retail stores, both of are achievable as the Company continues to grow dominantly due to further penetration of RELIC which generally produce gross margins above the its sales, further leverages the new infrastructure handbags in the national department store chan- Company’s historical consolidated gross margins. costs and begins to consolidate its existing infra- nel. These increases were partially offset by the Management believes gross profit margins for structure in Europe. 40 non-recurrence of an $8.3 million non-branded 2002 will be consistent with those reported in watch sale occurring in the second quarter of fiscal fiscal 2001. 2000 and by decreases in the Company’s domestic Write-off of Investment in Joint Venture. The write-off of investment in joint venture reflects a $4.8 watch business. An 11% decrease in domestic Operating Expenses. Operating expenses, as a per- million one-time pre-tax charge to write off the watches was primarily due to significant reduc- centage of net sales, increased to 35.7% compared carrying value of the Company’s investment in tions in the Company’s private label business and to 32.1% for the prior year. Increases in operating SII Marketing International, Inc. (“SMI”), and an 8% decrease in FOSSIL and RELIC brands result- expenses related to increased sales, expenses record certain termination costs as a result of the ing from the deteriorating retail climate during related to businesses acquired ($5.9 million) and Company’s decision to terminate its equity par- the year. Management believes that fiscal 2002 additional infrastructure added during the latter ticipation in this joint venture. SMI, a joint ven- net sales growth could reach the 15% level as a half of fiscal 2000. Operating expenses as a per- ture between the Company and Seiko Instruments result of continued growth internationally, growth centage of net sales for the fourth quarter were America, Inc., manufactures, markets and distrib- in the Company’s domestic leather and sunglass significantly below levels experienced during the utes watches to mass market retailers worldwide business, primarily due to further penetration year as the Company began to anniversary the under owned, licensed and private label brands. of the RELIC brand, and increased sales in the fiscal 2000 infrastructure initiatives. These infra- The Company will continue to provide certain Company’s FOSSIL domestic watch business. structure costs included higher payroll and person- product development, marketing and merchandis- nel-related expenses, store opening and operating ing support to SMI following termination of the Gross Profit. Gross profit margins decreased to expenses and warehouse and distribution related joint venture on a cost-plus basis. 49.8% compared to 50.7% in the prior year. Gross expenses. margins were favorably impacted from the non- Other Income (Expense). Changes in other income Increased sales volumes in the Company’s leather expanding the Company’s operating infrastruc- (expense) have historically reflected changes in product offerings were led by continued growth in ture and increased advertising expenditures. As interest income from cash investments, royalty handbags, women’s small leather goods and men’s a percentage of net sales, operating expenses income, minority interests in the earnings (loss) belts. Additionally, continued expansion of RELIC increased over 1999 levels by 2%. The infrastruc- of the Company’s majority-owned subsidiaries, for- leather products contributed to the overall growth ture costs included higher payroll and person- eign currency gains and losses and equity in the in the Company’s leather group. Expansion in both nel-related expenses, store opening and operating earnings (loss) of its non-consolidated joint ven- Company-owned retail and outlet stores, including expenses and warehouse and distribution related tures. Other income (expense) for 2001 remained the opening of 14 jeans wear retail stores during expenses. Increased advertising expenditures were relatively unchanged compared to fiscal 2000 as the second half of the year, and increases in same primarily related to expansion of the Company’s decreases in interest income, due to lower invested store sales in the Company’s accessory stores also leather handbag fixturing program at department cash balances and lower interest rates, were offset positively impacted sales. stores, web-based advertising and additional inter- by foreign currency gains and certain damages net portal affiliations. awarded the Company resulting from a prior Gross Profit. Gross profit margins remained rela- period legal matter. tively stable at 50.7% for 2000 compared to 50.8% Other income (expense). Other income (expense) pri- in 1999. Adversely effecting the Company’s gross marily reflects interest income from cash invest- 41 rate decreased to 40% during 2001 compared to rency valuation changes relating to a strong U.S. earnings (loss) of the Company’s majority-owned Income Taxes. The Company’s effective income tax margins throughout the year were foreign cur- ments, royalty income, minority interests in the 41% in the prior year. This decrease was primar- dollar against the Euro. The average Euro rate subsidiaries and equity in the earnings (loss) ily related to a higher mix of income derived from declined approximately 13% from 1999 levels of its non-consolidated joint ventures. During jurisdictions that carry lower statutory income tax resulting in overall gross profit margins being 2000, other income (expense) increased favorably rates. Management believes opportunities exist to lower by slightly less than one percent. Gross as interest and royalty income earned exceeded further reduce its effective income tax rate in 2002. profit margins were also adversely effected by an minority interest expense and equity in the losses Fiscal 2000 Compared to Fiscal 1999 leather products that generally carry lower gross Net Sales. Net sales increases were primarily profit margins than the Company’s consolidated EFFECTS OF INFLATION impacted by volume increases from the Company’s average. Positively impacting gross profit margins increase in sales mix related to the Company’s of the Company’s joint ventures. international and domestic watch sales, domestic were a higher sales mix of licensed watches and Management does not believe that inflation has leather product sales and from an increase in retail sales from Company-owned stores as well as had a material impact on results of operations the number of Company-owned retail stores over internet sales, all of which generally carry higher for the periods presented. Substantial increases the prior year. The March 2000 launch and con- gross profit margins than the Company’s consoli- in costs, however, could have an impact on the tinued rollout of the Company’s licensed brand dated average. line of DKNY watches, double-digit growth of Company and the industry. Management believes that, to the extent inflation affects its cost in the the Company’s FOSSIL watch brand and contin- Operating Expense. Operating expense increases future, the Company could generally offset infla- ued market penetration of the Company’s RELIC were a result of variable expenses associated with tion by increasing prices if competitive conditions watch brand fueled watch sales during the year. increased sales volumes, costs associated with permit. FOREIGN CURRENCY RISK As a multinational enterprise, the Company is and acquired businesses. These uses of cash were at the end of the year, all of which have subse- exposed to changes in foreign currency exchange partially offset by cash flows from operations. quently been paid off. These borrowings were pri- rates. The Company employs a variety of practices marily related to the acquisition of the Company’s to manage this market risk, including its operat- Accounts receivable and inventory levels increased new distribution center during the third quarter. ing and financing activities, and where deemed 18% and 28%, respectively, over prior year levels. Management believes that cash flows from opera- appropriate, the use of derivative financial instru- Days sales outstanding (“DSO”) increased to 38 tions combined with existing cash on hand and ments. Forward contracts have been utilized by days at year-end compared to 36 days in the previ- amounts available under its credit facility will be the Company to mitigate foreign currency risk. ous year. The DSO increase is a result of a higher sufficient to satisfy its working capital needs for The Company’s most significant foreign currency mix of international sales during the fourth quar- at least the next eighteen months. For disclosure risk relates to the Euro and the British Pound. The ter, which offer longer average payment terms regarding our contractual obligations, please see Company uses derivative financial instruments than that in the United States. Additionally, DSO Note 10 to our financial statements included else- only for risk management purposes and does not was unfavorably effected by an increase in the where in this report. use them for speculation or for trading. There collection cycle domestically as a result of the were no significant changes in how the Company weaker economy. The increase in inventory is pri- FORWARD-LOOKING STATEMENTS managed foreign currency transactional exposure marily related to FOSSIL watch inventories and during 2001 and management does not anticipate inventories related to acquired businesses. FOSSIL Included within management’s discussion of the any significant changes in such exposures or in inventories were impacted by additional newness Company’s operating results, “forward-looking 42 the strategies it employs to manage such exposure brought into the line. In conjunction with the statements” were made within the meaning of in the near future. change in the line, the Company reduced the the Private Securities Litigation Reform Act of LIQUIDITY AND CAPITAL RESOURCES approximately 75% of the line to less than 40%. results may differ materially from those expressed number of its quick response styles (“QRS”) from 1995 regarding expectations for 2002. The actual Accordingly, as QRS styles historically offer more by these forward-looking statements. Significant The Company’s general business operations his- predictability in sales, the Company increased factors that could cause the Company’s 2002 oper- torically have not required substantial cash needs inventory receipts during the fourth quarter to ating results to differ materially from manage- during the first several months of its fiscal year. be more flexible in reacting to consumer demand. ment’s current expectations include, among other Generally, starting in the second quarter, the The Company reduced purchases in the first quar- items, significant changes in consumer spending Company’s cash needs begin to increase, typically ter of 2002 to balance out the heavy receipts in the patterns or preferences, acts of terrorism and reaching its peak in the September-November fourth quarter of 2001 and management expects acts of war, competition in the Company’s prod- time frame. The Company’s cash holdings and overall inventory levels to be more in line with uct areas, international in comparison to domestic short-term marketable securities as of year-end prior year levels by the end of the first quarter. sales mix, changes in foreign currency valuations decreased to $73 million in comparison to $91 mil- in relation to the United States dollar, principally lion at the end of the prior year. This decrease is At the end of 2001, the Company had working cap- the European Union’s Euro, an inability of man- primarily comprised of working capital increases ital of $163 million compared to working capital agement to control operating expenses in relation relating to higher levels of accounts receivable and of $170 million at the end of the prior year. The to net sales without damaging the long-term direc- inventories and approximately $47 million paid in Company had outstanding borrowings of $16 mil- tion of the Company and the risks and uncertain- connection with new distribution infrastructure lion against its $50 million bank credit facility ties set forth in the Company’s current report on Form 8-K dated March 30, 1999. SEL ECT ED Q UA RT ER LY F INA N C IA L D ATA The table below sets forth selected quarterly finan- that management considers necessary for a fair cial information. The information is derived from statement of results for such periods. The oper- the unaudited consolidated financial statements of ating results for any quarter are not necessarily the Company and includes, in the opinion of man- indicative of results for any future period. agement, all normal and recurring adjustments Fiscal Year 2001 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales ......................................................................... $ 121,105 $ 112,357 $ 135,999 $ 176,079 Gross profit ..................................................................... Operating expenses........................................................ Operating income........................................................... Income before income taxes........................................... Provision for income taxes............................................. 59,735 43,394 16,341 16,662 6,661 Net income...................................................................... 10,001 Pro forma net income* ................................................... n/a 56,904 45,320 11,584 12,145 4,862 7,283 n/a 43 Earnings per share: Basic ........................................................................... Diluted ........................................................................ Pro forma earnings per share:* Basic ........................................................................... Diluted ........................................................................ Gross profit as a percentage of net sales ...................... Operating expenses as a percentage of net sales ......... Operating income as a percentage of net sales ............ 0.33 0.32 n/a n/a 49.3 % 35.8 % 13.5 % 0.24 0.23 n/a n/a 50.6 % 40.3 % 10.3 % 65,851 47,486 18,365 17,858 7,143 10,715 n/a 0.36 0.34 n/a n/a 48.4 % 34.9 % 13.5 % 89,360 58,796 30,564 26,139 10,455 15,684 18,549 0.52 0.50 0.61 0.59 50.7 % 33.3 % 17.4 % *Pro forma information excludes a $4.8 million one-time pre-tax charge in fiscal 2001 which reflects the write-off of the carrying value of the Company’s investment in SII Marketing International, Inc. as a result of the Company’s decision to terminate its equity participation in the joint venture. Fiscal Year 2000 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales ......................................................................... $ 103,569 $ 113,393 $ 128,064 $ 159,259 Gross profit ..................................................................... Operating expenses........................................................ Operating income........................................................... Income before income taxes........................................... Provision for income taxes............................................. 53,659 32,500 21,159 21,405 8,777 Net income...................................................................... 12,628 56,560 36,108 20,452 20,249 8,301 11,948 63,691 41,302 22,389 22,845 9,367 13,478 Earnings per share: Basic ........................................................................... Diluted ........................................................................ Gross profit as a percentage of net sales ...................... Operating expenses as a percentage of net sales ......... Operating income as a percentage of net sales ............ 0.39 0.38 51.8 % 31.4 % 20.4 % 0.37 0.36 49.9 % 31.9 % 18.0 % 0.42 0.41 49.7 % 32.2 % 17.5 % 81,836 52,015 29,821 30,218 12,389 17,829 0.59 0.57 51.4 % 32.7 % 18.7 % While the majority of the Company’s products are the Company’s inventory levels at its major cus- not seasonal in nature, a significant portion of tomers at the end of 2001 were below targeted the Company’s net sales and operating income is levels and therefore may favorably impact retail- generally derived in the second half of the year. ers restocking orders in the first quarter of 2002. The Company’s fourth quarter, which includes the Christmas season, on average generates in excess As the Company increases the number of of 30% of the Company’s annual operating income. Company-owned stores, it would generally amplify The amount of net sales and operating income gen- the Company’s seasonality by decreasing the erated during the first quarter is affected by the Company’s operating income in the first half of the levels of inventory held by retailers at the end of year while increasing operating income during the the Christmas season, as well as general economic second half of the year. In addition, new product conditions and other factors beyond the Company’s line launches would generally augment the sales control. In general, lower levels of inventory held levels in the quarter the product launch takes by retailers at the end of the Christmas season place. The results of operations for a particular may have a positive impact on the Company’s net quarter may also vary due to a number of factors, sales and operating income in the first quarter as including retail, economic and monetary condi- a result of higher levels of restocking orders placed tions, timing of orders or holidays and the mix of by retailers. Management currently believes that products sold by the Company. 44 FINANC IA L IN FO RMAT ION 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 5, 2002 and December 30, 2000, and the related consolidated statements of income and com- prehensive income, stockholders’ equity and cash flows for each of the three years in the period ended January 5, 2002. 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 auditing standards generally accepted in the United States of America. 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. 47 cial position of Fossil, Inc. and subsidiaries at January 5, 2002 and December 30, 2000, and the results of In our opinion, such consolidated financial statements present fairly, in all material respects, the finan- their operations and their cash flows for each of the three years in the period ended January 5, 2002, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Dallas, Texas February 25, 2002 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 accounting principles generally accepted in the United States of America 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 main- tains 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 certain of the Company’s outside direc- tors, 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. Kosta Kartsotis President and Chief Executive Officer Mike L. Kovar Senior Vice President, Chief Financial Officer and Treasurer 48 CONSOLIDATED BALANCE SHEETS DOLLARS IN THOUSANDS Assets Current assets: January 5, 2002 December 30, 2000 Cash and cash equivalents ......................................................................................... $ 67,491 $ 79,501 Short-term marketable investments.......................................................................... Accounts receivable–net ............................................................................................. 5,360 74,035 Inventories .................................................................................................................. 103,662 Deferred income tax benefits...................................................................................... Prepaid expenses and other current assets............................................................... 8,718 10,251 11,312 62,876 81,118 7,779 10,245 Total current assets ................................................................................................ 269,517 252,831 Investments in joint ventures ........................................................................................ Property, plant and equipment–net ............................................................................... Intangible and other assets–net..................................................................................... 1,099 90,036 20,211 5,935 42,252 6,573 Total assets.............................................................................................................. $ 380,863 $ 307,591 Liabilities and Stockholders’ Equity Current liabilities: 49 Note payable................................................................................................................ $ 15,955 $ 5,107 Accounts payable ........................................................................................................ 21,266 18,325 Accrued expenses: Co-op advertising .................................................................................................... Compensation.......................................................................................................... Other........................................................................................................................ Income taxes payable.................................................................................................. 14,838 8,594 27,679 17,905 Total current liabilities ........................................................................................... 106,237 14,320 6,179 19,145 19,964 83,040 Deferred income tax liability.......................................................................................... 7,318 – Commitments (Note 10) Minority interest in subsidiaries.................................................................................... 3,285 3,852 Stockholders’ equity: Common stock, 30,284,369 and 30,136,824 shares issued and outstanding, respectively......................................................... 303 Additional paid-in capital........................................................................................... 15,241 301 14,214 Retained earnings ....................................................................................................... 252,112 208,429 Accumulated other comprehensive loss..................................................................... (3,633) (2,245) Total stockholders’ equity ....................................................................................... 264,023 220,699 Total liabilities and stockholders’ equity............................................................ $ 380,863 $ 307,591 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA Fiscal Year 2001 2000 1999 Net sales ....................................................................................................... $ 545,541 $ 504,285 $ 418,762 Cost of sales.................................................................................................. 273,691 248,539 Gross profit ................................................................................................... 271,850 255,746 Operating expenses: Selling and distribution ........................................................................... 149,807 126,239 General and administrative .................................................................... 45,189 35,686 Total operating expenses ..................................................................... 194,996 161,925 Operating income......................................................................................... 76,854 93,821 Interest expense ........................................................................................... 319 Write-off of investment in joint venture ..................................................... (4,776) Other income (expense)-net......................................................................... Income before income taxes......................................................................... Provision for income taxes........................................................................... 1,045 72,804 29,121 128 – 1,024 94,717 38,834 205,875 212,887 95,349 30,089 125,438 87,449 117 – 509 87,841 36,015 Net income ............................................................................................... $ 43,683 $ 55,883 $ 51,826 Other comprehensive income: Currency translation adjustment ........................................................... (1,374) 827 (1,658) Unrealized (loss) gain on marketable investments ...................................................................... (35) 187 (564) Forward contracts as hedge of intercompany foreign currency payments: Cumulative effect of implementing SFAS No.133................................ Change in fair values........................................................................... (400) 421 – – – – Total comprehensive income................................................................ $ 42,295 $ 56,897 $ 49,604 Earnings per share: Basic ......................................................................................................... $ Diluted ...................................................................................................... $ 1.45 1.40 $ $ 1.76 1.71 $ $ 1.63 1.55 Weighted average common shares outstanding: Basic ........................................................................................................ Diluted ..................................................................................................... 30,167 31,240 31,689 32,675 31,900 33,428 See notes to consolidated financial statements. 50 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AMOUNTS IN THOUSANDS accumulated other common stock comprehensive income (loss) treasury stock shares par value additional paid–in capital retained earnings cumulative unrealized gain unrealized gain translation (loss) on marketable (loss) on forward adjustment investments contracts shares share cost total stockholders’ equity Balance, January 2, 1999 ........................................................... 20,932 $ 209 $ 34,345 $ 102,858 $ (1,037) $ – $ – (104) $ (1,456) $ 134,919 Common stock issued upon exercise of stock options ......................................................... 709 Tax benefit derived from exercise of stock options ......................................................... Purchase of treasury shares ....................................................... Reissuance of treasury stock upon exercise of stock options................................................. Three-for-two-stock split ............................................................. Net income ................................................................................... Unrealized loss on marketable investments ......................................................... Currency translation adjustment ............................................... 7 – – 3,632 3,902 – – – – – – – 10,466 – – 105 – – (105) – (1,115) – 51,826 – – – – – – – – – – – – – – – – – – – – – (1,658) (564) – 51 Balance, January 1, 2000 ........................................................... 32,107 321 41,774 153,569 (2,695) (564) Common stock issued upon exercise of stock options ......................................................... 56 Tax benefit derived from exercise of stock options .......................................................... Purchase of treasury shares ........................................................ Reissuance of treasury stock upon exercise of stock options................................................. Repurchase and retirement of common stock ...................................................................... Net income.................................................................................... Unrealized gain on marketable investments ......................................................... Currency translation adjustment ............................................... – – – (2,026) – – – – – – – (20) – – – 384 470 – – – – – (1,023) (28,414) – – 55,883 – – – – – – – – – – – – – – – – – 827 187 – Balance, December 30, 2000 ....................................................... 30,137 301 14,214 208,429 (1,868) (377) Common stock issued upon exercise of stock options ......................................................... 307 Tax benefit derived from exercise of stock options .......................................................... Common stock issued in connection with acquisitions .............. Repurchase and retirement of common stock ...................................................................... Net income.................................................................................... Unrealized loss on marketable investments ......................................................... Currency translation adjustment ............................................... Forward contracts as hedge of intercompany foreign currency payments: Cumulative effect of implementing SFAS No.133 ................. Change in fair values .............................................................. – 46 (206) – – – – – 3 – 1 (2) – – – – – 2,622 1,160 786 – – – (3,541) – – 43,683 – – – – – – – – – – – – – – – – – – – (1,374) (35) – – – – – (400) 421 Balance, January 5, 2002 ........................................................... 30,284 $ 303 $ 15,241 $ 252,112 $ (3,242) $ (412) $ 21 See notes to consolidated financial statements. – – – – – – – – – – – – – – – – – – – – – – – – – – – (90) 135 – – – – – 3,639 – (1,994) 3,902 (1,994) 2,242 – – 1,127 – 51,826 – – (564) (1,658) (59) (1,208) 191,197 – – (13) – 384 – (268) 470 (268) 72 1,476 453 – – – – – – – – – – – – – – – – – – – (28,434) 55,883 187 827 – 220,699 – – – – – – – – – 2,625 1,160 787 (3,543) 43,683 (35) (1,374) (400) 421 $ – $ 264,023 AMOUNTS IN THOUSANDS accumulated other common stock comprehensive income (loss) treasury stock shares par value additional paid–in capital retained earnings cumulative unrealized gain unrealized gain translation (loss) on marketable (loss) on forward adjustment investments contracts shares share cost stockholders’ total equity Balance, January 2, 1999 ........................................................... 20,932 $ 209 $ 34,345 $ 102,858 $ (1,037) $ – $ – (104) $ (1,456) $ 134,919 of common stock ...................................................................... (2,026) (20) (28,414) Three-for-two-stock split ............................................................. 10,466 105 (105) Balance, January 1, 2000 ........................................................... 32,107 321 41,774 153,569 (2,695) (564) (59) (1,208) 191,197 Common stock issued upon Tax benefit derived from exercise of stock options ......................................................... 709 exercise of stock options ......................................................... Purchase of treasury shares ....................................................... Reissuance of treasury stock upon exercise of stock options................................................. Net income ................................................................................... Unrealized loss on marketable investments ......................................................... Currency translation adjustment ............................................... Common stock issued upon Tax benefit derived from exercise of stock options ......................................................... 56 exercise of stock options .......................................................... Purchase of treasury shares ........................................................ Reissuance of treasury stock Repurchase and retirement upon exercise of stock options................................................. Net income.................................................................................... Unrealized gain on marketable investments ......................................................... Currency translation adjustment ............................................... Common stock issued upon Tax benefit derived from exercise of stock options ......................................................... 307 exercise of stock options .......................................................... Common stock issued in connection with acquisitions .............. Repurchase and retirement of common stock ...................................................................... (206) Net income.................................................................................... Unrealized loss on marketable investments ......................................................... Currency translation adjustment ............................................... Forward contracts as hedge of intercompany foreign currency payments: Cumulative effect of implementing SFAS No.133 ................. Change in fair values .............................................................. See notes to consolidated financial statements. – – – – – – – – – – – – – 46 – – – – – 7 – – – – – – – – – – – – – (2) – 3 – 1 – – – – 3,632 3,902 384 470 – – – – – – – – – – – – – – – 2,622 1,160 786 (3,541) (1,115) 51,826 (1,023) 55,883 – – – – – – – – – – – – – – – – – – – – (564) (1,658) – 827 187 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 43,683 (1,374) (35) – – – (400) 421 – – – – – – – – – – – – – – – – – – – – – – – – – (90) (1,994) 135 2,242 (13) (268) 72 1,476 453 – – – – – – – – – – – – – – – – – – – – – 3,639 3,902 (1,994) 1,127 – 51,826 (564) (1,658) 384 470 (268) (28,434) 55,883 187 827 2,625 1,160 787 (3,543) 43,683 (35) (1,374) (400) 421 – – – – – – – – – – – – – – – – – – – – – – – Balance, December 30, 2000 ....................................................... 30,137 301 14,214 208,429 (1,868) (377) – 220,699 Balance, January 5, 2002 ........................................................... 30,284 $ 303 $ 15,241 $ 252,112 $ (3,242) $ (412) $ 21 $ – $ 264,023 CONSOLIDATED STATEMENTS OF CASH FLOWS DOLLARS IN THOUSANDS Fiscal Year 2001 2000 1999 Operating Activities: Net income .................................................................................................................... $ 43,683 Noncash items affecting net income: Write-off of investment in joint venture.................................................................. Minority interest in subsidiaries ............................................................................. Equity in losses of joint ventures ............................................................................ Depreciation and amortization ................................................................................ Tax benefit derived from exercise of stock options ................................................. Loss on disposal of assets......................................................................................... Increase in allowance for doubtful accounts ........................................................... Increase in allowance for returns–net of related 4,776 1,430 933 9,627 1,160 316 1,811 inventory in transit.............................................................................................. Deferred income taxes.............................................................................................. Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable .................................................................................................. Inventories ................................................................................................................ Prepaid expenses and other current assets ............................................................ Accounts payable ...................................................................................................... Accrued expenses...................................................................................................... Income taxes payable ............................................................................................... Net cash from operating activities .......................................................................... Investing Activities: Business acquisitions, net of cash acquired............................................................ Effect of de-consolidating former subsidiary .......................................................... Additions to property, plant and equipment ........................................................... Sale (purchase) of marketable investments............................................................ Investment in joint ventures ................................................................................... Increase in intangible and other assets .................................................................. Net cash used in investing activities....................................................................... Financing Activities: Common stock issued upon exercise of stock options............................................. Net purchase of treasury stock................................................................................ Acquisition and retirement of common stock ......................................................... Distribution of minority interest earnings.............................................................. Increase in notes payable–banks............................................................................. Net cash from (used in) financing activities ........................................................... 268 6,378 (7,340) (15,776) 712 (1,886) 4,998 (2,184) 48,906 (15,787) (747) (55,610) 5,951 (373) (810) (67,376) 2,625 – (3,543) (1,116) 8,904 6,870 $ 55,883 $ 51,826 – 1,786 381 6,436 470 420 1,523 742 (1,010) (15,983) (15,993) (2,509) 7,842 (2,274) 2,574 40,288 – – (20,341) (442) (2,196) (818) (23,797) 838 (268) (27,806) (492) 64 (27,664) – 1,484 151 5,889 3,902 19 1,044 2,098 (1,114) (11,355) (3,014) (4,733) (5,056) 13,544 6,909 61,594 (2,732) – (10,568) (10,870) (4,000) (1,505) (29,675) 4,766 (1,994) – (790) 505 2,487 Effect of exchange rate changes on cash and cash equivalents ................................................................................................ Net (decrease) increase in cash and cash equivalents ................................................ Cash and cash equivalents: Beginning of year ..................................................................................................... (410) (12,010) (234) (11,407) (761) 33,645 79,501 90,908 57,263 End of year................................................................................................................ $ 67,491 $ 79,501 $ 90,908 See notes to consolidated financial statements. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Consolidated Financial Statements include the accounts of Fossil, Inc., a Delaware corporation and its sub- sidiaries (the “Company”). The Company reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). During 2001, the retail-based calendar contained 53 weeks instead of 52 weeks in the prior year. The additional week did not have a material impact on comparabil- ity to prior periods. References to 2001, 2000, and 1999 are for the fiscal years ended January 5, 2002, December 30, 2000 and January 1, 2000, respectively. Significant intercompany balances and transac- tions are eliminated in consolidation. The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion watches, accessories and apparel. The Company’s products are sold primarily through department stores and specialty retailers worldwide. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 53 Cash Equivalents are considered all highly liquid investments with original maturities at date of purchase of three months or less. Short–term Marketable Investments consist of liquid investments with original maturities exceeding three months and mutual fund investments. By policy, the Company invests primarily in high-grade market- able securities. Securities of $5.4 million and $5.1 million for fiscal years 2001 and 2000, respectively, are classified as available for sale and stated at fair value, with unrealized holding gains (losses) included in accumulated other comprehensive income (loss) as a component of stockholders’ equity. At the end of 2001, there were no securities classified as held-to-maturity. Securities of $6.2 million for fiscal 2000 are classified as held-to-maturity and are stated at amortized cost. Accounts Receivable are stated net of allowances of approximately $22.5 million and $21.2 million for estimated customer returns and approximately $11.7 million and $9.5 million for doubtful accounts at the close of fiscal years 2001 and 2000, respectively. Inventories are stated at the lower of average cost, including any applicable duty and freight charges, or market. Property, Plant and Equipment is 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. Non-compete agreements and trademarks are amortized using the straight-line method over the estimated useful lives of generally three and ten years, respectively. During 2001, cost in excess of tangible assets acquired, relative to business combinations occurring prior to July 1, 2001, have been amortized using the straight-line method over 20 years. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, issued in July 2001, future cost in excess of tangible assets acquired and other indefinite-lived intangible assets, related to business combinations occuring on or after July 1, 2001, will be tested for impairment rather than amortized beginning January 2002. Cumulative Translation Adjustment is included in accumulated other comprehensive income (loss) as a com- ponent of stockholders’ equity and reflects the unrealized adjustments resulting from translating the financial statements of foreign subsidiaries. The functional currency of the Company’s foreign subsidiar- ies 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 that 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 gains of approximately $0.3 million and losses of $0.4 million and $1.2 million for fiscal years 2001, 2000 and 1999, respectively, which have been included in other income (expense)–net. Forward Contracts are entered into by the Company principally to hedge the future payment of intercom- pany inventory transactions with its non-U.S. subsidiaries. Beginning in fiscal year 2001 these cash flow hedges are stated at estimated fair value and changes in fair value are reported as a component of other comprehensive income. At January 5, 2002, the Company had hedge contracts to sell (i) 16.7 million Euro for approximately $14.9 million, expiring through June 2002, and (ii) approximately 0.4 million British Pounds for approximately $0.6 million, expiring through January 2002. If the Company were to settle its Euro and British Pound based contracts at fiscal year-end 2001, the net result would be a gain of approximately $21,000, net of taxes. This unrealized gain is recognized in other comprehensive income. The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” 54 effective December 31, 2000, and recognized an unrealized loss for forward contracts open at that date of $400,000, net of taxes, in other comprehensive income. The net increase in fair value of $421,000, is reported as other comprehensive income during fiscal 2001. This net increase consisted of net gains from these hedges of $1.0 million, less $584,000 of net gains reclassified into earnings. Revenues are recognized as sales when merchandise is shipped and title transfers to the customer. 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, internet portal costs and promotional allowances are expensed as incurred. Advertising expenses for fiscal years 2001, 2000 and 1999 were approximately $32.9 million, $32.3 million and $27.1 million, respectively. New Accounting Standards. In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” These 55 standards were adopted by the Company on July 1, 2001. Under SFAS No. 142, all goodwill and intan- gible assets with indefinite lives will not be amortized in fiscal 2002 (amortization expense of $185,000 recognized in 2001) but will be tested for impairment annually and also in the event of an impairment indication. The Company does not expect the adoption of these standards to have a material effect on its financial statements. The FASB also issued SFAS No. 144, “Accounting for the Impairment or the Disposal of Long-Lived Assets,” which is effective January 6, 2002 for the Company. SFAS No. 144 supersedes SFAS No.121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” The Company has evaluated the impact of the provisions of SFAS No. 144, and believes the results of such evaluation would not result in any material adjustments to the carrying value of its long-lived assets as of the balance sheet date. Minority Interest in Subsidiaries, included within other income (expense)—net 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 the various consoli- dated subsidiaries. Earnings Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares out- standing during each period. Diluted EPS includes the effects of dilutive stock options outstanding during each period using the treasury stock method. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS: Fiscal Year IN THOUSANDS, EXCEPT PER SHARE DATA Numerator: 2001 2000 1999 Net income.............................................................................................. $ 43,683 $ 55,883 $ 51,826 Denominator: Basic EPS computation: Weighted average common shares outstanding ................................... 30,323 32,177 21,462 Three-for-two stock split effected August 1999 .................................... – – 10,466 Repurchase of common shares, net of treasury shares reissued ......................................................... (156) (488) (28) 30,167 31,689 31,900 Basic EPS............................................................................................ $ 1.45 $ 1.76 $ 1.63 Diluted EPS computation: Basic weighted average common shares outstanding.......................... 30,167 31,689 31,900 Stock option conversion ......................................................................... 1,073 986 1,528 31,240 32,675 33,428 Diluted EPS ........................................................................................ $ 1.40 $ 1.71 $ 1.55 Common Share and Per Share Data in these notes to consolidated financial statements have been presented on a retroactive basis for all stock splits. 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 is estimated to approximate the related book values unless otherwise indicated, based on market information available to the Company. Reclassification of certain 1999 and 2000 amounts have been made to conform to the 2001 presentation. 56 2. Acquisitions In May 2001, Fossil UK Holdings, Ltd., an indirect wholly owned subsidiary of the Company, acquired 100% of the capital stock of The Avia Watch Company Ltd. (“Avia”) as well as certain trademarks utilized by Avia from Roventa-Henex S.A. for a cash purchase price of approximately $5.0 million. The acquisi- tion was recorded as a purchase and, in connection therewith, the Company recorded goodwill of approxi- mately $3.3 million. In July 2001, the Company acquired 80% of the capital stock of FSLA, Pty. Limited, the Company’s dis- tributor in Australia, for a cash purchase price of approximately $300,000. This acquisition was recorded as a purchase and, in connection therewith, the Company recorded goodwill of approximately $200,000. Effective July 2001, Fossil (East) Limited (“Fossil East”) increased its equity interest in Pulse Time, Ltd. to 90% by acquiring an additional 30% of the capital stock from its minority holders in exchange for approximately 24,000 shares of the Company’s common stock, par value $0.1 per share (the “Common Stock”) valued at $450,000. Additionally, on July 3, 2001, Fossil East increased its equity interest in Trylink, Ltd. to 85% by acquiring an additional 34% of the capital stock from its minority holders in 57 exchange for $225,000 in cash and approximately 14,000 shares of the Company’s Common Stock valued at $225,000. Both of these acquisitions have been accounted for as a purchase and no goodwill was recorded in connection with either transaction. Effective August 2001, the Company acquired 99.6% of the outstanding capital stock of Vedette Industries, SA, the Company’s distributor in France, for a cash purchase price of approximately $5.3 million. The terms of this transaction include a future earnout payment of an amount up to $1.5 million in the event that defined sales and operating income objectives are achieved. The acquisition was recorded as a pur- chase and, in connection therewith, the Company recorded goodwill of approximately $2.5 million, includ- ing amounts relating to the earnout provision. In August 2001, the Company acquired the worldwide rights to the ZODIAC brand name and related inventory for a cash purchase price of approximately $4.7 million. This acquisition was recorded as a purchase and $0.2 million of goodwill was recorded in connection with this transaction. In October 2001, the Company acquired the outstanding stock of two separate companies and certain assets of a third, all located in Switzerland, for a combined cash purchase price of approximately $2.3 mil- lion. The terms of these transactions include future earnout payments for amounts up to approximately $750,000, in the event certain earnings thresholds are met. This acquisition was recorded as a purchase and, in connection therewith, the Company recorded goodwill of approximately $1.5 million, including amounts relating to the earnout provision. The results of these business combinations are included in the accompanying consolidated financial state- ments since the dates of their acquisition. The proforma effects, as if transactions had occurred at the beginning of the years presented, are not significant. 3. Investments in Joint Ventures During 1999, the Company acquired a 20% interest in SII Marketing International, Inc. (“SMI”), and since that time has invested $6.0 million in the venture. SMI, a joint venture between the Company and SII, was formed to design, market and distribute watches in the mass-market distribution channel. The investment of $5.4 million and $3.8 million at fiscal year-end 2000 and 1999, respectively, had been car- ried on the equity basis. The Company’s equity in SMI’s net loss of $1,100,000, $409,000 and $151,000 for fiscal 2001, 2000 and 1999, respectively, is included in other income (expense)—net. Subsequent to fiscal year-end 2001, the Company entered into an agreement to transfer its 20% interest in SMI to SII for no additional consideration in exchange for SII’s agreement to indemnify the Company from certain exist- ing and any future losses in connection with SMI. The write-off of the Company’s remaining investment in SMI and recognition of certain transition cost of $4.8 million is reported as a separate item as other expense for fiscal year 2001. Effective July 2001, the Company sold 50% of the equity of its wholly-owned subsidiary in Japan to Seiko Instruments Incorporated (“SII”) pursuant to a joint venture agreement for the marketing, distribution and sale of the Company’s products in Japan. The Company has accounted for this investment based upon the equity method from the effective date of the transaction. In August 2000, the Company sold 50% of the equity of its former wholly-owned subsidiary (“Fossil Spain”) pursuant to a joint venture agreement with Sucesores de A. Cardarso for the marketing, distribu- tion and sale of the Company’s products in Spain. The Company has accounted for the investment based upon the equity method from the effective date of the transaction. The Company’s equity in Fossil Spain’s net income was $497,000 and $28,000 for fiscal 2001 and 2000, respectively, and is included in other income (expense)—net. 58 4. Inventories Inventories consist of the following: Fiscal Year-End IN THOUSANDS 2001 2000 Components and parts....................................................................................................... $ 4,659 $ Work-in-process.................................................................................................................. Finished merchandise on hand ......................................................................................... Merchandise at Company stores....................................................................................... Merchandise in-transit from customer returns ............................................................... 3,855 70,547 11,365 13,236 6,258 1,182 48,113 13,296 12,269 5. Property, Plant and Equipment Property, plant and equipment consist of the following: Fiscal Year-End IN THOUSANDS $ 103,662 $ 81,118 2001 2000 Land.................................................................................................................................... $ 7,757 $ 2,525 59 Furniture and fixtures ....................................................................................................... 33,348 Buildings ............................................................................................................................ 15,949 Computer equipment and software .................................................................................. 18,536 Leasehold improvements................................................................................................... 19,579 Construction in progress ................................................................................................... 27,549 Less accumulated depreciation and amortization ........................................................... 32,682 122,718 11,142 24,977 11,883 13,494 1,817 65,838 23,586 6. Intangible and Other Assets Intangibles and other assets consist of the following: Fiscal Year-End IN THOUSANDS $ 90,036 $ 42,252 2001 2000 Costs in excess of tangible net assets acquired ................................................................ $ 13,401 $ 5,200 Noncompete agreement ..................................................................................................... Trademarks ........................................................................................................................ Deposits .............................................................................................................................. Cash surrender value of life insurance............................................................................. Other................................................................................................................................... Less accumulated amortization ........................................................................................ 475 5,168 2,320 900 978 23,242 3,031 $ 20,211 $ 475 1,030 1,458 783 290 9,236 2,663 6,573 7. Debt Bank: U.S.-based. The Company has renewed its short-term revolving credit facility with its primary bank (“U.S. Short-term Revolver”) each year since June 1998. In November 2001, the Company amended the U.S. Short-term Revolver to temporarily increase the funds available under the facility to $50 million through January 15, 2002, an increase of $10 million, not subject to any borrowing base calculation. The U.S. Short-term Revolver is unsecured and requires the maintenance of net worth, quarterly income, working capital and financial ratios. There were $16.0 million in borrowings under the U.S. Short-term Revolver as of fiscal year-end 2001. Since June 1999, none of the $40.0 million in available funds under the facility was subject to a borrowing base calculation. In June 2000, the Company negotiated a reduc- tion in the interest rate paid on Eurodollar Base Rate (“Eurodollar”) based borrowings. All borrowings under the U.S. Short-term Revolver accrue interest at the bank’s prime rate less 0.5%, 4.5% at year-end, or Eurodollar plus 0.75%, 3.2% at year-end. Interest expense under the credit facility was approximately $0.2 million for fiscal year 2001. At fiscal year-end 2001 and 2000, the Company had outstanding letters of credit of approximately $5.6 million and $1.8 million, 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 approximately 2.5 million Euro (approximately $2.3 million as of fiscal year-end 2001). No borrowings were outstanding under the combined credit facilities at the end of fiscal years 2001 and 2000. In connection with SFJ, Inc., the Company’s joint venture with SII in Japan, the Company and SII are co-guarantors of SFJ’s 500,000,000 yen ($3.8 million as of year-end) short-term credit facility with Fuji Bank. In the event that SFJ had approximately 260,000,000 yen ($2.0 million) of borrowings outstanding under his facility. 60 8. Other Income (Expense) – Net Other income (expense)—net consists of the following: Fiscal Year IN THOUSANDS 2001 2000 1999 Interest income ........................................................................................... $ 1,549 $ 3,480 $ 2,650 Minority interest in subsidiaries .............................................................. (1,430) (1,786) (1,484) Equity in losses of joint ventures ............................................................... (933) Currency gain (loss) .................................................................................... Royalty income............................................................................................ Insurance proceeds above book value ....................................................... Other income (expense) .............................................................................. 336 740 – 783 (381) (412) 770 – (647) (151) (1,181) 353 52 270 509 $ 1,045 $ 1,024 $ 9. Income Taxes 61 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 ben- efits, consist of the following: Fiscal Year-End IN THOUSANDS Current assets: Deferred tax assets: 2001 2000 Bad debt allowance ............................................................................. $ 3,709 $ 3,163 Returns allowance .............................................................................. 263(A) capitalization of inventory...................................................... Miscellaneous tax asset items............................................................ 6,772 878 1,260 6,537 704 1,060 Deferred tax liabilities: In-transit returns inventory............................................................... Net current deferred tax benefits ...................................................... (3,901) 8,718 (3,685) 7,779 Long-term deferred tax liability: Tax on certain undistributed earnings of foreign subsidiaries ............ (7,318) – Net deferred tax benefit.............................................................................. $ 1,400 $ 7,779 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 IN THOUSANDS Current provision: 2001 2000 1999 United States ............................................................................................. $ 12,104 $ 21,229 $ 18,448 Foreign........................................................................................................ Deferred provision.......................................................................................... 9,479 6,378 18,145 14,779 (1,010) (1,114) Tax equivalent related to exercise of stock options (credited to additional paid-in capital) ..................................................... 1,160 470 3,902 Provision for income taxes............................................................................. $ 29,121 $ 38,834 $ 36,015 A reconciliation of income tax computed at the U.S. federal statutory income tax rate of 35% to the provi- sion for income taxes is as follows: Fiscal Year IN THOUSANDS 2001 2000 1999 Tax at statutory rate...................................................................................... $ 25,481 $ 33,151 $ 30,744 State, net of federal tax benefit ..................................................................... Other............................................................................................................... 1,069 2,571 736 4,947 975 4,296 Provision for income taxes............................................................................. $ 29,121 $ 38,834 $ 36,015 Deferred U.S. federal income taxes are not provided on certain undistributed earnings of foreign subsid- iaries where management plans to continue reinvesting these earnings outside the United States indefi- nitely. Determination of such tax amounts that would be payable if earnings were distributed to the U.S. Company is not practical because potential offsets by U.S. foreign tax credits would be available under various assumptions involving the tax calculation. 62 10. 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 roy- alty expense of approximately $11.2 million, $9.6 million and $4.7 million in fiscal years 2001, 2000 and 1999, respectively. These amounts are included in the Company’s cost of sales and selling expenses. The Company had several agreements in effect at the end of fiscal year 2001 which expire on various dates from February 2002 through December 2007 and require the Company to pay royalties ranging from 6% to 20.5% of defined net sales. Future minimum royalty commitments under such license agreements at the close of fiscal year 2001 are as follows (amounts in thousands): 2002 ............................................................................................................................................ $ 11,122 2003 ............................................................................................................................................ 11,420 2004 ............................................................................................................................................ 2005 ............................................................................................................................................ 2006 ............................................................................................................................................ Thereafter................................................................................................................................... 5,551 1,360 1,863 1,855 $ 33,171 63 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 approximately $17.5 million, $10.9 million, and $6.8 million for fiscal years 2001, 2000 and 1999, respectively. Contingent rent expense has been immaterial in each of the last three fiscal years. Future minimum rental commitments under non-cancelable such leases at the close of fiscal year 2001 are as follows (amounts in thousands): 2002 ............................................................................................................................................ $ 14,428 2003 ............................................................................................................................................ 2004 ............................................................................................................................................ 2005 ............................................................................................................................................ 2006 ............................................................................................................................................ Thereafter................................................................................................................................... 14,622 14,245 13,753 13,115 50,382 $ 120,545 11. Stockholders’ Equity and Benefit Plans Common and Preferred Stock. On July 21, 1999, the Board of Directors of the Company declared a 3-for-2 stock split (“Stock Split”) of the Company’s Common Stock which was effected in the form of a stock divi- dend which was paid on August 17, 1999 to stockholders of record on August 3, 1999. Retroactive effect has been given to the Stock Split in all share and per share data in these notes to financial statements. The Company has 100,000,000 shares of authorized Common Stock, with 30,284,369 and 30,136,824 shares issued and outstanding at the close of fiscal years 2001 and 2000, 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. Common Stock Repurchase Programs. On September 18, 2000 and September 18, 1998, the Company’s Board of Directors authorized management to repurchase up to 500,000 shares and 2.5 million shares, respectively, of the Company’s Common Stock in the open market or privately negotiated transactions (the “Repurchase Programs”). During fiscal years 2001 and 2000, the Company repurchased 206,198 and 2,039,400 shares, respectively, of its Common Stock under the Repurchase Programs at a cost of approxi- mately $3.5 million and $28.6 million, respectively. During fiscal years 2001 and 2000, none and 73,372 shares respectively, of Common Stock repurchased were reissued in connection with the Company’s 1993 Long-Term Incentive Plan (“Incentive Plan”). The Company retired 206,198 shares and 2,026,600 shares of its Common Stock that were purchased in fiscal years 2001 and 2000, respectively. Deferred Compensation and Savings Plans. The Company has a savings plan in the form of a defined contri- bution plan (the “401(k) plan”) for substantially all full-time employees of the Company. 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 approximately $0.4 million for fiscal year 2001 and $0.3 million and $0.2 million for fiscal years 2000 and 1999, respectively. In December 1998, the Company adopted the Fossil, Inc. and Affiliates Deferred Compensation Plan (the “Deferred Plan”). Eligible participants may elect to defer up to 50% of their salary pursuant to the terms and conditions of the Deferred Plan. Eligible participants include certain officers and other highly 64 compensated employees designated by the Deferred Plan’s administrative committee. In addition, the Company may make employer contributions to participants under the Deferred Plan from time to time. The Company made no contributions to the Deferred Plan during the fiscal years 2001 and 2000 while $0.5 million was distributed during fiscal 1999. Long-term Incentive Plan. An aggregate of 2,587,500 shares of Common Stock were initially reserved for issuance pursuant to the Incentive Plan, adopted April 1993. An additional 1,350,000 shares were reserved in each of 1995, 1998 and 2001 for issuance under the Incentive Plan. Designated employees of the Company, including officers and directors, are eligible to receive (i) stock options, (ii) stock apprecia- tion rights, (iii) restricted or non-restricted 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 the fair market value of the Company’s Common Stock at the date of grant. The weighted average fair value of the stock options granted during fiscal years 2001, 2000 and 1999 was $10.11, $8.97 and 65 $12.01, respectively. Nonemployee Director Stock Option Plan. An aggregate of 225,000 shares of Common Stock were reserved for issuance pursuant to the Nonqualified Stock Option Plan, adopted April 1993. During the first year an individual is elected as a nonemployee director of the Company, they receive a grant of 5,000 nonqualified stock options. In addition, on the first day of each subsequent calendar year, each non-employee director automatically receives a grant of an additional 3,000 nonqualified stock options as long as the person is serving as a nonemployee director. Pursuant to this plan, 50% of the options granted will become exercis- able 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 2001, 2000 and 1999 was $10.29, $10.06 and $14.25, respectively. The fair value of options granted under the Company’s stock option plans during fiscal years 2001, 2000 and 1999 was 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 66%, risk free interest rate of 3.50% to 6.00%, and expected life of five to six years. The following tables summarize the Company’s stock option activity: Incentive Plan exercise price per share weighted average exercise price per share outstanding weighted average exercise price per share exercisable available for grant Balance, Fiscal 1998 .......................................................................... $ 2.945 – $ 19.833 Granted ..................................................................................... $ 17.875 – $ 33.187 Exercised ..................................................................................... $ 2.945 – $ 18.167 Canceled ..................................................................................... $ 3.528 – $ 29.875 Exercisable ..................................................................................... $ 2.945 – $ 19.833 Balance, Fiscal 1999 .......................................................................... $ 2.945 – $ 33.187 Granted ..................................................................................... $ 11.187 – $ 25.000 Exercised ..................................................................................... $ 2.945 – $ 20.000 Canceled ..................................................................................... $ 5.167 – $ 33.187 Exercisable ..................................................................................... $ 2.945 – $ 32.625 Balance, Fiscal 2000 .......................................................................... $ 2.945 – $ 32.625 Granted ..................................................................................... $ 14.000 – $ 22.940 Shares designated for grant through the plan ......................................................................... – Exercised ..................................................................................... $ 2.945 – $ 19.333 Canceled ..................................................................................... $ 9.667 – $ 32.209 Exercisable ..................................................................................... $ 2.945 – $ 32.625 $ 6.187 $ 19.483 $ 5.319 $ 13.176 $ – $ 10.193 $ 15.169 $ 7.204 $ 16.812 $ – $ 11.639 $ 17.432 – $ 8.736 $ 17.243 $ – 2,313,788 $ 4.767 1,140,451 1,715,779 542,671 (895,580) (53,426) – – – – – – – – (199,643) (542,671) – 53,426 – 1,907,453 $ 5.831 940,808 1,226,534 789,000 (106,870) (94,494) – – – – – – – – 300,027 2,495,089 $ 7.344 1,240,835 680,130 – (288,823) (129,201) – – – – – – – – – – 55,812 (789,000) – 94,494 – 532,028 (680,130) 1,350,000 – 129,201 – Balance, Fiscal 2001 ........................................................................... $ 2.945 – $ 32.625 $ 13.081 2,757,195 $ 8.993 1,296,647 1,331,099 66 Non-Employee Director Plan exercise price per share weighted average exercise price per share outstanding weighted average exercise price per share exercisable Balance, Fiscal 1998 ........................................................................... $ 3.333 – $ 19.167 Granted ..................................................................................... $ 23.125 Exercised ..................................................................................... $ – Exercisable .................................................................................. $ 3.333 – $ 19.167 Balance, Fiscal 1999 ........................................................................... $ 3.333 – $ 23.125 Granted ..................................................................................... $ 14.375 – $ 19.625 Exercised ..................................................................................... $ 3.333 Exercisable .................................................................................. $ 3.333 – $ 23.125 Balance, Fiscal 2000 ........................................................................... $ 3.333 – $ 23.125 Granted ..................................................................................... $ 14.484 – $ 21.000 Exercised ..................................................................................... $ 3.333 – $ 8.445 Exercisable .................................................................................. $ 3.722 – $ 23.125 $ 7.288 $ 23.125 $ $ – – $ 8.193 $ 17.000 $ 3.333 $ – $ 9.554 $ 17.742 $ 5.250 $ – 148,500 $ 5.681 119,812 9,000 – – 157,500 10,000 (22,500) – 145,000 30,000 (18,000) – – – – – – 16,874 $ 6.560 136,686 – – – – – (22,500) $ 7.195 114,186 – – – – – 13,064 available for grant 64,687 (9,000) – – 55,687 (10,000) – – 45,687 (30,000) – – Balance, Fiscal 2001 ........................................................................... $ 3.722 – $ 23.125 $ 11.612 157,000 $ 9.921 127,250 15,687 67 Additional weighted average information for options outstanding and exercisable as of fiscal year-end 2001: range of exercise price Long-Term Incentive Plan: ............................................................ $ 2.945 – $ 8.250 $ 8.260 – $ 17.000 $ 17.010 – $ 32.625 Nonemployee Director Plan:.......................................................... $ 3.722 – $ 8.250 $ 8.260 – $ 17.000 $ 17.010 – $ 23.125 options outstanding options exercisable weighted average exercise price per share $ 4.947 $ 13.248 $ 18.613 weighted average remaining contractual life 4.1 years 7.7 years 8.3 years $ 5.185 $ 11.686 $ 20.706 4.0 years 6.1 years 8.4 years number of shares 716,535 390,650 189,462 1,296,647 60,750 43,750 22,750 127,250 weighted average exercise price per share $ 4.947 $ 11.246 $ 19.650 $ 8.993 $ 5.185 $ 11.053 $ 20.392 $ 9.921 number of shares 716,535 1,017,811 1,022,849 2,757,195 60,750 53,750 42,500 157,000 68 The Company applies Accounting Principles Board Opinion No.25 and related Interpretations in account- ing for its stock option plans. No compensation cost has been recognized for the Company’s stock option plans because the quoted market price of the Common Stock at the date of the grant was not in excess of the amount an employee must pay to acquire the Common Stock. SFAS No. 123, “Accounting for Stock- Based Compensation,” issued by the FASB in 1995, prescribes 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 2001, 2000 and 1999 are presented below. Fiscal Year IN THOUSANDS, EXCEPT PER SHARE DATA Net income: 2001 2000 1999 As reported .................................................................................................. $ 43,683 $ 55,883 $ 51,826 Proforma under SFAS No. 123.................................................................... $ 40,633 $ 53,018 $ 49,707 Basic earnings per share: As reported .................................................................................................. $ 1.45 Proforma under SFAS No. 123.................................................................... $ 1.35 Diluted earnings per share: As reported .................................................................................................. $ 1.40 Proforma under SFAS No. 123.................................................................... $ 1.30 $ $ $ $ 1.76 1.67 1.71 1.62 $ $ $ $ 1.63 1.56 1.55 1.49 12. Supplemental Cash Flow Information The following is provided as supplemental information to the consolidated statements of cash flows: Fiscal Year IN THOUSANDS Cash paid during the year for: 2001 2000 1999 69 Interest ........................................................................................................ $ 216 $ 62 $ 402 Income taxes................................................................................................ $ 23,156 $ 35,106 $ 27,532 13. Major Customer, Segment and Geographic Information Customers of the Company consist principally of major department stores and specialty retailers located throughout the United States, Europe and the Far East. There were no significant customers, individu- ally or considered as a group under common ownership, which accounted for over 10% of net sales for fiscal years 2001, 2000 and 1999. The Company’s majority owned facilities operate primarily in four geographic regions. The Company operates in two distinct distribution channels, wholesale and retail. In its wholesale operations the Company designs, develops, markets and distributes fashion watches and other accessories to depart- ment stores, specialty shops, and independent retailers throughout the world. The Company’s store oper- ations consist of the Company’s outlet and mall-based retail stores selling the Company’s product directly to the consumer. Specific information related to 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. Fiscal Year-End 2001 IN THOUSANDS Net Sales Operating Income (Loss) Long-lived Assets Total Assets United States–exclusive of Stores:................................ $ 62,315 $ 169,538 External customers .................................................... $ 290,859 $ 48,127 Intergeographic .......................................................... Stores .............................................................................. 77,236 66,504 Europe ............................................................................ 132,030 Far East and Export: ..................................................... External customers .................................................... Intergeographic .......................................................... Japan .............................................................................. 53,580 192,678 2,568 Intergeographic items.................................................... (269,914) – (8,190) 1,306 36,046 – (435) – – – 23,897 21,567 – – 43,702 34,270 3,567 133,353 – – – – – – – – Consolidated................................................................... $ 545,541 $ 76,854 $ 111,346 $ 380,863 Fiscal Year-End 2000 United States–exclusive of Stores:................................ $ 28,269 $ 138,796 External customers .................................................... $ 301,767 $ 55,811 Intergeographic .......................................................... Stores .............................................................................. Europe ............................................................................ Far East and Export: ..................................................... External customers .................................................... Intergeographic .......................................................... Japan .............................................................................. 73,270 49,803 99,439 47,152 189,651 6,124 Intergeographic items.................................................... (262,921) – (7,215) 6,442 39,910 – (1,127) – – – 18,135 5,132 – – 39,978 21,138 3,052 106,375 – – 172 – – – 1,304 – Consolidated................................................................... $ 504,285 $ 93,821 $ 54,760 $ 307,591 Fiscal Year-End 1999 United States–exclusive of Stores:................................ $ 24,554 $ 144,465 External customers .................................................... $ 252,816 $ 36,020 Intergeographic .......................................................... Stores .............................................................................. Europe: ........................................................................... External customers .................................................... Intergeographic .......................................................... Far East and Export: ..................................................... External customers .................................................... Intergeographic .......................................................... Japan .............................................................................. 34,700 37,797 86,714 500 34,091 140,800 7,516 Intergeographic items.................................................... (176,172) – 4,361 17,793 – 29,662 – (387) – – – 8,294 2,745 – – – – 24,818 23,099 – – 2,687 74,469 – – 277 – – – 2,513 – Consolidated................................................................... $ 418,762 $ 87,449 $ 38,557 $ 269,364 70 CORP OR ATE IN FO RMAT ION EXECUTIVE OFFICERS AND DIRECTOR Tom Kartsotis Chairman of the Board Kosta N. Kartsotis President, Chief Executive Officer and Director Michael W. Barnes President, International and Special Markets Division and Director Richard H. Gundy President, FOSSIL Watches and Stores Division and Director Jal S. Shroff Managing Director – Fossil East and Director Randy S. Kercho Executive Vice President Kenneth W. Anderson Director Mike L. Kovar Senior Vice President, Chief Financial Officer and Treasurer Mark D. Quick President, Fashion Accessories Division Alan J. Gold Director Junichi Hattori Director T. R. Tunnell Executive Vice President, Chief Legal Officer and Secretary Michael Steinberg Director 71 CORPORATE INFORMATION Transfer Agent and Registrar: Mellon Investor Services Independent Auditors: Deloitte & Touche LLP Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07760 2200 Ross Avenue Dallas, TX 75201 Donald J. Stone Director Corporate Counsel: Jenkens & Gilchrist 1445 Ross Avenue Dallas, TX 75202 INTERNET WEBSITE The Company maintains a website at the worldwide internet address of www.fossil.com. Certain product, event, investor relations and collector club information concerning the Company is available at the site. ANNUAL MEETING The Annual Meeting of Stockholders will be held on Wednesday, May 22, 2002, 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. 72 73 74 

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