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