Fossil Group
Annual Report 2002

Plain-text annual report

T A B L E O F C O N T E N T S > Company Profile Financial Highlights Letter to Stockholders Company Overview Management’s Discussion and Analysis Financial Information Corporate Information 2 3 4 12 21 29 47 COM PA NY PROFILE Fossil is a design, development, marketing and distribution company that specializes in consumer products predicated on fashion and value. The Company’s principal offerings include an extensive line of fashion watches sold under the Company’s proprietary FOSSIL®, RELIC® and ZODIAC® brands as well as licensed brands for some of the most prestigious companies in the world, including EMPORIO ARMANI®, DKNY®, DIESEL® and BURBERRY®. The Company also offers complementary lines of small leather goods, belts, handbags and sunglasses under the FOSSIL and RELIC brands, jewelry under the FOSSIL and EMPORIO ARMANI brands and FOSSIL apparel. 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 differentiates its products from those of its com - petitors principally through innovations in fashion details. These innovations include variations in the treatment of watch dials, crystals, cases, straps and bracelets for the Company’s watches and innovative treatments and details in its other accessories. An in-house creative services team coordinates product design, packaging, advertising and in-store presentations to more effectively and cohesively 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 requirements of its customers and maintain significant cost advantages compared to its competitors. Additionally, the Company’s centralized infrastructure in development/design coupled with its production/sourcing capabilities allows it to leverage the strength of its branded watch portfolio over an extensive global distribution network. 2 3 NET SALES (in millions of dollars) 98 99 00 01 02 OPERATING INCOME (in millions of dollars) 98 99 00 01 02 NET INCOME (in millions of dollars) 98 99 00 01 02 STOCKHOLDERS’ EQUITY (in millions of dollars) 98 99 00 01 02 700 600 500 400 300 200 100 0 90 80 70 60 50 40 30 0 60 50 40 30 20 10 5 0 350 300 250 200 150 100 50 0 FIN ANCIAL HIGHLIGH TS Fiscal Year IN THOUSANDS, EXCEPT PER SHARE DATA 2002 2001 2000 1999 1998 Net sales ......................................................... $ 663,338 $ 545,541 $ 504,285 $ 418,762 $ 304,743 Gross profit...................................................... 334,085 Operating income ........................................... Income before income taxes ............................ Net income ...................................................... Earnings per share: (2) Basic ............................................................ Diluted.......................................................... 95,930 95,979 58,907 1.28 1.22 271,850 76,854 72,804 43,683 (1) 255,746 93,821 94,717 55,883 0.97 (1) 0.93 (1) 1.18 1.14 212,887 87,449 87,841 51,826 1.08 1.03 150,504 55,370 54,729 32,161 0.69 0.66 Weighted average common shares outstanding: (2) Basic ............................................................ Diluted.......................................................... 45,993 48,238 45,251 46,860 47,534 49,013 47,850 50,142 46,581 48,879 Working capital ............................................... $ 241,177 $ 163,280 $ 169,792 $ 155,198 $ 109,040 Total assets...................................................... 482,526 380,863 307,591 Long-term debt ............................................... – – Stockholders’ equity ........................................ 340,541 264,023 Return on average stockholders’ equity .......... 19.9 % 18.3% – 220,699 26.9 % 269,364 – 191,197 194,078 – 134,919 32.2 % 29.3 % (1) Includes a $2.9 million one-time charge 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 relationship. Excluding this one-time charge, pro forma net income, basic earnings per share and diluted earnings per share were $46.5 million, $1.03 and $0.99, respectively. (2) All share and per share price data has been adjusted to reflect three-for-two stock splits effected in the form of a stock dividend paid on August 17, 1999 and June 7, 2002. STOCK INFORMATION The Company’s common stock prices are published daily in The Wall Street Journal and other publications under the NASDAQ National Market Listing. The stock is traded under the ticker symbol “FOSL.” The following are the high and low sale prices of the Company’s stock per the NASDAQ National Market. All share price data has been adjusted to reflect a three-for-two stock split effected in the form of a stock dividend paid on June 7, 2002. Stock prices have been adjusted in certain cases to the nearest traded amount. 2002 2001 High Low High Low First quarter ............................... $ 18.667 $ 13.167 $ 13.500 $ 9.167 Second quarter ........................ Third quarter ............................. Fourth quarter .......................... 23.740 24.610 22.620 17.527 15.600 14.990 15.567 14.867 15.067 11.007 9.407 10.767 As of March 28, 2003, the Company estimates that there were approximately 6,000 beneficial owners of the Company’s Common Stock, represented by approximately 160 holders of record. Dividend Policy. The Company expects that it will retain all available earnings generated by its operations for the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. Any future determination as to dividend policy will be made in the discretion of the Board of Directors of the Company and will depend on a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. L E T T ER TO STOCK HOLDER S Dear Stockholders, We are pleased to report that during 2002, FOSSIL expanded its global market share and achieved record levels of sales and earnings. We are also pleased with the Company’s ability to intensify its focus on the creative, financial, operational and strategic aspects of our different businesses. During the year, the Company demonstrated an ability to operate effectively even during a time when consumers around the world were decreasing their spending. We ended 2002 with strong growth in sales, operating income and earnings per share. Additionally, our balance sheet and inventory levels are in good shape and we have no long-term debt. Our shareholders were rewarded with a 44% increase in the value of the enterprise during 2002. • Increased distribution capacity in the United States • Announced plans to introduce our first wrist technology offerings through partnerships with PalmSource and Microsoft As we look ahead, we believe our strategies and initiatives provide us an outstanding opportunity for continued growth over the next three to five years. Domestically, we will con- tinue to pursue an expansion of market share for our RELIC and FOSSIL brands. Our licensed brands should grow faster than the overall market this year. With our Swiss initiative, we will capture new distribution by selling jewelry in the United States for the first time. Furthermore, we will add new distribution by selling our technology watches to a large The Company’s focus on diversification by brand, distribution number of consumer electronic stores in the United States. channel, customer and geography has created a strong oper- ating model. In 2002, we grew by both increasing the absolute number of business platforms that we offer to retailers and by increasing our sales within each platform. We attribute this success to our disciplined approach to manufacturing, sourc- ing and distribution. Our sourcing and distribution systems are efficient and our operating model generates high levels of predictability and profitability. The following are some of the specific objectives that the Company was able to accomplish during 2002: • Achieved strong growth in FOSSIL watches worldwide • Significantly expanded RELIC watches and accessories • Laid the groundwork for our Swiss watch offerings with the launch of BURBERRY and ZODIAC • Introduced EMPORIO ARMANI jewelry • Significantly grew our international presence with FOSSIL brand and licensed watches Internationally, we are focused on fine-tuning our global distribution systems in order to improve operational efficien- cies. We believe that we are just now starting to penetrate a business that we estimate to be twice the size of the U.S. market. The U.K., France, Italy, Spain, Switzerland and all of Asia should represent significant growth opportunities for us as we continue to expand our business model. We appreciate the support we received from our retail partners around the world during 2002. We also appreciate the tenacity that was exhibited by our global management team in continuing in their effort to aggressively capture market share and to do so efficiently. We believe that we have significant momentum, that our systems are sound and that our future should bring continued success. Sincerely, Tom Kartsotis Chairman Kosta Kartsotis President & Chief Executive Officer COMPANY OVER VIE W WATCHES Fossil: The Company’s FOSSIL brand continues to expand inside and fashion watch brands and the newly introduced Swiss brands, outside the U.S., with 11% sales growth during 2002. Over these licensed brands have assisted the Company in building a the last several years, the Company has upgraded its entire watch portfolio that allows the Company to tailor its offerings to assortment to include stainless steel components that further the demands of the global marketplace. advances its competitive advantage due to the high value/ quality relationship. The strengths of the FOSSIL design team Swiss Brands: coupled with the Company’s production expertise continues to The Company initiated its Swiss watch strategy in late 2001 increase the brand’s market share worldwide and position it as by acquiring three companies in Switzerland that specialized one of the leading brands in the fashion watch category. Over in design, sourcing and production of high-quality Swiss- the last three years, the Company has seen its FOSSIL business made watches. In addition to these acquisitions, the Company in the U.S. grow significantly in the specialty retail channel, to purchased the ZODIAC brand, which carries a 120 year the point that more watches are being sold through this channel Swiss watch heritage, and entered into a global licensing today than department stores. On the international front, stra- arrangement with Burberry for design, production, marketing and tegic brand building initiatives, including the opening of FOSSIL distribution of BURBERRY fine timepieces. These offerings will retail stores and increased advertising in the wholesale channel, allow the Company to immediately leverage its international have resulted in significant sales growth. Management believes distribution channels. Additionally, the Company is in the process opportunities exist in the international market that would allow of finalizing its sales infrastructure in the U.S. that will allow its FOSSIL business to grow to the size of that achieved in the it to distribute watches to fine jewelry departments in major U.S. over the next three to four years. department stores and specialty jewelry stores for the first time. Relic: Technology Offerings: The RELIC brand continues to gain market share and has Over the last three years, the Company has invested become a recognized brand in leading national chain depart- significant time and money in research and development ment stores. Leveraging the Company’s design and production associated with new applications for the watch market. This capabilities allows RELIC to continue to offer fashion right investment has centered on developing innovative and watches at modest prices. The growth of RELIC accessories diversified products, primarily mobile communication devices, over the last year has further assisted in the recognition of this that can be worn on the wrist. As a result, in 2002 the brand as a significant name in its distribution channel. Company announced that it would be delivering the first Licensed Fashion Brands: wearable full-functioning Palm Powered device pursuant to a licensing arrangement with PalmSource. This product pro - The Company’s strengths in design and production, coupled vides consumers convenient access to information while on- with its global distribution network, have been instrumental the-go in a sleek and compact form factor. The Company also in allowing it to attract licensing arrangements with some of announced in 2002 its partnership with Microsoft to develop a the most prestigious companies in the world. This licensed wrist device utilizing SPOT (Microsoft’s Smart Personal Objects watch group, that includes EMPORIO ARMANI, DKNY, DIESEL, Technology). This new watch will enable users to receive and COLUMBIA and PHILLIP STARCK, represented approximately display timely, customized web content at the convenient flick of 21% of the Company’s net sales in 2002, compared to 17.5% a wrist. Both of these products are scheduled to launch in 2003. in the prior year. Combined with the Company’s proprietary 12 13 JEWELRY The Company believes the fashion jewelry category provides control the timely liquidation of discontinued merchandise while many of the same competitive advantages as its watch busi- maintaining the integrity of the FOSSIL brand. ness. These advantages include portability, predictability and profitability. As a result, the Company initially developed FOSSIL Fossil.com, the Company’s award winning and highly jewelry in Germany to further leverage the FOSSIL brand and successful website, provides another excellent format in which to customer relationships in the German market and to take advan- display the FOSSIL product assortment and convey the FOSSIL tage of this synergistic category. In two years, net sales from this brand image. The website attracts approximately 1.4 million unique offering have grown to approximately $15 million in Germany and visitors each month. The integration of the site with the Company’s the Company is testing this category in other locations around distribution facility allows the visitor real-time information on prod- the world. Additionally, the Company signed a global license uct availabiity. The Company has accumulated a database of 1.6 mil- arrangement with Emporio Armani for design, production and lion users who have signed up to receive weekly or monthly emails. distribution of EMPORIO ARMANI jewelry worldwide. The Additionally, this site provides extensive financial and investor Company tested this product offering in late 2002 and will be relations information for interested investors. launching into hundreds of doors worldwide during fiscal 2003. ACCESSORIES The accessory division of Fossil exhibited solid growth in 2002 with sales increases of 12%. The Company’s handbag, small leather, belt and sunglass businesses under the FOSSIL brand are a major resource for moderately priced department stores throughout the U.S. Innovative designs and competitively priced products have allowed the Company to gain market share in this distribution channel in 2002. Additionally, expansion of RELIC accessories in late 2001 has solidified RELIC as a major brand in national department stores throughout the U.S., as well as leveraged the design and production capabilities of the Company’s accessory division. DIRECT BUSINESSES The Company’s full price stores continue to provide an exciting format in which to display the Company’s increasing FOSSIL product assortment and to convey the FOSSIL brand image. These stores are primarily located in major metropolitan malls, high traffic street locations and major entertainment theme parks throughout the U.S., Canada, Europe and the Far East. Furthermore, these stores are excellent vehicles for testing new product offerings. The Company also operates its own outlet stores throughout the U.S. These stores allow the Company to MA N AGE MENT ’S DIS C US SION AND AN ALYS IS Fossil is a design, development, marketing and distribution financial statements and the reported amounts of revenues and company that specializes in consumer products predicated expenses during the reporting period. On an on- going basis, on fashion and value. The FOSSIL brand name was developed management evaluates its estimates and judgments, including by the Company to convey a distinctive fashion, quality and those related to product returns, bad debts, and inventories. value message and a brand image reminiscent of an earlier Management bases its estimates and judgments on historical time in America that suggests a time of fun, fashion and humor. experience and on various other factors that are believed to be Since its inception in 1984, the Company has grown from its reasonable under the circumstances, the results of which form original flagship FOSSIL watch product into a dominant global the basis for making judgments about the carrying values of watch company with a well-recognized branded portfolio deliv- assets and liabilities that are not readily apparent from other ered over an extensive distribution network. The Company’s sources. Actual results may differ from these estimates under principle offerings include an extensive line of watches sold different assumptions or conditions. Management believes the under the Company’s proprietary brands FOSSIL, RELIC and following critical accounting policies require the most significant ZODIAC as well as licensed brands for some of the most pres - estimates and judgments. tigious companies in the world including, EMPORIO ARMANI, DKNY, DIESEL and BURBERRY. The Company also offers Revenues. Revenues are recognized as sales when mer- complementary lines of small leather goods, belts, handbags chandise is shipped and title transfers to the customer. The and sunglasses under the FOSSIL and RELIC brands, jewelry Company permits the return of damaged or defective products under the FOSSIL and EMPORIO ARMANI brands and FOSSIL and accepts limited amounts of product returns in certain other apparel. The Company’s centralized infrastructure in design/ instances. Accordingly, the Company provides allowances for development and production/sourcing allows it to leverage the the estimated amounts of these returns at the time of revenue strength of its branded watch portfolio over an extensive global recognition based on historical experience. While such returns distribution network. have historically been within management’s expectations and the provisions established, future return rates may differ from The Company’s products are sold primarily to department those experienced in the past. Any significant increase in stores and specialty retail stores in over 90 countries world- product damages or defects and the resulting credit returns wide through Company- owned foreign sales subsidiaries could have an adverse impact on the operating results for the and through a network of 53 independent distributors. The period or periods in which such returns materialize. Company’s foreign operations include wholly or majority- owned subsidiaries in Australia, Canada, France, Germany, Accounts Receivable. The Company performs ongoing credit Hong Kong, Italy, Japan, Singapore, Switzerland and the U.K. evaluations of its customers and adjusts credit limits based In addition, the Company’s products are offered at Company- upon payment history and the customer’s current credit owned retail locations, primarily in the United States, and in worthiness, as determined by the review of their current credit independently- owned, authorized FOSSIL retail stores and information. The Company continuously monitors collections kiosks located in several major airports, on cruise ships and and payments from its customers and maintains a provision in certain international markets. The Company’s successful for estimated credit losses based upon historical experience expansion of its product lines worldwide and leveraging of and any specific customer collection issues identified. While its infrastructure have contributed to its increasing net sales such credit losses have historically been within the Company’s and operating profits during the last five fiscal years. expectations and the provisions established, future credit losses may differ from those experienced in the past. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with Inventories. Inventories are stated at the lower of average cost, including any applicable duty and freight charges, or market. accounting principles generally accepted in the United States The Company writes down its inventory for estimated obso - requires management to make estimates and assumptions that lescence or unmarketable inventory equal to the difference affect the reported amounts of assets and liabilities and the between the average cost of inventory and the estimated disclosure of contingent assets and liabilities at the date of the market value based upon assumptions about future demand and market conditions. If actual future demand or market con- New Products and Acquisitions ditions are less favorable than those projected by management, • The Company introduced its Swiss-made timepiece col- additional inventory write - downs may be required. lections, BURBERRY and ZODIAC, on a limited basis during the fourth quarter of 2002. A more significant roll- out of these Long - Lived Assets. The Company periodically reviews the brands is anticipated in the second half of 2003. estimated useful lives of its depreciable assets based on factors including historical experience, the expected • EMPORIO ARMANI jewelry was introduced in the fourth quarter of 2002. This product extension will allow the Company to beneficial service period of the asset, the quality and durability leverage its existing sales infrastructure worldwide. of the asset and the Company’s maintenance policy including periodic upgrades. Changes in useful lives are made on a prospective basis unless factors indicate the carrying amounts of the assets may not be recoverable and an impairment • The Company continued to expand its fashion watch offering by launching COLUMBIA watches in the United States in 2002. • In the technology area, the Company announced its license arrangement with PalmSource to launch the first wrist PDA with write - down is necessary. COMPANY HIGHLIGHTS Sales Growth • During 2002, the Company continued to extend its product offering and geographical distribution. As a result, net sales a fully functional Palm operating system. This product combines the functionality of the Palm OS system and the portability of a watch. The product is scheduled to launch in mid- 2003. Additionally, the Company announced its partnership with Microsoft to launch “SPOT” (Smart Personal Objects Technology), watches in the latter part of 2003. This product will allow personalized information to be delivered to a watch increased 22% with contributions from all major product via FM radio frequency. These two tecnology offerings will categories and businesses. • Sales from the Company’s international businesses increased 36% (29% excluding currency gains), including a 45% increase allow the Company to expand its watch distribution into national electronic superstores as well as other electronic specialty retailers. in Europe (36% excluding currency gains). Primary drivers of this increase were licensed watches, FOSSIL watches and • The Company acquired its former watch distributor and operator of four watch retail stores in Switzerland. Four FOSSIL jewelry. Sales from businesses acquired during the FOSSIL retail stores were acquired in Canada during 2002. year were $6.7 million. Additionally, the Company acquired the remaining 50% interest • Domestic watch sales increased 11% as a result of an 8% increase in FOSSIL and a 68% increase in licensed brands. of its former joint venture company in Japan. RELIC watches increased slightly for the year, but experienced Infrastructure Additions double - digit growth in the second half of the year, benefiting from expanded visibility and intensified brand imaing associated • The Company began consolidating its U.S. based warehouse and distribution operations into its new 517,000 square foot with the expansion of RELIC accessories. state-of-the-art distribution facility in Dallas, Texas in April 2002. • Other domestic sales increased 14% as a result of growth in both FOSSIL and RELIC brand accessory products. RELIC accessories increased 57% as the prouct continued to gain market share The Company completed this transition in early January 2003. • During December 2002, the Company acquired a parcel of land in Germany on which it will construct a new 100,000 square after the expansion of this category in the fall of 2001. foot facility anticipated to be operational in August 2003. • Sales from the Company’s retail stores increased 22% as a result of a 12% increase in the average number of stores This facility will support the Company’s current operations in Germany as well as allow the Company to further support opened during the year and same store sales increases of future growth throughout Europe. 10%. The Company operated 104 stores at the end of the year, consisting of 47 outlet, 23 accessory and 18 jeans-wear stores • Over the past year, the Company has been engaged in implementing a new enterprise resource planning system for in the United States and 16 accessory stores located outside its North American operations. Completion of this initial phase is the United States. This compares to 91 stores open at the end scheduled for 2003. The Company plans on expanding this of the prior year; 44 outlet, 20 accessory and 19 jeans-wear implementation into its European facilities beginning in late 2003. stores in the United States and 8 accessory stores located outside the United States. 22 23  RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, (i) the percentages of the Company’s net sales represented by certain line items from the Company’s consolidated statements of income and (ii) the percentage changes in these line items between the years indicated. Fiscal Year 2002 Percentage change from 2001 2001 Percentage change from 2000 2000 Net sales ............................................................ 100.0 % 21.6 % 100.0 % 8.2 % 100.0 % Cost of sales ..................................................... 49.6 Gross profit ........................................................ 50.4 Operating expenses .......................................... 35.9 Operating income .............................................. 14.5 Interest expense ................................................ Other income (expense) – net ............................ – – Income before income taxes............................... 14.5 Provision for income taxes ................................. 5.6 20.3 22.9 22.1 24.8 (66.4) 104.2 31.8 27.3 50.2 49.8 35.7 14.1 0.1 (0.7) 13.3 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 ........................................................ 8.9 % 34.9 % 8.0 % (21.8)% 11.1 % The following table sets forth certain components of the Company’s consolidated net sales and the percentage relationship of the components to consolidated net sales for the fiscal year indicated: Fiscal Year International: Amount in millions Percent of total 2002 2001 2000 2002 2001 2000 Europe .......................................................... $ 189.5 $ 130.3 $ 99.5 28.6 % 23.9 % 19.7 % Other ............................................................. Total international........................................ 63.5 253.0 56.1 186.4 53.3 152.8 9.6 38.2 10.3 34.2 10.6 30.3 Domestic: Watch products ............................................. Other products ............................................... Total domestic ............................................ Stores worldwide............................................ 201.4 125.8 327.2 83.1 180.6 110.3 290.9 68.2 202.7 99.0 301.7 49.8 30.4 18.9 49.3 12.5 33.1 20.2 53.3 12.5 40.2 19.6 59.8 9.9 Total net sales............................................. $ 663.3 $ 545.5 $ 504.3 100.0 % 100.0 % 100.0 % FISCAL 2002 COMPARED TO FISCAL 2001 Net Sales. Net sales increased 22% for the year (19% profit margin. The Company believes gross profit margin for excluding currency gains). This increase was led by strong sales 2003 will increase slightly as management expects sales from volume growth in the Company’s international businesses, its international businesses and licensed watch businesses to primarily from Europe which experienced a 45% increase (36% increase at a faster rate than its domestic accessory business. excluding currency gains). The Company believes its strategy of utilizing its impressive portfolio of watch brands continues to Operating Expenses. Operating expenses, as a percentage of net position it for further market penetration in Europe and the Far sales, increased to 35.9% compared to 35.7% for the prior East. Also, the Company believes the addition of Swiss-made year. The $43 million increase in operating expenses primarily BURBERRY and ZODIAC watches and EMPORIO ARMANI reflects increased variable costs to support sales growth, as jewelry will further advance its product offerings and allow for well as higher distribution costs relating to the Company’s new long-term leverage of its existing distribution infrastructure distribution facility, increased payroll cost, increased adver- inside and outside the U.S. Businesses acquired in Switzerland, tising expenditures, operating expenses related to acquired Canada and Japan contributed approximately $6.7 million to businesses and higher costs in Europe due to the effects of international sales. In the U.S., sales from the Company’s a stronger Euro. The increase in payroll and advertising costs domestic wholesale businesses grew 12% as a result of further is primarily associated with new business initiatives, including expansion of RELIC accessories, significant growth in licensed Swiss-made watches, jewelry and new technology products. watch sales and solid growth in FOSSIL watches and accessories. The Company believes operating cost, as a percentage of Market expansion of RELIC handbags, small leather goods and net sales, will increase slightly during 2003 as it incurs costs, sunglasses in the national department store channel accelerated inclusive of advertising, related to these product offerings. beyond the launch of these product categories in 2001. Licensed During 2003, management believes advertising costs, as a watch sales growth in 2002 benefited from the launch of the percentage of net sales, could increase 50 to 100 basis points COLUMBIA brand and further market penetration in DIESEL, to support these new product offerings and further expansion EMPORIO ARMANI and DKNY. FOSSIL watches grew of advertising for FOSSIL watches worldwide. market share in the U.S. during 2002 and further expanded its leading fashion watch position in department and selected Operating Income. Increased sales and improved gross profit specialty stores. Additionally, the Company believes Swiss- margin more than offset increases in operating expenses for made BURBERRY and ZODIAC watches, EMPORIO ARMANI the year. As a result, the Company’s operating profit margin jewelry and newly developed technology watch offerings will increased to 14.5% from 14.1% in the prior year. For fiscal allow it to expand into additional distribution channels in the 2003, management believes slight improvement in gross profit U.S., primarily specialty watch and jewelry stores and retail margin will be offset by operating expense increases resulting electronic stores, during 2003 and beyond. in operating margins consistent with fiscal 2002. Management believes long-term sustainable margins in the 17% range are Gross Profit. Gross profit margin increased to 50.4% compared to achievable as the Company continues to grow its sales, further 49.8% in the prior year. This increase is attributed to increased leverages the new infrastructure costs and consolidates its sales mix from the Company’s international businesses and existing infrastructure in Europe. licensed watches as a percentage of total sales. International sales and licensed watch sales grew to approximately 38% and Other Income (Expense). Other income (expense) primarily reflects 21% of total sales during 2002, respectively, as compared to interest income from cash investments, royalty income, 34% and 17.5% during 2001, respectively. Both international minority interests in the earnings (loss) of the Company’s and licensed watch sales generally provide gross margins majority- owned subsidiaries and equity in the earnings (losses) in excess of the Company’s historical consolidated gross of its non- consolidated joint venture. During 2002, other income profit margin. Additionally, gross profit margin was favorably (expense) decreased unfavorably by approximately $900,000 impacted from a lower sales mix of accessory products that primarily as a result of reduced interest income due to lower generally provide gross profit margins below the Company’s yields on invested cash balances and the effects of a $500,000 historical consolidated gross profit margin. A stronger Euro legal settlement received by the Company in the prior year. during 2002 compared to the prior year slightly benefited gross 24 25 Income Taxes. The Company’s effective income tax rate Operating Expenses. Operating expenses, as a percentage of decreased to 38.6% during 2002 compared to 40% in the net sales, increased to 35.7% compared to 32.1% for the prior prior year. This decrease was primarily related to a higher year. Increases in operating expenses related to increased sales, mix of income generated from countries whose statutory expenses related to businesses acquired ($5.9 million) and addi- income tax rates are lower than the Company’s historical tional infrastructure added during the latter half of fiscal 2000. average income tax rate. Management believes this trend Operating expenses as a percentage of net sales for the fourth in its mix of income will continue and, as a result, expects quarter were significantly below levels experienced during the year its income tax rate to continue to decrease in 2003. as the Company began to anniversary the fiscal 2000 infrastruc- FISCAL 2001 COMPARED TO FISCAL 2000 Net Sales. Net sales increases were led by continued sales ture initiatives. These infrastructure costs included higher payroll and personnel-related expenses, store opening and operating expenses and warehouse and distribution related expenses. volume growth in the Company’s international businesses, Operating Income. The increase in operating expenses as a increased sales from the Company’s retail stores, due to an percentage of net sales combined with a decrease in gross margins, increase in the number of stores, and further penetration of resulted in the reduction of the Company’s operating profit margin the Company’s leather products in the United States market. to 14.1% for 2001 in comparison to 18.6% in the prior year. Excluding the impact of acquisitions, which contributed $16.6 million to net sales, international sales increased 12% over prior Write-off of Investment in Joint Venture. The write-off of investment year. This increase was primarily a result of sales volume increases in joint venture reflects a $4.8 million one-time pre-tax charge to from licensed watch products and continued growth in the FOSSIL write off the carrying value of the Company’s investment in SII jewelry line. The Company’s leather product line increased Marketing International, Inc.. (“SMI”), and record certain termi- predominantly due to further penetration of RELIC handbags nation costs as a result of the Company’s decision to terminate in the national department store channel. These increases were its equity participation in this joint venture. SMI, a joint venture partially offset by the non-recurrence of an $8.3 million non- between the Company and Seiko Instruments America, Inc., branded watch sale occurring in the second quarter of fiscal 2000 manufactures, markets and distributes watches to mass market and by decreases in the Company’s domestic watch business. An retailers worldwide under owned, licensed and private label 11% decrease in domestic watches was primarily due to significant brands. The Company will continue to provide certain product reductions in the Company’s private label business and an 8% development, marketing and merchandising support to SMI decrease in FOSSIL and RELIC brands resulting from the deterio- following termination of the joint venture on a cost-plus basis. rating retail climate during the year. Gross Profit. Gross profit margins decreased to 49.8% compared relatively unchanged compared to fiscal 2000 as decreases in to 50.7% in the prior year. Gross margins were favorably impacted interest income, due to lower invested cash balances and lower from the non-recurrence of the $8.3 million sale that carried a interest rates, were offset by foreign currency gains and certain gross margin lower than the Company’s historical consolidated damages awarded the Company resulting from a prior period Other Income (Expense). Other income (expense) for 2001 remained gross margin. Excluding the effects of this sale, gross margins legal matter. decreased approximately 140 basis points. The gross profit margins were impacted from a higher mix of lower margin domestic Income Taxes. The Company’s effective income tax rate leather sales versus domestic watch sales, increased markdowns, decreased to 40% during 2001 compared to 41% in the prior lower margins generated by the Company’s outlet stores and lower year. This decrease was primarily related to a higher mix of margins on European sales, primarily due to the Euro being weaker income derived from jurisdictions that carry lower statutory during the first three quarters of the year. Positively effecting gross income tax rates. margins was a greater mix of sales from the Company’s interna- tional business and retail stores, both of which generally produce gross margins above the Company’s historical consolidated gross margin. EFFECTS OF INFLATION Management does not believe that inflation has had a current at $122 million, representing a 17% increase from the material impact on results of operations for the periods $104 million at the end of the prior year. This $18 million presented. Substantial increases in costs, however, could increase was entirely related to the Company’s international have an impact on the Company and the industry. Man - businesses as its domestic inventories remained unchanged agement believes that, to the extent inflation affects its compared to the prior year. costs in the future, the Company could generally offset inflation by increasing prices if competitive conditions permit. At the end of the year, the Company had working capital of FOREIGN CURRENCY RISK As a multinational enterprise, the Company is exposed to $241 million compared to working capital of $163 million at the end of the prior year. The Company had no outstanding borrowings against its $40 million bank credit facility at the end of the year. Management believes that cash flow from changes in foreign currency exchange rates. The Company operations combined with existing cash on hand and amounts employs a variety of practices to manage this market available under its credit facility will be sufficient to satisfy risk, including its operating and financing activities, and the cash requirements of its working capital needs for at where deemed appropriate, the use of derivative financial least the next eighteen months. For disclosure regarding the instruments. Forward contracts have been utilized by the Company’s contractual obligations, see Note 10 to the consoli - Company to mitigate foreign currency risk. The Company’s most dated financial statements included elsewhere in this report. significant foreign currency risk relates to the Euro and the British Pound. The Company uses derivative financial instru- ments only for risk management purposes and does not use them for speculation or for trading. There were no significant FORWARD-LOOKING STATEMENTS Included within management’s discussion of the Company’s changes in how the Company managed foreign currency operating results, “forward-looking statements” were made transactional exposure during 2002 and management does not within the meaning of the Private Securities Litigation Reform anticipate any significant changes in such exposures or in the Act of 1995 regarding expectations for 2003. The actual results strategies it employs to manage such exposure in the near future. may differ materially from those expressed by these forward- LIQUIDITY AND CAPITAL RESOURCES The Company’s general business operations historically have looking statements. Significant factors that could cause the Company’s 2003 operating results to differ materially from management’s current expectations include, among other items, significant changes in consumer spending patterns or not required substantial cash needs during the first several preferences, acts of terrorism and acts of war, competition in months of its fiscal year. Generally, starting in the second the Company’s product areas, international in comparison to quarter, the Company’s cash needs begin to increase, typi - domestic sales mix, changes in foreign currency valuations cally reaching their peak in the September-November time in relation to the United States dollar, principally the European frame. The Company’s cash holdings and short-term mar- Union’s Euro, an inability of management to control operating ketable securities as of year end increased to $118 million in expenses in relation to net sales without damaging the long- comparison to $73 million at the end of the prior year. This increase term direction of the Company and the risks and uncertainties in cash flow is primarily derived from $81 million of net cash set forth in the Company’s Current Report on Form 8 -K dated generated from operating activities offset by $27 million in March 30, 1999. capital expenditures and $14 million in debt reduction. Accounts receivable at year- end were $86 million compared to $74 million at the end of the prior year. This 17% increase is below the 22% sales increase for the year and resulted in days sales outstanding decreasing to 37 days compared to 38 days in the prior year. Inventory at year- end was on plan and 26 27 SELECT ED QUAR T ERLY F IN ANCIAL D ATA The table below sets forth selected quarterly financial information. The information is derived from the unaudited consolidated financial statements of the Company and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair statement of results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period. Fiscal Year 2002 AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales .......................................................................... $ 143,680 $ 142,460 $ 164,821 $ 212,377 Gross profit....................................................................... Operating expenses ......................................................... Operating income ............................................................. Income before income taxes............................................. Provision for income taxes................................................ Net income....................................................................... 71,492 52,229 19,263 19,367 7,552 11,815 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 ................ 0.26 0.25 49.8 % 36.4 % 13.4 % 71,475 55,306 16,169 15,962 6,224 9,738 0.21 0.20 50.2 % 38.8 % 11.3 % 81,579 58,419 23,160 23,112 9,015 14,097 0.31 0.29 49.5 % 35.4 % 14.1 % 109,539 72,201 37,338 37,538 14,281 23,257 0.50 0.48 51.6 % 34.0 % 17.6 % Fiscal Year 2001 AMOUNTS 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................................................ Net income....................................................................... 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 ................ 59,735 43,394 16,341 16,662 6,661 10,001 0.22 0.21 49.3 % 35.8 % 13.5 % 56,904 45,320 11,584 12,145 4,862 7,283 0.16 0.16 50.6 % 40.3 % 10.3 % 65,851 47,486 18,365 17,858 7,143 10,715 0.24 0.23 48.4 % 34.9 % 13.5 % 89,360 58,796 30,564 26,139 10,455 15,684 (1) 0.35 (1) 0.33 (1) 50.7 % 33.3 % 17.4 % (1) Includes a $2.9 million one-time charge 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. Excluding this one-time charge, pro forma net income, basic earnings per share and diluted earnings per share were $18.5 million, $0.41 and $0.39, respectively.  While the majority of the Company’s products are not seasonal in nature, a significant portion of the Company’s net sales and operating income is generally derived in the second half of the year. The Company’s fourth quarter, which includes the Christmas season, on average generates in excess of 30% of the Company’s annual operating income. The amount of net sales and operating income generated during the first quarter is affected by the levels of inventory held by retailers at the end of the Christmas season, as well as general economic conditions and other factors beyond the Company’s control. In general, lower levels of inventory held by retailers at the end of the Christmas season may have a positive impact on the Company’s net sales and operating income in the first quar- ter as a result of higher levels of restocking orders placed by retailers. Management currently believes that the Company’s inventory levels at its major customers at the end of 2002 were at or near retailers’ target inventory levels, although on average, slightly higher than the levels at the end of 2001. As the Company increases the number of Company- owned stores, it would generally amplify the Company’s seasonality by decreasing the Company’s operating income in the first half of the year while increasing operating income during the second half of the year. In addition, new product launches would generally augment the sales levels in the quarter in which the product launch takes place. The results of operations for a particular quarter may also vary due to a number of factors, including retail, economic and monetary conditions, timing of orders or holidays and the mix of products sold by the Company. 28 29 FIN ANCIAL INFORMATION INDEPENDENT AUDITORS’ REPORT REPORT OF MANAGEMENT Directors and Stockholders of Fossil, Inc. The accompanying consolidated financial statements and We have audited the accompanying consolidated balance other information contained in this Annual Report have been sheets of Fossil, Inc. and subsidiaries as of January 4, 2003 prepared by management. The financial statements have been and January 5, 2002, and the related consolidated statements prepared in accordance with accounting principles generally of income and comprehensive income, stockholders’ equity accepted in the United States of America and include amounts and cash flows for each of the three years in the period ended Janu- that are based upon our best estimates and judgments. ary 4, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an To help assure that financial information is reliable and that opinion on these financial statements based on our audits. assets are safeguarded, management maintains a system of internal controls and procedures which it believes is effec- We conducted our audits in accordance with auditing stan- tive in accomplishing these objectives. These controls and dards generally accepted in the United States of America. Those procedures are designed to provide reasonable assurance, standards require that we plan and perform the audit to at appropriate costs, that transactions are executed and obtain reasonable assurance about whether the financial recorded in accordance with management’s authorization. The statements are free of material misstatement. An audit includes consolidated financial statements and related notes thereto examining, on a test basis, evidence supporting the amounts have been audited by Deloitte & Touche LLP, independent and disclosures in the financial statements. An audit also auditors. The accompanying auditors’ report expresses an includes assessing the accounting principles used and independent professional opinion on the fairness of presenta- significant estimates made by management, as well as evaluating tion of management’s financial statements. the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Audit Committee of the Board of Directors is composed of certain of the Company’s outside directors, and is respon - In our opinion, such consolidated financial statements present sible for selecting the independent auditing firm to be retained fairly, in all material respects, the financial position of Fossil, for the coming year. The Audit Committee meets periodically Inc. and subsidiaries at January 4, 2003 and January 5, 2002, with the independent auditors, as well as with management, and the results of their operations and their cash flows for each to review internal accounting controls and financial reporting of the three years in the period ended January 4, 2003, in matters. The independent auditors also meet privately on conformity with accounting principles generally accepted in the occasion with the Audit Committee, to discuss the scope and United States of America. results of their audits and any recommendations regarding the system of internal accounting controls. Deloitte & Touche LLP Dallas, Texas February 24, 2003 Kosta Kartsotis President and Chief Executive Officer Mike L. Kovar Senior Vice President, Chief Financial Officer and Treasurer CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS Fiscal Year Assets Current assets: 2002 2001 Cash and cash equivalents............................................................................................ $ 112,348 $ 67,491 Short-term marketable investments ............................................................................... Accounts receivable–net................................................................................................ 5,576 86,351 Inventories..................................................................................................................... 121,823 Deferred income tax benefits ......................................................................................... Prepaid expenses and other current assets ................................................................... 13,597 15,944 Total current assets ................................................................................................... 355,639 Investment in joint ventures................................................................................................ Property, plant and equipment–net .................................................................................... Intangible and other assets–net ......................................................................................... 1,926 103,112 21,849 5,360 74,035 103,662 8,718 10,251 269,517 1,099 90,036 20,211 Total assets ............................................................................................................... $ 482,526 $ 380,863 Liabilities and Stockholders’ Equity Current liabilities: Notes payable ............................................................................................................... $ Accounts payable.......................................................................................................... Accrued expenses: Co-op advertising...................................................................................................... Compensation........................................................................................................... Other......................................................................................................................... Income taxes payable.................................................................................................... 2,505 32,999 13,784 11,314 33,028 20,832 Total current liabilities................................................................................................. 114,462 Deferred income tax liability ............................................................................................... 23,599 Commitments (Note 10) Minority interest in subsidiaries .......................................................................................... 3,924 Stockholders’ equity: Common stock, 46,392,123 and 30,284,369 shares issued and outstanding, respectively .............................................................. Additional paid-in capital................................................................................................ Retained earnings.......................................................................................................... 464 27,096 311,019 Accumulated other comprehensive income (loss) .......................................................... 4,263 Deferred compensation ................................................................................................. (2,301) Total stockholders’ equity .......................................................................................... 340,541 $ 15,955 21,266 14,838 8,594 27,679 17,905 106,237 7,318 3,285 303 15,241 252,112 (3,633) – 264,023 Total liabilities and stockholders’ equity .................................................................. $ 482,526 $ 380,863 See notes to consolidated financial statements. 30 31 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA Fiscal Year 2002 2001 2000 Net sales ........................................................................................................ $ 663,338 $ 545,541 $ 504,285 Cost of sales .................................................................................................. Gross profit..................................................................................................... Operating expenses: Selling and distribution................................................................................ General and administrative ......................................................................... Total operating expenses........................................................................ Operating income ........................................................................................... Interest expense ............................................................................................. Write-off of investment in joint venture ............................................................ Other income (expense)-net............................................................................ Income before income taxes........................................................................... Provision for income taxes.............................................................................. Net income ................................................................................................ $ 329,253 334,085 186,634 51,521 238,155 95,930 107 – 156 95,979 37,072 58,907 273,691 271,850 149,807 45,189 194,996 76,854 319 (4,776) 1,045 72,804 29,121 $ 43,683 $ Other comprehensive income (loss), net of taxes: Currency translation adjustment ................................................................. 11,510 (1,374) Unrealized (loss) gain on marketable investments.......................................................................... (83) (35) Forward contracts as hedge of intercompany foreign currency payments: Cumulative effect of implementing SFAS No.133 ................................. – Change in fair values.......................................................................... (3,531) (400) 421 Total comprehensive income .................................................................. $ 66,803 $ 42,295 $ 56,897 Earnings per share: Basic .......................................................................................................... $ Diluted........................................................................................................ $ 1.28 1.22 $ $ 0.97 0.93 $ $ 1.18 1.14 Weighted average common shares outstanding: Basic ......................................................................................................... Diluted ....................................................................................................... 45,993 48,238 45,251 46,860 47,534 49,013 See notes to consolidated financial statements. 248,539 255,746 126,239 35,686 161,925 93,821 128 – 1,024 94,717 38,834 55,883 827 187 – – CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AMOUNTS IN THOUSANDS common stock comprehensive income (loss) treasury stock par shares value additional paid–in capital cumulative unrealized gain unrealized gain total retained translation (loss) on marketable (loss) on forward share deferred stockholders’ earnings adjustment investments contracts shares cost compensation equity accumulated other Balance, January 1, 2000 .................... 32,107 $ 321 $ 41,774 $ 153,569 $ (2,695) $ (564) $ – (59) $ (1,208) $ – $ 191,197 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 ............................ (2,026) – Net income ........................................... Unrealized gain on marketable investments................... Currency translation adjustment............ – – – – – – 384 470 – – – – – (1,023) (20) – (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 .............................. 46 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 ................... (206) – – – – – 3 – 1 (2) – – – – – 2,622 1,160 786 – – – (3,541) – – 43,683 – – – – – – – – – – – – – – – – – (1,374) (35) – – – – – – – Balance, January 5, 2002 .................... 30,284 303 15,241 252,112 (3,242) (412) Common stock issued upon exercise of stock options ................ 970 10 6,433 – – Tax benefit derived from exercise of stock options ................ – – 3,053 Repurchase and retirement of common stock ............................ (4) Three-for-two-stock split ...................... 15,142 Restricted stock issued in connection – 151 (59) (156) – – – with deferred compensation plan..... Amortization of deferred compensation. Net income .......................................... Unrealized loss on marketable investments................... Currency translation adjustment............ Forward contracts as hedge of intercompany foreign currency payments: – – – – – – – – – – Change in fair values ................... – – 2,584 – – – – 58,907 – – – – – – – – – – – – – – – – _ – – – 11,510 (83) – – – (3,531) Balance, January 4, 2003 .................... 46,392 $ 464 $ 27,096 $ 311,019 $ 8,268 $ (495) $ (3,510) See notes to consolidated financial statements. 32 33 – – – – – – – – – – – – – – – – (400) 421 21 – – – – _ _ – – – – – – (13) – (268) 72 1,476 – – – – – – – – – – – – – – – – – – – _ _ – – – – – – – – – – – – – – – – – – – _ – – – – _ _ – – – – – $ – – – – – – – – – 384 470 (268) 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 – – – – 6,443 3,053 (59) (5) (2,584) 283 – – 283 58,907 – – (83) 11,510 – (3,531) $ (2,301) $ 340,541 common stock comprehensive income (loss) treasury stock par retained translation (loss) on marketable (loss) on forward share deferred stockholders’ shares value earnings adjustment investments contracts shares cost compensation equity cumulative unrealized gain unrealized gain total additional paid–in capital accumulated other Balance, January 1, 2000 .................... 32,107 $ 321 $ 41,774 $ 153,569 $ (2,695) $ (564) $ – (59) $ (1,208) $ – $ 191,197 of common stock ............................ (206) (3,541) 43,683 (1,374) (35) – of common stock ............................ (2,026) (28,414) (1,023) 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 ................ 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 Net income ........................................... Unrealized gain on marketable investments................... Currency translation adjustment............ Common stock issued upon exercise of stock options ................ 307 Tax benefit derived from exercise of stock options ................. – Common stock issued in connection with acquisitions .............................. 46 Repurchase and retirement 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 ................... Tax benefit derived from exercise of stock options ................ – Repurchase and retirement of common stock ............................ (4) Three-for-two-stock split ...................... 15,142 151 Restricted stock issued in connection with deferred compensation plan..... Amortization of deferred compensation. Net income .......................................... Unrealized loss on marketable investments................... Currency translation adjustment............ Forward contracts as hedge of intercompany foreign currency payments: See notes to consolidated financial statements. – – – – – – – – – – – – – – – – – – – – (20) – – – 3 – 1 (2) – – – – – – – – – – – – 384 470 – – – – – 2,622 1,160 786 – – – – – – – – – – 3,053 (59) (156) 2,584 – – – – – – – – – – – – – – 58,907 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Balance, January 5, 2002 .................... 30,284 303 15,241 252,112 (3,242) (412) Common stock issued upon exercise of stock options ................ 970 10 6,433 – – – – – – – – – – – – – – – – – – – _ – – 11,510 (83) – – – – – – – – – – – – – – – – – – – – – _ _ – – – (400) 421 21 384 470 (268) 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 6,443 3,053 (59) (5) – 283 58,907 (83) 11,510 (2,584) 283 – – (268) (13) 72 1,476 – – – – – – – – – – – – – – – – – – – – _ _ – – – – – – – – – – – – – – – – – – – – _ – – – – _ _ – – – – – Change in fair values ................... – – – (3,531) – (3,531) Balance, January 4, 2003 .................... 46,392 $ 464 $ 27,096 $ 311,019 $ 8,268 $ (495) $ (3,510) $ $ (2,301) $ 340,541 CONSOLIDATED STATEMENTS OF CASH FLOWS AMOUNTS IN THOUSANDS Fiscal Year 2002 2001 2000 Operating Activities: Net income ..................................................................................................................... $ Noncash items affecting net income: Write-off of investment in joint venture......................................................................... Minority interest in subsidiaries.................................................................................... Equity in (income) losses of joint ventures.................................................................... Depreciation and amortization..................................................................................... Amortization of deferred compensation....................................................................... 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 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................................................................. (Purchase) sale of marketable investments.................................................................. Investment in joint ventures ......................................................................................... Decrease (increase) in intangible and other assets....................................................... Net cash used in investing activities........................................................................ Financing Activities: Proceeds from exercise of stock options..................................................................... Net purchase of treasury stock ................................................................................... Acquisition and retirement of common stock............................................................... Distribution of minority interest earnings ...................................................................... (Payments) borrowings on notes payable-net.............................................................. Net cash (used in) from financing activities.............................................................. Effect of exchange rate changes on cash and cash equivalents .................................................................................................. Net increase (decrease) in cash and cash equivalents...................................................... Cash and cash equivalents: Beginning of year ........................................................................................................ 58,907 $ 43,683 $ 55,883 – 1,958 (827) 14,230 283 3,053 369 907 484 13,674 (15,537) (14,783) (5,463) 16,398 6,802 594 81,049 (4,373) – (26,860) (216) – 917 (30,532) 6,438 – (59) (1,319) (13,998) (8,938) 3,278 44,857 67,491 4,776 1,430 933 9,627 – 1,160 316 1,811 268 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 (410) (12,010) 79,501 – 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) (234) (11,407) 90,908 End of year ................................................................................................................. $ 112,348 $ 67,491 $ 79,501 See notes to consolidated financial statements.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Consolidated Financial Statements include the accounts of Fossil, of three to ten years for equipment and thirty years for buildings. Inc., a Delaware corporation and its subsidiaries (the “Company”). Leasehold improvements are amortized over the shorter of the The Company reports on a fiscal year reflecting the retail-based lease term or the asset’s useful life. calendar (containing 4-4-5 week calendar quarters). During 2001, the retail-based calendar contained 53 weeks instead of Intangible and Other Assets include the cost in excess of 52 weeks in the current year. The additional week did not have tangible assets acquired, noncompete agreements and trade- a material impact on comparability between periods presented. marks. Non-compete agreements and trademarks are amortized References to 2002, 2001, and 2000 are for the fiscal years using the straight-line method over the estimated useful lives of ended January 4, 2003, January 5, 2002 and December 30, 2000, generally three and ten years, respectively. In accordance with respectively. Significant intercompany balances and transactions SFAS No. 142, “Goodwill and Other Intangible Assets”, issued in are eliminated in consolidation. The Company is a leader in the July 2001, cost in excess of tangible assets acquired and other design, development, marketing and distribution of contempo- indefinite-lived intangible assets related to business combinations rary, high quality fashion watches, accessories and apparel. The occurring on or after July 1, 2001, are tested for impairment rather Company’s products are sold primarily through department stores than amortized. During 2001 and prior periods, cost in excess of and specialty retailers worldwide. tangible assets acquired relative to business combinations occur- ring prior to July 1, 2001, were amortized using the straight-line The preparation of financial statements in conformity with account- method over 20 years. ing principles generally accepted in the United States of America requires management to make estimates and assumptions that Cumulative Translation Adjustment is included as a compo- affect the reported amounts of assets and liabilities and the nent of other comprehensive income (loss) and reflects the disclosure of contingent assets and liabilities at the date of the unrealized adjustments resulting from translating the financial financial statements and the reported amounts of revenues and statements of foreign subsidiaries. The functional currency of the expenses during the reporting period. Actual results could differ Company’s foreign subsidiaries is the local currency of the coun- from those estimates. try. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income Cash Equivalents are considered all highly liquid investments with and expense items are translated at the average rates prevailing original maturities at date of purchase of three months or less. during the year. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as trans- Short–term Marketable Investments consist of liquid investments action gains and losses in the determination of net income. The with original maturities exceeding three months and mutual Company incurred net foreign currency transaction losses of fund investments. By policy, the Company invests primarily in approximately $500,000, gains of $300,000 and losses of $400,000 high-grade marketable securities. Securities of $5.6 million and for fiscal years 2002, 2001 and 2000, respectively, which have been $5.4 million for fiscal years 2002 and 2001, respectively, are clas- included in other income (expense) –net. sified as available for sale and stated at fair value, with unrealized holding gains (losses) included in accumulated other comprehen- Forward Contracts are entered into by the Company principally sive income (loss) as a component of stockholders’ equity. to hedge the future payment of intercompany inventory trans - actions with its non- U.S. subsidiaries. Beginning in fiscal year Accounts Receivable are stated net of allowances of approximately 2001, these cash flow hedges are stated at estimated fair value $24.8 million and $22.5 million for estimated customer returns and and changes in fair value are reported as a component of other approximately $12.6 million and $11.7 million for doubtful accounts comprehensive income (loss). At January 4, 2003, the Company at the close of fiscal years 2002 and 2001, respectively. had hedge contracts to sell (i) 63.1 million Euro for approximately $59.9 million, expiring through December 2003, and (ii) approx- Inventories are stated at the lower of average cost, including any imately 1.1 million British Pounds for approximately $1.5 million, applicable duty and freight charges, or market. expiring through February 2003. If the Company were to settle its Euro and British Pound based contracts at fiscal year- end Property, Plant and Equipment is stated at cost less accumulated 2002, the net result would be a loss of approximately $3.5 mil- depreciation and amortization. Depreciation is provided using the lion, net of taxes. This unrealized loss is recognized in other com - straight-line method over the estimated useful lives of the assets prehesive income (loss). The Company adopted SFAS No. 133, 34 35 “Accounting for Derivative Instruments and Hedging Activities,” interim financial statements about the method of accounting effective December 31, 2000, and recognized an unrealized loss for for stock-based employee compensation and the effect of the forward contracts open at that date of $400,000, net of taxes, in method used on reported results. SFAS No. 148 is effective for other comprehensive income (loss). The net decrease in fair value periods beginning after December 15, 2002. Accordingly, the of $3.5 million during fiscal 2002 and net increase in fair value of Company will begin making the disclosures required by SFAS $421,000 during fiscal 2001, are reported as other comprehensive No. 148 beginning in the first quarter of fiscal year 2003. income (loss). The net decrease in fiscal 2002 of $3.5 million con- sisted of net losses from these hedges of $4.0 million less $500,000 In November 2002, the Emerging Issues Task Force (“EITF”) of net losses reclassified into earnings. The increase in fiscal 2001 reached a consensus on Issue No. 02-16, “Accounting by consisted of net gains from these hedges of $771,000, less a Customer (Including a Reseller) for Cash Consideration $350,000 of net gains reclassified into earnings. Received from a Vendor.” EITF Issue No. 02-16 provides guid - ance on how cash consideration received by the Company, as Revenues are recognized as sales when merchandise is shipped a reseller of others’ goods, should be classified in its statement and title transfers to the customer. The Company permits the return of earnings. The Company does not expect EITF Issue No. of damaged or defective products and accepts limited amounts 02-16 to have a material impact on its consolidated financial of product returns in certain other instances. Accordingly, the position or operating results. Company provides allowances for the estimated amounts of these returns at the time of revenue recognition. In July 2001, the FASB issued SFAS No. 141, “Business Combina- Advertising Costs for in-store and media advertising as well as These standards were adopted by the Company on July 1, 2001. co-op advertising, internet portal costs and promotional allow- Under SFAS No. 142, all goodwill and intangible assets with ances are expensed as incurred. Advertising expenses for fiscal indefinite lives are not amortized in fiscal 2002 but are to be tested years 2002, 2001 and 2000 were approximately $41.9 million, $36.9 for impairment annually and also in the event of an impairment million and $36.5 million, respectively. indication. The adoption of these standards did not have a material tions,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” effect on the Company’s financial statements. New Accounting Standards. In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, The FASB also issued SFAS No. 144, “Accounting for the “Accounting for Costs Associated with Exit or Disposal Impairment or the Disposal of Long-Lived Assets,” which became Activities.” SFAS No. 146 addresses financial accounting and effective January 6, 2002 for the Company. SFAS No. 144 reporting for costs associated with exit or disposal activities supersedes SFAS No.121 “Accounting for the Impairment of Long- and nullifies the guidance previously provided in EITF No. Lived Assets and for Long-Lived Assets to be Disposed of.” The 94-3, “Liability Recognition for Certain Employee Termination adoption of this standard did not have a material effect on the Benefits and Other Costs to Exit an Activity (including Certain Company’s financial statements. Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity is Minority Interest in Subsidiaries, included within other income recognized at fair value when the liability is incurred rather than (expense)—net represents the minority stockholders’ share at the date of a commitment to an exit or disposal plan. The pro - of the net income (loss) of various consolidated subsidiaries. visions of SFAS No. 146 will be effective for disposal activities The minority interest in the consolidated balance sheets initiated after December 31, 2002. reflects the proportionate interest in the equity of the various consolidated subsidiaries. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock- Based Compensation - Transition and Disclosure.” SFAS Earnings Per Share (“EPS”). Basic EPS is based on the weighted No. 148 amends SFAS No. 123, “Accounting for Stock-Based average number of common shares outstanding during each Compensation” to provide alternative methods of transition for period. Diluted EPS includes the effects of dilutive stock a voluntary change to the fair value based method of account- options outstanding during each period using the treasury ing for stock-based employee compensation. In addition, this stock method. Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and 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: 2002 2001 2000 Net income............................................................................................... $ 58,907 $ 43,683 $ 55,883 Denominator: Basic EPS computation: Weighted average common shares outstanding ....................................... Three-for-two stock split effected June 2002 ............................................ Repurchase of common shares, net of treasury shares reissued ............................................................. Basic EPS ............................................................................................ $ Diluted EPS computation: Basic weighted average common shares outstanding .............................. Stock option conversion ........................................................................... Diluted EPS .......................................................................................... $ 30,854 15,142 (3) 45,993 1.28 45,993 2,245 48,238 1.22 30,323 15,162 (234) 45,251 0.97 45,251 1,609 46,860 0.93 $ $ 32,177 16,089 (732) 47,534 1.18 47,534 1,479 49,013 1.14 $ $ 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 2000 and 2001 amounts have been made to conform to the 2002 presentation. 2. Acquisitions On October 7, 2002, the Company acquired the remaining fifty agreement with Comark Inc. for approximately $400,000. This percent (50%) of the outstanding shares of SFJ, Inc., (“SFJ”) a acquisition was recorded as a purchase and no goodwill was former joint venture with Seiko Instruments Inc., at no cost to recorded in connection with this transaction. the Company. The Company has renamed the business Fossil Japan. Prior to this transaction, the Company owned 50% of the In July 2002, Fossil Europe B.V., Ltd. (“Fossil B.V.”), a wholly equity in SFJ and accounted for this investment based upon the owned subsidiary of the Company, acquired 100% of the equity method. Accordingly, the Company recorded net losses of capital stock in the Company’s Swiss distributor, No -Time $124,000 and $265,000 during 2002 and 2001, respectively. AG, for a purchase price of approximately $3.8 million in cash. Fossil B.V. also acquired three stores in Switzerland from X- On July 31, 2002, Fossil Canada Inc., a wholly owned sub - Time AG for approximately $10,000 in cash. These acquisi- sidiary of the Company, acquired four full price FOSSIL retail tions were recorded as purchases and resulted in goodwill of stores in Canada that were previously operated under a license approximately $2.0 million. 36 37 In May 2001, Fossil UK Holdings, Ltd., an indirect wholly owned earnout payments for amounts up to approximately $750,000 in subsidiary of the Company, acquired 100% of the capital stock the event certain earnings thresholds are met. This acquisi- of The Avia Watch Company Ltd. (“Avia”) as well as certain tion was recorded as a purchase and resulted in goodwill of trademarks utilized by Avia from Roventa-Henex S.A. for a cash approximately $1.5 million, including amounts relating to the purchase price of approximately $5.0 million. The acquisition was earnout provision. recorded as a purchase and resulted in goodwill of approximately $3.3 million. The results of these business combinations are included in the accompanying consolidated financial statements since the dates In July 2001, the Company acquired 80% of the capital stock of of their acquisition. The pro forma effects, as if transactions had FSLA, Pty. Limited, the Company’s distributor in Australia, for occurred at the beginning of the years presented, are not significant. a cash purchase price of approximately $300,000. This acqui- sition was recorded as a purchase and resulted in goodwill of approximately $200,000. 3. Investments in Joint Ventures During 1999, the Company acquired a 20% interest in SII Market- Effective July 2001, Fossil (East) Limited (“Fossil East”) increased ing International, Inc. (“SMI”), and since that time invested $6.0 its equity interest in Pulse Time, Ltd. to 90% by acquiring an addi- million in the venture. SMI, a joint venture between the Company tional 30% of the capital stock from its minority holders in exchange and Seiko Instruments Incorporated (“SII” ), was formed to design, for approximately 24,000 shares of the Company’s common stock, market and distribute watches in the mass-market distribution par value $0.1 per share (the “Common Stock”) valued at $450,000. channel. The investment of $5.4 million at fiscal year-end 2000, Additionally, on July 3, 2001, Fossil East increased its equity inter- had been carried on the equity basis. The Company’s equity in est in Trylink, Ltd. to 85% by acquiring an additional 34% of the SMI’s net loss of $1,100,000 and $409,000 for fiscal 2001 and capital stock from its minority holders in exchange for $225,000 in 2000, respectively, is included in other income (expense)—net. cash and approximately 14,000 shares of the Company’s Common Subsequent to fiscal year-end 2001, the Company entered into Stock valued at $225,000. Both of these acquisitions have been an agreement to transfer its 20% interest in SMI to SII for no accounted for as a purchase and no goodwill was recorded in con- additional consideration in exchange for SII’s agreement to indem- nection with either transaction. Effective August 2001, the Company acquired 99.6% of the out- standing capital stock of Vedette Industries, SA, the Company’s nify the Company from certain existing and any future losses in connection with SMI. The write-off of the Company’s remaining investment in SMI and recognition of certain transition costs of $4.8 million was reported as a separate item as other expense for distributor in France, for a cash purchase price of approxi- fiscal year 2001. mately $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 In August 2000, the Company sold 50% of the equity of its former defined sales and operating income objectives are achieved. The wholly-owned subsidiary (“Fossil Spain”) pursuant to a joint ven- acquisition was recorded as a purchase and resulted in goodwill ture agreement with Sucesores de A. Cardarso for the marketing, of approximately $2.5 million, including amounts relating to the distribution and sale of the Company’s products in Spain. The earnout provision. In August 2001, the Company acquired the worldwide rights to the ZODIAC brand name and related inventory for a cash purchase 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 $770,000, $497,000 and $28,000 for fiscal 2002, 2001 and 2000, respectively, and is price of approximately $4.7 million. This acquisition was recorded included in other income (expense)—net. as a purchase and $200,000 of goodwill was recorded in connec- tion 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 approxi- mately $2.3 million. The terms of these transactions include future 4. Inventories Inventories consist of the following: Fiscal Year IN THOUSANDS 2002 Components and parts ........................................................................................................ $ 9,481 $ Work-in-process................................................................................................................... Finished merchandise on hand............................................................................................. Merchandise at Company retail stores.................................................................................. Merchandise in-transit from customer returns....................................................................... 2,417 83,462 11,430 15,033 2001 4,659 3,855 70,547 11,365 13,236 $ 121,823 $ 103,662 5. Property, Plant and Equipment Property, plant and equipment consist of the following: Fiscal Year IN THOUSANDS 2002 Land .................................................................................................................................... $ 9,300 $ Buildings .............................................................................................................................. Furniture and fixtures ............................................................................................................ Computer equipment and software ...................................................................................... Leasehold improvements...................................................................................................... Construction in progress....................................................................................................... 35,516 45,271 20,151 19,851 13,812 143,901 Less accumulated depreciation and amortization ................................................................. 40,789 $ 103,112 $ 2001 7,757 15,949 33,348 18,536 19,579 27,549 122,718 32,682 90,036 6. Intangible and Other Assets Intangibles and other assets consist of the following: Fiscal Year IN THOUSANDS 2002 2001 Costs in excess of tangible net assets acquired ....................................................... $ 15,526 $ 13,401 Noncompete agreement .......................................................................................... Trademarks ............................................................................................................. Deposits ................................................................................................................. Cash surrender value of life insurance ..................................................................... Other ...................................................................................................................... Less accumulated amortization ............................................................................... – 5,540 1,905 1,008 530 24,509 2,660 475 5,168 2,320 900 978 23,242 3,031 $ 21,849 $ 20,211 38 39 7. Debt Bank: U.S.- based. The Company has renewed its short-term At fiscal year-end 2002 and 2001, the Company had outstanding revolving credit facility with its primary bank (“U.S. Short-term letters of credit of approximately $5.2 million and $8.6 million, Revolver”) each year since June 1998. In November 2001, the respectively, to vendors for the purchase of merchandise. Company amended the U.S. Short-term Revolver to temporar- ily increase the funds available under the facility to $50 million Banks : Foreign - based. During October 2002, Fossil Japan through January 15, 2002, an increase of $10 million, not subject restructured its short-term credit facility with its primary bank to any borrowing base calculation. The U.S. Short-term Revolver is allowing borrowings of up to 400 million yen. All outstanding unsecured and requires the maintenance of net worth, quarterly borrowings under the facility bear interest at the Euroyen rate. In income, working capital and financial ratios. There were no bor- connection with the financing agreement, Fossil Japan agreed to rowings under the U.S. Short-term Revolver as of fiscal year-end pay an unused fee of 0.3% per annum. The facility is collateralized 2002, and $15.0 million in borrowings as of fiscal year-end 2001. by a U.S. bank. Japan-based borrowings, in U.S. dollars, under the Since June 1999, none of the $40.0 million in available funds under facility were approximately $2.5 million at fiscal year-end 2002. the facility was subject to a borrowing base calculation. In June 2000, the Company negotiated a reduction in the interest rate paid on Eurodollar Base Rate (“Eurodollar”) based borrowings. All bor- rowings under the U.S. Short-term Revolver accrue interest at the bank’s prime rate less 0.5%, 3.75% at year-end, or Eurodollar plus 0.75%, 2.11% at year-end. There was no interest expense under the credit facility for fiscal year 2002, and approximately $200,000 for fiscal year 2001. 8. Other Income (Expense) – Net Other income (expense)—net consists of the following: Fiscal Year IN THOUSANDS 2002 2001 2000 Interest income.............................................................................................. $ Minority interest in subsidiaries ..................................................................... Equity in gains (losses) of joint ventures—net................................................. Currency (loss) gain ....................................................................................... Royalty income.............................................................................................. Other income (expense) ................................................................................ $ 1,013 (1,958) 842 (528) 611 176 156 $ 1,549 (1,430) (933) 336 740 783 $ 3,480 (1,786) (381) (412) 770 (647) $ 1,045 $ 1,024 9. Income Taxes Deferred income tax benefits reflect the net tax effects of deductible temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company’s net deferred tax benefits, consist of the following: Fiscal Year IN THOUSANDS Current assets: Deferred tax assets: 2002 2001 Bad debt allowance............................................................................... $ Returns allowance ................................................................................. 263 (A) capitalization of inventory........................................................... Forward contract losses ........................................................................ Miscellaneous tax asset items ............................................................... 4,463 7,296 897 2,259 2,923 $ Deferred tax liabilities: In-transit returns inventory ..................................................................... Net current deferred tax benefits ...................................................... (4,241) 13,597 Long-term deferred tax liability: Tax on certain undistributed earnings of foreign subsidiaries ...................... (23,599) Net deferred tax (liabilities) benefits................................................................ $ (10,002) $ 3,709 6,772 878 (13) 1,273 (3,901) 8,718 (7,318) 1,400 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: 2002 2001 2000 United States............................................................................................. $ Foreign ...................................................................................................... Deferred provision ......................................................................................... 5,304 15,041 13,674 $ 12,104 $ 9,479 6,378 21,229 18,145 (1,010) Tax equivalent related to exercise of stock options (credited to additional paid-in capital)......................................................... 3,053 Provision for income taxes............................................................................. $ 37,072 Tax (benefit) expense related to other comprehensive income (loss)............................................................ $ (2,272) 1,160 29,121 470 $ 38,834 13 $ – $ $ A reconciliation of income tax computed at the U.S. federal statutory income tax rate of 35% to the provision for income taxes is as follows: Fiscal Year IN THOUSANDS 2002 2001 2000 Tax at statutory rate ....................................................................................... $ 33,593 $ 25,481 $ 33,151 State, net of federal tax benefit ...................................................................... Other............................................................................................................. 397 3,082 1,069 2,571 736 4,947 Provision for income taxes............................................................................. $ 37,072 $ 29,121 $ 38,834 Deferred U.S. federal income taxes are not provided on certain undistributed earnings of foreign subsidiaries where management plans to continue reinvesting these earnings outside the United States indefinitely. 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. 40 41 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 royalty expense of approximately $17.8 million, $11.2 million and $9.6 million in fiscal years 2002, 2001 and 2000, respectively. These amounts are included in the Company’s cost of sales and selling expenses. The Company has several agreements in effect at the end of fiscal year 2002 which expire on various dates from January 2003 through December 2008 and require the Company to pay royalties ranging from 3.6% to 20.0% of defined net sales. Future minimum royalty commitments under such license agreements at the close of fiscal year 2002 are as follows (amounts in thousands): 2003 ..................................................................................................................... $ 20,933 2004 ..................................................................................................................... 17,847 2005 ..................................................................................................................... 13,785 2006 ..................................................................................................................... 14,798 2007 ..................................................................................................................... 14,325 Thereafter .............................................................................................................. 9,791 $ 91,479 Leases. The Company leases its retail and outlet store facilities as well as certain of its office facilities and equipment under non-cancel- able 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 $20.6 million, $17.5 million, and $10.9 million for fiscal years 2002, 2001 and 2000, respectively. Contingent rent expense has been immaterial in each of the last three fiscal years. Future minimum rental commitments under such non-cancelable leases at the close of fiscal year 2002 are as follows (amounts in thousands): 2003 ..................................................................................................................... $ 15,874 2004 ..................................................................................................................... 14,782 2005 ..................................................................................................................... 13,639 2006 ..................................................................................................................... 12,122 2007 ..................................................................................................................... 11,131 Thereafter .............................................................................................................. 35,245 $ 102,793 11. Stockholders’ Equity and Benefit Plans Common and Preferred Stock. On May 13, 2002, the Board of Direc- pursuant to the terms and conditions of the Deferred Plan. tors of the Company declared a 3-for-2 stock split (“Stock Split”) Eligible participants include certain officers and other highly of the Company’s Common Stock which was effected in the form of a stock dividend which was paid on June 7, 2002 to stockhold- ers of record on May 24, 2002. Retroactive effect has been given to the stock split in all share and per share data in these notes to consolidated financial statements. 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 2002, 2001 and 2000. The Company has 100,000,000 shares of authorized $0.01 par value Common Stock, with 46,392,123 and 45,426,554 shares issued and outstanding at the close of fiscal years 2002 and 2001, respec- tively. 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 deter- mined 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 autho- rized management to repurchase up to 750,000 shares and 3.7 million shares, respectively, of the Company’s Common Stock in the open market or privately negotiated transactions (the “Repur- chase Programs”). During fiscal years 2002 and 2001, the Company repurchased and retired 3,558 and 309,297 shares, respectively, of its Common Stock under the Repurchase Programs at a cost of approximately $59,000 and $3.5 million, respectively. At the end of 2002, the Company had approximately 600,000 shares avail- able for repurchase relating to previous authorizations. Deferred Compensation and Savings Plans. The Company has a sav- ings plan in the form of a defined contribution plan (the “401(k) Plan”) for substantially all full-time employees of the Company. After one year of service (minimum of 1,000 hours worked), the Company matches 50% of employee contributions up to 3% of their compensation and 25% of the employee contributions between 4% 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 Com- pany to the 401(k) Plan totaled approximately $500,000, $400,000 and $300,000 for fiscal years 2002, 2001 and 2000, 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 Long-term Incentive Plan. An aggregate of 3,881,250 shares of Common Stock were initially reserved for issuance pursuant to the Incentive Plan, adopted April 1993. An additional 2,025,000 shares were reserved in each of 1995, 1998 and 2001 for issuance under the Incentive Plan. Designated employees of the Company, includ- ing officers and directors, are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) cash awards or (v) any combination of the fore - going. 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 Com- mittee, 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 2002, 2001 and 2000 was $7.95, $6.74 and $5.98, respectively. Nonemployee Director Stock Option Plan. An aggregate of 337,500 shares of Common Stock were reserved for issuance pursu- ant to the Nonqualified Stock Option Plan, adopted April 1993. An additional 75,000 shares were reserved in 2002 for issuance under this plan. During the first year individuals are elected as nonemployee directors of the Company, they receive a grant of 5,000 nonqualified stock options. In addi- tion, 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 exercisable on the first anniversary of the date of grant and in two additional installments of 25% on the second and third anniversaries. The exercise prices of options granted under this plan were not less than the fair market value of the Common Stock at the date of grant. The weighted average fair value of the stock options granted during fiscal years 2002, 2001 and 2000 was $11.07, $6.86 and $6.71, respectively. 42 43 exercise price per share weighted average exercise price weighted average exercise price per share outstanding per share exercisable Balance, Fiscal 1999 ................... $ 1.963 – $ 22.125 $ 6.795 $ 3.887 1,411,212 Granted.................................. $ 7.458 – $ 16.667 $ 10.113 Exercised ............................... $ 1.963 – $ 13.333 $ 4.803 Canceled................................ $ 3.445 – $ 22.125 $ 11.208 Exercisable............................. $ 1.963 – $ 21.750 $ – Balance, Fiscal 2000 ................... $ 1.963 – $ 21.750 $ 7.759 $ 4.896 1,861,253 Granted.................................. $ 9.333 – $ 15.293 $ 11.621 Shares designated for grant through the plan ................ – Exercised ............................... $ 1.963 – $ 12.889 $ 5.824 Canceled................................ $ 6.445 – $ 21.473 $ 11.495 (433,235) (193,801) – – Exercisable............................. $ 1.963 – $ 21.750 $ 83,718 Balance, Fiscal 2001 ................... $ 1.963 – $ 21.750 $ 8.721 4,135,793 $ 5.996 1,944,971 Granted.................................. $ 13.440 – $ 23.800 $ 14.606 1,034,329 Exercised ............................... $ 1.963 – $ 21.014 $ 6.686 Canceled................................ $ 3.704 – $ 22.490 $ 12.816 Exercisable............................. $ 1.963 – $ 21.750 $ – (937,555) (174,551) – 2,861,180 1,183,500 (160,305) (141,741) 3,742,634 1,020,195 – – – available for grant 1,839,801 (1,183,500) 141,741 798,042 (1,020,195) 2,025,000 193,801 1,996,648 (1,034,329) 174,551 – – – – – – – – – – – – – – – – – – – 450,041 – – – – – – – – – – (418,693) Balance, Fiscal 2002.................... $ 1.963 – $ 23.800 $ 10.530 4,058,016 $ 7.594 1,526,278 1,136,870 Restricted Stock Plan. The 2002 Restricted Stock Plan of the Company, (the “Restricted Stock Plan”) is intended to advance the best interests of the Company, its subsidiaries and its stock- holders in order to attract, retain and motivate key employees by providing them with additional incentives through the award of shares of restricted stock. The Restricted Stock Plan is being fully funded with treasury shares contributed to the Company from a significant shareholder. During 2002, 139,500 shares of restricted stock were contributed to the Restricted Stock Plan by the shareholder and reissued by the Company to the employees. These shares were accounted for at fair value and resulted in deferred compensation and additional paid in capital of approximately $2.6 million. At fiscal year- end 2002, the Company has reserved 599,500 common shares for future issuances under the Restricted Stock Plan. The fair value of options granted under the Company’s stock option plans during fiscal years 2002, 2001 and 2000 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 62% to 66%, risk free interest rate of 3.0% to 6.0%, 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 weighted average exercise price per share outstanding per share exercisable Balance, Fiscal 1999 ................... $ 1.963 – $ 22.125 $ 6.795 Granted.................................. $ 7.458 – $ 16.667 $ 10.113 Exercised ............................... $ 1.963 – $ 13.333 $ 4.803 Canceled................................ $ 3.445 – $ 22.125 $ 11.208 Exercisable............................. $ 1.963 – $ 21.750 $ – Balance, Fiscal 2000 ................... $ 1.963 – $ 21.750 $ 7.759 Granted.................................. $ 9.333 – $ 15.293 $ 11.621 Shares designated for grant through the plan ................ – – Exercised ............................... $ 1.963 – $ 12.889 $ 5.824 Canceled................................ $ 6.445 – $ 21.473 $ 11.495 Exercisable............................. $ 1.963 – $ 21.750 $ – 2,861,180 1,183,500 (160,305) (141,741) – 3,742,634 1,020,195 – (433,235) (193,801) – $ 3.887 1,411,212 – – – – – – – 450,041 $ 4.896 1,861,253 – – – – – – – – – 83,718 Balance, Fiscal 2001 ................... $ 1.963 – $ 21.750 $ 8.721 4,135,793 $ 5.996 1,944,971 Granted.................................. $ 13.440 – $ 23.800 $ 14.606 1,034,329 Exercised ............................... $ 1.963 – $ 21.014 $ 6.686 Canceled................................ $ 3.704 – $ 22.490 $ 12.816 Exercisable............................. $ 1.963 – $ 21.750 $ – (937,555) (174,551) – – – – – – – – (418,693) available for grant 1,839,801 (1,183,500) – 141,741 – 798,042 (1,020,195) 2,025,000 – 193,801 – 1,996,648 (1,034,329) – 174,551 – Balance, Fiscal 2002.................... $ 1.963 – $ 23.800 $ 10.530 4,058,016 $ 7.594 1,526,278 1,136,870 Nonemployee Director Plan exercise price per share weighted average exercise price weighted average exercise price per share outstanding per share exercisable Balance, Fiscal 1999 .......................... $ 2.222 – $ 15.417 Granted ..................................... $ 9.583 – $ 13.083 Exercised ................................... $ 2.222 $ 5.462 $ 11.333 $ 2.222 Exercisable ................................ $ 2.222 – $ 15.417 $ – 236,250 $ 4.373 205,029 15,000 (33,750) – – – – – – (33,750) Balance, Fiscal 2000 .......................... $ 2.222 – $ 15.417 Granted ..................................... $ 9.656 – $ 14.000 Exercised................................... $ 2.222 – $ 5.630 $ 6.369 $ 11.828 $ 3.500 Exercisable ................................ $ 2.481 – $ 15.417 $ – 217,500 $ 4.797 171,279 45,000 (27,000) – – – – – – 19,596 Balance, Fiscal 2001 .......................... $ 2.481 – $ 15.417 Granted ..................................... $ 20.340 $ 7.742 $ 20.340 235,500 15,000 Shares designated for grant through the plan .................. Exercised ................................... $ 3.889 – $ 5.630 $ 5.027 (29,250) Exercisable ................................ $ 2.481 – $ 15.417 $ – – $ 6.614 190,875 – – – – – (5,250) available for grant 83,531 (15,000) – – 68,531 (45,000) – – 23,531 (15,000) 75,000 – – Balance, Fiscal 2002 .......................... $ 2.481 – $ 20.340 $ 8.955 221,250 $ 7.660 185,625 83,531 Additional weighted average information for options outstanding and exercisable as of fiscal year- end 2002: range of exercise price Long-Term Incentive Plan: ......... $ 1.963 – $ 8.000 $ 8.001 – $ 13.000 $ 13.001 – $ 23.800 Nonemployee Director Plan: ....... $ 2.481 – $ 8.000 $ 8.001 – $ 13.000 $ 13.001 – $ 20.340 options outstanding options exercisable weighted average exercise price weighted average remaining number of per share contractual life shares $ 5.053 $ 11.322 $ 14.847 4.7 years 7.3 years 8.8 years 897,183 543,129 85,966 1,526,278 $ 4.506 $ 10.903 $ 15.835 3.6 years 112,500 7.2 years 8.6 years 42,750 30,375 185,625 weighted average exercise price per share $ 4.277 $ 11.494 $ 17.564 $ 7.594 $ 4.506 $ 11.125 $ 14.460 $ 7.660 number of shares 1,186,343 1,673,629 1,198,044 4,058,016 112,500 50,250 58,500 221,250 44 45 The Company applies Accounting Principles Board Opinion No.25 and related Interpretations in accounting 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 2002, 2001 and 2000 are presented below. Fiscal Year IN THOUSANDS, EXCEPT PER SHARE DATA Net income: 2002 2001 2000 As reported ................................................................................................... $ Pro forma under SFAS No. 123 ..................................................................... $ Basic earnings per share: As reported ................................................................................................... $ Pro forma under SFAS No. 123 ..................................................................... $ Diluted earnings per share: As reported ................................................................................................... $ Pro forma under SFAS No. 123 ..................................................................... $ 58,907 55,117 1.28 1.20 1.22 1.14 $ $ $ $ $ $ 43,683 40,633 0.97 0.90 0.93 0.87 $ $ $ $ $ $ 55,883 53,018 1.18 1.12 1.14 1.08 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: 2002 2001 2000 Interest .......................................................................................................... $ 11 Income taxes................................................................................................. $ 17,608 $ $ 216 23,156 $ $ 62 35,106 13. Major Customer, Segment and Geographic Information Customers of the Company consist principally of major the Company designs, develops, markets and distributes department stores and specialty retailers located throughout fashion watches and other accessories to department stores, the United States, Europe and the Far East. There were no specialty shops, and independent retailers throughout the significant customers, individually or considered as a group world. The Company’s retail operations consist of its outlet and under common ownership, which accounted for over 10% of net mall-based retail stores and its website selling the Company’s sales for fiscal years 2002, 2001 and 2000. product directly to the consumer. Specific information related to the Company’s reportable segments and geographic areas The Company’s majority owned facilities operate primarily in four are contained in the following table. Intercompany sales of geographic regions. The Company operates in two distinct distri- products between geographic areas are referred to as inter- bution channels, wholesale and retail. In its wholesale operations geographic items. 2002 IN THOUSANDS Net Sales Operating Income (Loss) Long-lived Assets Total Assets United States–exclusive of Stores: .................................... $ 75,663 $ 210,945 External customers....................................................... $ 327,151 $ 33,637 Intergeographic ............................................................ Stores............................................................................... Europe ............................................................................. Far East and Export:......................................................... External customers....................................................... Intergeographic ............................................................ 103,046 83,135 189,485 63,567 219,945 Intergeographic items ....................................................... (322,991) – (8,432) 13,233 57,492 – – – – 22,931 23,510 4,783 – – – – – 43,051 53,951 174,579 – – – Consolidated .................................................................... $ 663,338 $ 95,930 $ 126,887 $ 482,526 2001 IN THOUSANDS United States–exclusive of Stores: .................................... $ 62,315 $ 169,538 External customers....................................................... $ 290,859 $ 48,127 Intergeographic ............................................................ Stores............................................................................... 77,236 68,243 Europe ............................................................................. 130,330 Far East and Export:......................................................... External customers....................................................... Intergeographic ............................................................ 56,109 192,678 Intergeographic items ....................................................... (269,914) – (9,276) 2,408 35,595 – – – – 25,951 19,513 3,567 – – – – – 46,465 31,507 133,353 – – – Consolidated .................................................................... $ 545,541 $ 76,854 $ 111,346 $ 380,863 2000 IN THOUSANDS 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 ............................................................ 73,270 49,803 99,439 53,276 189,651 Intergeographic items ....................................................... (262,921) – (7,215) 6,442 38,783 – – – – 18,135 5,132 3,052 172 – – – – 39,978 21,138 106,375 1,304 – – Consolidated .................................................................... $ 504,285 $ 93,821 $ 54,760 $ 307,591 46 47 COR P ORATE INFORMATION EXECUTIVE OFFICERS AND DIRECTORS Tom Kartsotis Chairman of the Board Randy S. Kercho Executive Vice President Kenneth W. Anderson Director 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 CORPORATE INFORMATION Transfer Agent and Registrar: Mellon Investor Services Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07760 Mike L. Kovar Senior Vice President, Chief Financial Officer and Treasurer Alan J. Gold Director Mark D. Quick President, Fashion Accessories Division Michael Steinberg Director T. R. Tunnell Executive Vice President, Chief Legal Officer and Secretary Donald J. Stone Director Independent Auditors: Deloitte & Touche LLP 2200 Ross Avenue Dallas, TX 75201 Corporate Counsel: Jenkens & Gilchrist, P.C. 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 21, 2003, 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, or online at www.fossil.com. 

Continue reading text version or see original annual report in PDF format above