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Company Profile
Financial Highlights
Letter to Stockholders
Company Overview
Management’s Discussion
and Analysis
Financial Information
Corporate Information
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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.