UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 3, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19848
FOSSIL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2018505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2280 N. Greenville Avenue
Richardson, Texas 75082
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 234-2525
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
------
The aggregate market value of Common Stock held by nonaffiliates of the
registrant, based on the sale trade price of the Common Stock as reported by the
Nasdaq National Market on March 31, 1998, was $178,015,815. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant. As of March 31, 1998, 13,644,367 shares of Common
Stock were outstanding (pre-split).
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual
Meeting of Stockholders to be held May 27, 1998, to be filed with the Commission
pursuant to Regulation 14A, and the Company's Annual Report to Stockholders are
incorporated by reference into Part III of this report.
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PART I
Item 1. Business
General
Fossil, Inc. (the "Company") is a Delaware corporation formed in
December 1991 and is the successor to a Texas corporation formed in 1984. In
1993, the Company completed an initial public offering (the "Offering") of
2,760,000 shares of common stock, par value $.01 (the "Common Stock").
The Company's principal executive offices are located at 2280 N.
Greenville Avenue, Richardson, Texas 75082, and its telephone number at such
address is (972) 234-2525.
The Company designs, develops, markets and distributes fashion watches
and accessories, including sunglasses, small leather goods, belts and handbags,
principally under the FOSSIL(R), RELIC(R) and FSL(TM) brand names. The Company
designs, manufactures and markets a line of limited edition watches bearing the
trademarks and logos of various entities, as well as contracts with retailers
and other customers for the manufacture of watches for sale under private label.
The Company conducts substantially all of its United States operations
through Fossil Partners, L.P. ("Partners"), a Texas limited partnership formed
in August 1994, of which the Company is the sole general partner. The sole
limited partner of Partners is Fossil Trust, a Delaware business trust, an
indirect wholly owned subsidiary of the Company, formed in August 1994. The
Company's operations in the state of New York are conducted by Fossil New York,
Inc., a Delaware corporation, a wholly owned subsidiary of the Company. The
Company's outlet stores are leased and operated by Fossil Stores I, Inc., a
Delaware corporation, a wholly owned subsidiary of the Company formed in
November 1994. The Company's retail stores are leased and operated by Fossil
Stores II, Inc., a Delaware corporation, a wholly owned subsidiary of Fossil
Stores I, Inc., formed in November 1994. In addition, certain merchandising
activities of the Company are conducted through Arrow Merchandising, Inc., a
Texas corporation, a wholly owned subsidiary of the Company formed in August
1992.
The Company's operations in Hong Kong relating to the procurement of
watches from various manufacturing sources are conducted by Fossil (East)
Limited ("Fossil East"), a wholly owned subsidiary of the Company organized
under the laws of Hong Kong and acquired by the Company in 1992. Fossil Europe
B.V. ("Fossil B.V.") a Netherlands holding company established in May 1993, is a
wholly owned subsidiary of the Company. Fossil Europe GmbH ("Fossil GmbH") is a
wholly owned German subsidiary of Fossil B.V., which markets and resells the
Company's products throughout Europe. Fossil Italia, S.r.l. ("Fossil Italy"), a
wholly owned Italian subsidiary of Fossil B.V., was formed in June 1994 and
markets and sells the Company's products in Italy. Fossil France EURL, S.a.r.l.
("Fossil France") and Fossil U.K. Ltd. ("Fossil UK"), wholly owned subsidiaries
of Fossil B.V., were formed in 1995 to market and sell the Company's products in
France and the United Kingdom, respectively. In April 1996, the Company
acquired an 81% interest in Fossil Japan, Inc. ("Fossil Japan") which acts as
the distributor of the Company's products in Japan. In 1997, the Company
discontinued sales in the U.K. through Fossil UK. Fossil Spain, S. A.("Fossil
Spain"), a wholly owned subsidiary of Fossil B.V., was formed in 1996 and
markets and sells the Company's products in Spain.
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Forward-Looking Information
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in this Item 1. Business and Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations, are
forward-looking statements and involve a number of risks and uncertainties. The
actual results of the future events described in such forward-looking statements
in the Annual Report could differ materially from those stated in such
forward-looking statements. Among the factors that could cause actual results to
differ materially are: general economic conditions, competition, government
regulation and possible future litigation, as well as the risks and
uncertainties discussed in this Annual Report, including, without limitation,
the portions referenced above, and the risks and uncertainties set forth on the
Company's Current Report on Form 8-K dated March 31, 1997.
Industry Overview
Watch Products
The Company believes that the current market for watches in the United
States can be divided into three segments. One segment of the market consists of
fine watches characterized by high fashion and internationally known brand
names, such as Concord, Piaget and Rolex. Watches offered in this segment are
often manufactured in Switzerland and are sold by trade jewelers and in the fine
jewelry departments of better department stores and other purveyors of luxury
goods at retail prices ranging from $150 to $20,000. A second segment of the
market consists of watches sold by mass marketers, which include certain watches
sold under the Timex brand name as well as certain watches sold by Armitron
under various brand names and labels. Retail prices in this segment range from
$5 to $40.
The third segment of the market consists of moderately priced watches
characterized by contemporary fashion and well known brand names. Moderately
priced watches are typically manufactured in Japan or Hong Kong and are sold by
department stores and specialty stores at retail prices ranging from $40 to
$150. The Company believes that this segment in turn can be divided into two
discrete sectors that are competitive with each other only to a limited extent.
One sector of the moderately priced market segment is targeted by companies that
generally offer conservatively styled time pieces under well known brand names
such as Seiko and Citizen. The second sector of this market segment is targeted
by the Company and its principal competitors, including the companies that
market watches under the Anne Klein II, Guess? and Swatch brand names, whose
products attempt to reflect emerging fashion trends in accessories and apparel.
Some of the watches in this sector are manufactured under license agreements
with companies that market watches under various brand names, including Guess?,
Kenneth Cole and Nautica. The Company believes that one reason for the growth of
this sector has been that fashion-conscious consumers have increasingly come to
regard branded fashion watches not only as time pieces but also as fashion
accessories. This trend has resulted in consumers owning multiple watches that
may differ significantly in terms of style, features and cost.
Fashion Accessories
The Company believes that the fashion accessories market in
the United States includes products such as small leather goods,
handbags, belts, eyewear, neckwear, underwear, lounge wear, costume
jewelry, gloves, hats, hosiery and socks. These fashion accessory
products are generally marketed through mass merchandisers,
department stores and specialty shops. Fashion accessories for both men
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and women are sold at low, moderate and higher price points. Lower price
point items are typically retailed through mass merchandisers. Higher
price point items are typically sold in moderate and better department stores
and specialty shops and include products offered by Coach, Dooney & Burke,
Ralph Lauren and Donna Karan.
Moderately priced fashion accessories are typically marketed in
department stores and are characterized by contemporary fashion and well known
brand names. Fossil currently offers small leather goods, belts and eyewear for
both men and women, men's underwear and lounge wear, as well as handbags,
through department stores and specialty retailers in the moderate to
upper-moderate price range. Companies such as Calvin Klein, Tommy Hilfiger,
Swank, Guess?, Nine West, Kenneth Cole, and Liz Claiborne currently operate in
this market. The Company believes that one reason for the growth in this line of
business is that consumers are becoming more aware of accessories as fashion
statements, and as a result, are purchasing brand name, quality items that
complement other fashion items. The Company emphasizes its fashion accessories
as a natural complement to the core watch business by offering consumers the
same high quality and value that are associated with other FOSSIL brand
products. The Company generally markets its fashion accessory lines through the
same distribution channels as its watch business, using similar in-store
presentations, graphics and packaging.
Business Strategy
The Company's business strategy is designed to achieve further growth
in its watch and fashion accessories businesses and to capitalize on growing
consumer awareness of the FOSSIL, RELIC and FSL brand names by expanding the
scope of its product offerings to include additional categories of fashion
accessories. The Company intends to seek further growth in its watch business by
increasing consumer awareness of, and sales of the products marketed under, the
FOSSIL, RELIC and FSL brand names, expanding the scope of its product offerings
through the introduction or licensing of new categories of fashion accessories
that would complement its existing products, and placing increased emphasis on
growth in selected international markets. The Company also intends to seek
further growth in its accessories business by broadening its domestic
distribution channels and by introducing accessories in selected international
markets. In order to expand the scope of its product offerings, the Company may
in the future introduce additional categories of fashion accessories that would
complement its existing products.
The following are the principal elements of the Company's business
strategy:
Brand Development. The Company has established the FOSSIL and RELIC
brand names and images to reflect a theme of fun, fashion and humor, and
believes that both the FOSSIL and RELIC brand names have achieved growing
acceptance among fashion-conscious consumers in their target markets.
Product Value. The Company's products provide value to the consumer
by offering high quality components and features at moderate prices. The
Company's products offer a variety of distinctive details and treatments that
provide value to the customer at suggested retail prices generally below
competitive products of comparable quality.
Fashion Orientation. The Company attempts to stay abreast of emerging
lifestyle and fashion trends affecting accessories and apparel, and it responds
to those trends by making adjustments in its product lines as frequently as five
times each year.
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Innovative Product Design. The Company differentiates its products
from those of its competitors principally through innovations in fashion
details, including variations in the treatment of watch dials, crystals, cases
and straps for the Company's watches and innovative treatments and details in
its other accessories.
Expansion of International Business. The Company is seeking to
achieve further growth in its international business through its international
subsidiaries as well as by expanding the Company's network of distributors in
selected international markets.
Introduction of New Product Categories. The Company may leverage its
design and marketing expertise to expand the scope of its product offerings
through the introduction or licensing of new categories of fashion accessories
that would complement its existing products.
Active Management of Retail Sales. The Company manages the retail
sales process by monitoring its customers' sales and inventories by product
category and style and by assisting in the conception, development and
implementation of their marketing programs. As a result, the Company believes it
enjoys close relationships with its principal customers, often allowing it to
influence the mix, quantity and timing of their purchasing decisions.
Close Relationships with Manufacturing Sources. The Company has
established and maintains close relationships with a number of watch
manufacturers located in Hong Kong and Japan. The Company believes that these
relationships allow it to quickly and efficiently introduce innovative product
designs and alter production in response to the retail performance of its
products.
Coordinated Product Promotion. The Company coordinates product
design, packaging and advertising functions in order to communicate in a
cohesive manner to its target markets the themes and images that it associates
with its products.
Personnel Development. The Company actively seeks to recruit and
train its design, advertising, sales, administrative and marketing personnel
to assist it in achieving further growth in its existing businesses and in
expanding the scope of its product offerings.
Cost Advantages. Because the Company does not pay royalties on the
watch, leather goods or sunglass products sold under the FOSSIL, RELIC and FSL
brand names, and because of cost savings associated with the location of its
headquarters and warehousing and distribution center in Richardson, Texas, the
Company believes that it enjoys certain cost advantages that enhance its ability
to provide better value yet achieve attractive profit margins.
Centralized Distribution. Substantially all of the Company's products
sold in the United States are distributed from its warehouse and distribution
center located in Richardson, Texas. The Company's products sold in Europe
generally are distributed from the Company's warehouse and distribution centers
located in Germany and Italy, and in Japan from the Company's warehouse and
distribution center in Tokyo. The Company believes that its distribution
capabilities enable it to reduce inventory risk and increase its flexibility in
meeting the delivery requirements of its customers.
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Products
Watch Products
In 1986, the Company introduced FOSSIL watches, its flagship product.
The Company commenced its FOSSIL watch strap program in 1989, introduced its
RELIC watches in 1990 and introduced its FSL watches in 1995. Since 1986, the
Company has also contracted with retailers and other customers for the
manufacture of watches primarily for sale under private labels. Sales of the
Company's watches for fiscal years 1997, 1996 and 1995 accounted for
approximately 72.4%, 71.9% and 83.6% respectively, of the Company's gross sales.
FOSSIL Watches. The Company's FOSSIL watches are targeted at middle and
upper income consumers between the ages of 16 and 40 and are sold at retail
prices generally ranging from $45 to $120, with an average price of
approximately $73. The Company currently offers various categories of FOSSIL
watches, including Blue Teq, Dress, DRT(TM), Fossil Steel, Fossil Blue(R),
F2, Limited Edition, Skeleton, and Vintage watches. The Company believes that
its strategy of offering various categories of FOSSIL watches enables it to
market its watches to a wide range of consumers with differing tastes and
lifestyles. New lines of FOSSIL watches are introduced each year in January,
March, May, August and November. FOSSIL watches are sold through a diversified
distribution system which includes major department stores, such as
Federated/Macy's Department Stores, Dillard's, May Department Stores,
Mercantile Stores, Dayton Hudson, Proffitts and Nordstroms, as well as
specialty retail stores and independent distributors.
RELIC Watches. RELIC watches incorporate a number of the features found
in FOSSIL watches into a format suitable for lower priced fashion watches. RELIC
watches are targeted at mid-level income consumers and are sold at retail prices
generally ranging from $30 to $75, with an average price of approximately $55.
The Company currently offers various categories of RELIC watches, including
Dressy, Metal Sport, Moon, Novelty, Pendant, Pocket, RELIC Wet, Skeleton and
Sport watches. New lines of RELIC watches are introduced each year in
February, July and September. RELIC watches are sold principally through major
retailers, such as Ames Department Stores, Bealls, JCPenney, Kohl's,
Montgomery Ward, Sears, Service Merchandise, SRI and Uptons.
FSL Watches. FSL watches are sold at retail prices generally ranging
from $30 to $150, with an average price of approximately $60. The Company offers
both analog and digital watches under the FSL brand which combine high quality
engineering and fashion. New lines of FSL watches are introduced each year in
January, May and August and are sold through better department stores, specialty
gift and apparel stores and sports specialty stores.
Emporio Armani Orologi. In 1997, the Company entered into a multi-year,
worldwide license agreement with Giorgio Armani for the manufacture,
distribution and sale of a line of Emporio Armani watches. These products are
sold through better department stores, specialty retailers and jewelry stores at
retail prices generally ranging from $125 to $500.
Private Label and Premium Products. The Company designs, markets and
arranges for the manufacture of watches on behalf of certain retailers,
entertainment companies, theme restaurants and other corporate customers as
private label products or as premium and incentive items for use in various
corporate events. Under this arrangement, the Company performs
design and product development functions as well as acts as a
sourcing agent for its customers by contracting for the manufacture of
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watches, managing the manufacturing process, inspecting the finished watches,
purchasing the watches and arranging for their shipment to the United States.
Certain of these services are provided for the Company through Fossil East.
The Company has recently expanded the scope of its private label business to
include other categories of accessories such as sunglasses, small leather
goods, gifts and clocks. The Company's private label products are currently
sold to certain retail chains and other customers. The Company's premium and
incentive products are sold to many Fortune 500 companies. Participation in the
private label and premium businesses provide the Company with certain
advantages, including increased manufacturing volume (which may reduce the
costs of manufacturing the Company's other watch products) and the
strengthening of business relationships with its manufacturing sources. These
lines provide income to the Company with reduced inventory risks and certain
other carrying costs.
Licensed Watches. The Company has entered into a number of licensing
agreements for the sale of collectible watches under the Company's brands. Under
these agreements, the Company designs, manufactures and markets the goods
bearing the trademarks, trade names and logos of various entities through major
department stores within the Company's channels of distribution. Sales of
collectible watches in 1997 included the NFL, Star Wars, the Beatles, Felix the
Cat, James Bond, Mickey & Co. and I Love Lucy.
Fashion Accessories
In order to leverage the Company's design and marketing expertise and
its close relationships with its principal retail customers, the Company has
developed a line of sunglasses, men's and women's small leather goods, men's and
women's belts, and handbags under the FOSSIL brand and leather goods under the
RELIC brand. The Company currently sells its sunglasses, small leather goods,
belts and handbags through a number of its existing major department store and
specialty retail store customers. These fashion accessories are typically
sold in locations adjacent to watch departments, which may lead to purchases by
persons who are familiar with the Company's FOSSIL watches. Sales of the
Company's accessory lines for fiscal years 1997, 1996 and 1995 accounted for
26.4%, 26.5% and 15.2%, respectively of the Company's total sales.
Sunglasses. In 1995, the Company introduced a line of sunglasses sold
under the FOSSIL brand name. The FOSSIL Sunwear collection offers designs for
both men and women. The sunglass line features optical quality lenses in both
plastic and metal frames, with classic and fashion retro styling as found with
other FOSSIL products. Suggested retail prices for the Company's sunglasses
generally range from $28 to $75 with an average price of $40.
Small Leather Goods and Belts. In 1992, the Company introduced
a line of small leather goods and belts for ladies sold under the
FOSSIL brand name. In July 1993, the Company introduced a line of small
leather goods for men under the FOSSIL brand name and expanded the
men's line to include belts in April 1994. These small leather goods
are made of fine leathers and include items such as mini-bags, coin
purses, key chains and wallets. Retail prices for the Company's small
leather goods generally range from $15 to $70, with an average price of $40.
Retail prices for the Company's men's and women's belts generally range from
$20 to $45 with an average price of $30.
Handbags. In 1996, the Company introduced a new line of FOSSIL
handbags. The Company's handbags are made of a variety of fine leathers and
other materials. Classic styles and a variety of creative designs. Retail
prices generally range from $35 to $170 with an average price of $100.
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Licensed Products
In order to complement the Company's existing line of products and to
increase consumer awareness of the FOSSIL brand, the Company has entered into
various licensing agreements for other categories of fashion accessories and
apparel. These license agreements provide for the payment of royalties based on
a percentage of net sales and are subject to certain guaranteed minimum
royalties.
Men's Underwear and Lounge Wear. The Company entered into a multi-year
license agreement for the manufacture, marketing and sale of men's underwear,
sleepwear and lounge wear in the United States under the FOSSIL brand. This
product line was introduced in December 1997 and is available at better
department stores and specialty retailers in the United States.
Apparel. The Company also entered into a multi-year license agreement
for the manufacture, marketing and sale of various apparel items in Japan under
the FOSSIL brand. These products are scheduled to be introduced in 1998 and
include casual shirts, knit tops, pants, jackets and related separates for
everyday wear.
Future Products
The Company entered into a multi-year license agreement for the
manufacture, marketing and sale of outerwear in the United States under the
FOSSIL brand. This line is currently scheduled to be introduced in 1999. In
addition, the Company may expand its product offerings in the future to include
other accessory or apparel lines that would complement its existing products.
Design and Development
The Company's products are created and developed by the in-house design
staff for such products in cooperation with various outside sources, including
its manufacturing sources and component suppliers. Product design ideas are
drawn from various sources and are reviewed and modified by the design staff to
ensure consistency with the Company's existing product offerings and the themes
and images that it associates with its products. Senior management is actively
involved in the design process.
In order to respond effectively to changing consumer preferences, the
Company attempts to stay abreast of emerging lifestyle and fashion trends
affecting accessories and apparel. In addition, the Company attempts to take
advantage of the constant flow of information from the Company's customers
regarding the retail performance of its products. The design staff reviews
weekly sales reports provided by a substantial number of the Company's customers
containing information with respect to sales and inventories by product category
and style. Once a trend in the retail performance of a product category or
style has been identified, the design and marketing staffs review their
product design decisions to ensure that key features of successful products are
incorporated into future designs. Other factors having an influence on the
design process include the availability of components, the capabilities of the
factories that will manufacture the products and the anticipated retail prices
of and profit margins for the products.
The Company differentiates its products from those of its competitors
principally by incorporating into its product designs innovations in fashion
details, including variations in the treatment of dials, crystals, cases and
straps for the Company's watches and details and treatments of its other
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accessories. In certain instances, the Company believes that such innovations
have allowed it to achieve significant improvements in consumer acceptance of
its product offerings with only nominal increases in manufacturing costs. The
Company believes that the substantial experience of its design staff will assist
it in maintaining its current leadership position in watch design and in
expanding the scope of its product offerings.
Manufacturing
The Company's products are manufactured to its specifications by
independent contractors and by companies in which the Company holds a majority
interest. Substantially all of the Company's watches are manufactured by
approximately 19 factories located primarily in Hong Kong, and to a lesser
extent in Japan and the United States Virgin Islands. Newtime, Ltd. ("Newtime"),
a Hong Kong corporation, and Amazing Time, Ltd. ("Amazing Time"), a Hong Kong
corporation are indirect wholly owned subsidiaries of the Company. In addition,
the Company holds a majority interest in Pulse Time Center Company, Ltd. ("Pulse
Time"), a Hong Kong corporation, and Trylink International Ltd. ("Trylink"),
a Hong Kong corporation. During fiscal year 1997, approximately 19.5% of the
Company's watches were manufactured by Pulse Time; 15.6% by Amazing Time;
approximately 15.6% by Trylink and 25.3% by Newtime. In addition, one other
factory accounted for more than 10% of the Company's watch supplies in 1997.
The Company's sunglasses are manufactured by approximately 18 factories
located in China, Hong Kong, Italy, Japan, Korea and Taiwan. The Company's
leather products are manufactured by approximately 23 factories located in Hong
Kong, Italy, Korea, the Philippines, Taiwan, Turkey and the United States.
Except for its interest in Pulse Time, Amazing Time, Trylink and Newtime, the
Company does not own or operate any manufacturing facilities. The Company does
not have long-term contracts with any of its manufacturing sources. All
transactions between the Company and its manufacturing sources are conducted on
the basis of purchase orders.
The principal components used in the manufacture of the Company's
watches are cases, crystals, dials, movements and straps. These components are
obtained by the Company's manufacturing sources from a large number of suppliers
located principally in Hong Kong, Japan, China, Taiwan, Italy and Korea. The
majority of the movements used in the manufacture of the Company's watches are
supplied by two principal vendors. No other single component supplier
accounted for more than 10% of component supplies in 1997.
Although the Company does not normally engage in direct
transactions with component suppliers, in some cases it actively
reviews the performance of such suppliers and makes
recommendations to its manufacturing sources regarding the sourcing of
components. The Company does not believe that its business is materially
dependent on any single component supplier.
The Company believes that its policy of outsourcing products allows it
to achieve increased production flexibility while avoiding significant capital
expenditures, build-ups of work-in-process inventory and the costs of managing a
substantial production work force. The Company believes that it has established
and maintains close relationships with a number of watch manufacturers located
in Hong Kong and Japan. In 1997, four separate watch manufacturers in which the
Company holds a majority interest, each accounted for 10% or
more of the Company's watch supplies. The loss of any one of these
manufacturers could temporarily disrupt shipments of certain of
the Company's watches. However, as a result of the number of suppliers
from which the Company purchases its watches, the Company believes
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that it could arrange for the shipment of goods from
alternative sources within approximately 30 days on terms that are not
materially different from those currently available to the Company. Accordingly,
the Company does not believe that the loss of any single supplier, including
Pulse Time, Amazing Time, Trylink or Newtime would have a material adverse
effect on the Company's business. In general, however, the future success of the
Company will depend upon its ability to maintain close relationships with its
current suppliers and to develop long-term relationships with other suppliers
that satisfy the Company's requirements for price and production flexibility.
The Company's products are manufactured according to plans that reflect
management's estimates of product performance based on recent sales results,
current economic conditions and prior experience with manufacturing sources. The
average lead time from the commitment to purchase products through the
production and shipment thereof ranges from two to three months in the case of
watches, from three to six months in the case of sunglasses and from three to
four months in the case of leather goods. The Company believes that the close
relationships that it has established and maintains with its principal
manufacturing sources constitute a significant competitive advantage and allow
it to quickly and efficiently introduce innovative product designs and alter
production in response to the retail performance of its products.
Fossil East, a subsidiary of the Company, acts as the Company's
exclusive agent in Hong Kong. In such capacity, Fossil East is responsible for
overseeing the production of samples of new products, placing orders with
factories located in Hong Kong and China, monitoring manufacturing operations on
a daily basis, inspecting finished goods and coordinating the shipment of
finished goods. Fossil East also acts as the Company's payment agent in
purchasing products from the Company's manufacturing sources.
Quality Control
The Company's quality control program attempts to ensure that its
products meet the standards established by its design staff. Samples of products
are inspected by the Company prior to the placement of orders with manufacturing
sources to ensure compliance with its specifications. The operations of the
Company's manufacturing sources located in Hong Kong are monitored on a periodic
basis by Fossil East. Substantially all of the Company's watches and certain of
its other accessories are inspected by personnel of Fossil East or by the
manufacturer prior to shipment to the Company. In addition, the Company performs
quality control checks on its products upon receipt at the Company's facility.
Marketing and Promotion
The Company's in-house advertising department oversees the conception,
development and implementation of all aspects of the packaging, advertising,
marketing and sales promotion of the Company's products. The advertising staff
uses computer-aided design techniques to generate the images presented on
product packaging and other advertising materials. The Company believes that the
use of computers encourages greater creativity and reduces the time and cost
required to incorporate new themes and ideas into effective product packaging
and other advertising materials. Senior management is involved in monitoring the
Company's advertising and promotional activities to ensure that themes and ideas
are communicated in a cohesive manner to the Company's target audience.
The Company's current advertising themes aim at evoking
nostalgia for the simpler values and more optimistic outlook of the
1950s through the use of images of cars, trains, airliners and consumer
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products that reflect the classic American tastes of the period. These images
are carefully coordinated in order to convey the flair for fun, fashion and
humor that the Company associates with its products.
The Company participates in cooperative advertising programs with its
major retail customers, whereby it shares the cost of certain of their
advertising and promotional expenses. An important aspect of the marketing
process involves the use of in-store visual support and other merchandising
materials, including packages, signs, posters and fixtures. Through the use of
these materials, the Company attempts to differentiate the space used to sell
its products from other areas of its customers' stores. In addition, the Company
frequently offers promotional gifts, such as T-shirts and caps, to consumers who
purchase its products. The Company also provides its customers with a large
number of preprinted, customized advertising inserts and from time to time
stages promotional events designed to focus public attention on its products.
In 1994, the Company introduced the Fossil Collectors Club. Club
members receive a special limited edition watch, T-shirt and official Club
membership card. Newsletters are produced quarterly to inform members of new
product launches and to provide information to members about FOSSIL
collectibles, trivia and upcoming store events. In 1995, the Fossil Collectors
Club was successfully launched in certain international markets as well.
The Company advertises, markets and promotes its products to potential
consumers through a variety of media, including catalog inserts, billboards and
print media. The Company has advertised from time to time with billboards and
other outdoor advertisements including bus panels in major metropolitan areas.
The Company also periodically advertises in national fashion magazines such as
GQ and Glamour, as well as in trade publications such as Women's Wear Daily and
Daily News Record.
Sales and Customers
The Company sells its products in approximately 15,000 retail locations
in the United States through a diversified distribution network that includes
department stores and other major retailers, as well as specialty retail stores.
The Company also sells its product in retail stores operated by Fossil located
at retail malls in the United States and sells certain of its products in Fossil
outlet stores located at selected outlet centers throughout the United States.
The Company also sells its products at retail locations in major
airports in the United States, on cruise ships and in FOSSIL retail stores and
kiosks in certain international markets. In addition, the Company
from time to time sells its products to certain off-price retailers in order to
manage current product offerings and inventory levels. The Company does not
have long-term contracts with any of its retail customers. All transactions
between the Company and its retail customers are conducted on the basis of
purchase orders, which generally require payment of amounts due to the Company
on a net 30-day basis.
For fiscal years 1997, 1996 and 1995, domestic department stores
accounted for 45.2%, 46.6% and 40.5% of the Company's net sales, respectively.
In addition, in the same periods, the Company's ten largest customers
represented approximately 45.0%, 47.0% and 46.0% of net sales, respectively. For
fiscal year 1996, Dillard's Department Stores accounted for 10% of the Company's
net sales. No other customer accounted for more than 10% of the Company's net
sales in fiscal years 1997, 1996 and 1995. Certain of the Company's customers
are under common ownership. Sales to the department store group under
common ownership by Federated Department Stores accounted for
approximately 10.8%, 11.1% and 11.8% of the Company's net sales
in fiscal years 1997, 1996 and 1995, respectively. No other
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customer, when considered as a group under common ownership, accounted for
more than 10% of the Company's net sales in fiscal years 1997, 1996 and 1995.
Sales by the Company to off-price retailers accounted for approximately
1.0%, 2.7% and 2.2% of its net sales during fiscal years 1997, 1996 and 1995,
respectively. Off-price retailers include those customers to whom the Company
makes periodic or occasional sales of products at reduced prices. A majority of
the products sold to off-price retailers consist of watch styles that the
Company has eliminated or proposes to eliminate from its current product lines.
In 1995, the Company commenced operations of Fossil outlet stores at
selected outlet centers throughout the United States. The Company operated 27
outlet stores at the end of fiscal year 1997. These stores, which operate under
the FOSSIL name, carry some of the product that previously were sold by the
Company to off-priced retailers. The Company's products in such stores are
generally sold at discounts from 25% to 50% off the suggested retail price.
In 1996, the Company commenced operations of full priced Fossil retail
stores at some of the most prestigious retail malls in the United States. In
1997, the Company opened an additional three retail stores at the Galleria
(Houston, Texas), The Mall of America (Minneapolis, Minnesota), and Tuttle
Crossing (Columbus, Ohio). These stores, which operate under the FOSSIL name,
carry a full assortment of FOSSIL merchandise which is generally sold at the
suggested retail price.
In November 1995, the Company began offering various products for sale
to consumers through America Onlines's Market Place. The Company currently
offers product through a "storefront" on America Online that is connected to the
Company's website. These products include selected FOSSIL watches, sunglasses
and leather goods, as well as NFL and NBA licensed watches. In November 1996,
the Company established its own website at www.fossil.com. In addition to
offering selected FOSSIL products, the Company also provides Company news and
information, product annoucements and promotional contests on the website.
The Company historically has relied on in-house sales personnel,
instead of the independent sales representatives more typical in the industry.
The Company utilizes independent sales representatives, however, to help develop
the market for the FSL watch line into sports specialty stores and to expand the
distribution of RELIC watches to selected retailers and to promote the sale of
the Company's leather goods to certain specialty retailers. As of the end of
fiscal year 1997, the Company had 72 in-house sales and customer service
employees and 58 independent sales representatives. The Company's in-house sales
personnel receive a salary and, in some cases, a commission based on a
percentage of gross sales attributable to specified accounts. Independent sales
representatives generally do not sell competing product lines and are under
contracts with the Company that are generally terminable by either party upon 30
days' prior notice. These independent contractors are compensated on a
commission basis.
The Company's products are sold in over 70 countries through foreign
subsidiaries in which Fossil has an interest and through a network of
approximately 50 independent distributors operating in South and Central
America, the Carribean, Canada, the Far East, Australia and the Middle East.
Foreign distributors generally purchase products at uniform prices established
by the Company for all international sales and resell them to department stores
and specialty retail stores. The Company generally receives payment from its
foreign distributors in United States currency. In May 1993, the Company formed
Fossil B.V. which established Fossil GmbH to market and resell the Company's
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products throughout Europe. Fossil GmbH resells the Company's products directly
to department stores or other retailers, and in certain countries, Fossil GmbH
also offers the Company's products through independent distributors. In 1994,
Fossil B.V. established Fossil Italy to market and sell the Company's products
in Italy. In 1995, Fossil B.V. established Fossil France and Fossil U.K. to
market and sell the Company's products in France and England, respectively.
During 1997, the Company appointed an independent distributor in the United
Kingdom and discontiued operations through Fossil UK. In 1996, Fossil B.V.
established Fossil Spain to market and sell the Company's products in Spain. In
April 1996, the Company acquired an 81% interest in Fossil Japan which acts as
the sole distributor of the Company's products in Japan. During the fiscal years
1997, 1996 and 1995, international and export sales accounted for 31%, 30% and
32% of net sales, respectively.
During the past several years, the retail industry has undergone
significant consolidation. As a result of these developments, department stores
and other major retailers have generally become more dependent on the resources
and market expertise of their suppliers. The Company believes that this
dependence has created opportunities for suppliers that provide superior service
to their retail customers and are able to manage the retail sales process
effectively. In order to take advantage of the opportunities presented by this
increasing dependence, the Company has developed an approach to managing the
retail sales process that involves monitoring its customers' sales and
inventories by product category and style and assisting in the conception,
development and implementation of their marketing programs. For example, the
Company reviews weekly selling reports prepared by certain of its principal
customers and has established an active electronic data interchange program with
certain of its customers. The Company also places significant emphasis on the
establishment of cooperative advertising programs with its major retail
customers. The Company believes that its management of the retail sales process
has resulted in close relationships with its principal customers, often allowing
it to influence the mix, quantity and timing of their purchasing decisions.
The Company believes that its sales approach achieves high retail
turnover in its products, which can result in attractive profit margins for its
retail customers. The Company believes that the resulting profit margins for its
retail customers encourage them to devote greater selling space to its products
within their stores and enable the Company to work closely with buyers in
determining the mix of products any store should carry. In addition, the Company
believes that the buyers' familiarity with the Company's sales approach should
facilitate the introduction of new products through its existing distribution
network.
The Company permits the return of damaged or defective
products. In addition, although it has no obligation to do so, the
Company accepts limited amounts of product returns from its customers in
certain other instances. Accordingly, the Company provides allowances for
the estimated amount of product returns. The allowances for product returns at
for the fiscal years 1997, 1996 and 1995 were $10,576,000, $8,854,000 and
$9,034,000, respectively. Since 1990, the Company has not experienced any
returns in excess of the aggregate allowances therefor.
Backlog
For fiscal year 1997, the Company had unfilled customer orders of
approximately $16,223,000 compared to $15,852,000 and $14,340,000 for fiscal
years 1996 and 1995, respectively. It is the practice of a substantial number of
the Company's customers not to confirm orders by delivering
a formal purchase order until a relatively short time prior to
the shipment of goods. As a result, the amounts shown above include
confirmed orders and orders that the Company believes will be confirmed by
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delivery of a formal purchase order. A majority of such amounts represent orders
that have been confirmed. The remainder of such amounts represent orders that
the Company believes, based on industry practice and prior experience, will be
confirmed in the ordinary course of business. The Company's backlog at a
particular time is affected by a number of factors, including seasonality
and the scheduling of the manufacture and shipment of products. Accordingly,
a comparison of backlog from period to period is not necessarily meaningful
and may not be indicative of eventual actual shipments. In addition, the
increased use and reliance on the electronic data interchange program in recent
years has contributed to the decline in backlog in comparison to prior years.
Distribution
Upon completion of manufacturing, the Company's products are shipped to
its warehousing and distribution centers in Richardson, Texas, Italy, Japan and
Germany from which they are shipped to customers in their respective markets. In
1994, the Company consolidated its United States warehouse and distribution
facilities into a single facility which enhances the Company's inventory
management and distribution capabilities. In July 1997, the Company completed
construction of an additional warehouse and distribution facility adjacent to
its existing facility.
On March 12, 1997, the Dallas/Fort Worth International Airport Board
filed an application for authority to establish special purpose subzone status
at the Company's warehouse/distribution facilities in Richardson, Texas. The
establishment of the special purpose subzone was approved by the United States
Department of Commerce Foreign Trade Zone Board on December 3, 1997. As a result
of the establishment of the subzone, the Company enjoys certain economic and
operational advantages: (i) the Company may not have to pay duty on imported
merchandise until it leaves the subzone and enters the United States market,
(ii) the Company may not pay any United States duty on merchandise if the
imported merchandise is subsequently re-exported, and (iii) the Company may not
pay local property tax on inventory located within the subzone.
The Company maintains inventory control systems at its facilities which
enable it to track each item of merchandise from receipt to ultimate sale. A
significant number of products sold by the Company are pre-ticketed and bar
coded prior to shipment to its retail customers. The Company believes that its
distribution capabilities enable it to reduce inventory risk and increase its
flexibility in responding to the delivery requirements of its customers.
Warranty and Repair
The Company's Fossil watch products are covered by a limited warranty
against defects in materials or workmanship for a period of 11 years from the
date of purchase. The Company's sunglass line is covered by a one year limited
warranty against defects in materials or workmanship. Defective products
returned by customers are processed at the Company's warehousing and
distribution centers. In most cases, defective products under warranty are
repaired by the Company's personnel. Products under warranty that cannot be
repaired in a cost-effective manner are replaced by the Company at no cost to
the customer. The Company also performs watch repair services on behalf of
certain of its private label customers.
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Governmental Regulations
Imports and Import Restrictions. The vast majority of the Company's
products are manufactured overseas in China, Hong Kong, Italy, Japan, Korea, the
Philippines, Taiwan and Turkey. The Company's arrangements with its
manufacturing sources are subject to the risks of doing business abroad.
The Company's products imported to the United States are subject to
United States customs duties and, in the ordinary course of its business, the
Company may from time to time be subject to claims by the United States Customs
Service for duties and other charges.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adversely adjust prevailing quotas, duty or tariff levels,
which could adversely affect the Company's operations and its ability to import
products at current or increased levels. In general, the Company cannot predict
the likelihood or frequency of any such events occurring or what effect such
events could have on its financial condition and results of operations.
The United States Trade Representative (the "USTR") has been directed
to designate those countries that deny adequate and effective intellectual
property rights or fair and equitable market access to United States firms that
rely on intellectual property. From the countries designated, the USTR is to
identify as "priority" foreign countries those countries where the lack of
intellectual property rights protection is most egregious and has the greatest
adverse impact on United States products. The USTR is directed to identify and
investigate as priority foreign countries only those that have not entered into
good faith negotiations or made significant progress in protecting intellectual
property. Where such an investigation does not lead to a satisfactory resolution
of such practices, through consultations or otherwise, the USTR is authorized to
take retaliatory action, including the imposition of retaliatory tariffs and
import restraints on goods from the priority foreign country.
The Company cannot predict whether any of the countries in which its
products are currently manufactured or any of the countries in which the Company
may manufacture its products in the future will be subject to an investigation
by the USTR. The Company cannot predict the likelihood, type or effect of any
trade retaliation as a result of such investigations. Trade retaliation in the
form of increased tariffs or quotas, or both, against products that are
manufactured on behalf of the Company now or in the future could increase the
cost or reduce the supply of such products available to the Company.
There have been a number of ongoing trade disputes between
the United States and China during which the United States has
threatened to impose tariffs and duties on some products imported from
China and to withdraw China's "most favored nation" status. There can be no
assurance that legislation will not be introduced in Congress seeking to place
restrictions on the renewal of China's most favored nation status or that China
will continue to enjoy such status in the future. If goods manufactured in China
enter the United States without the benefit of most favored nation treatment,
such goods will be subject to significantly higher duty rates. Any such
increased duties would increase the cost or reduce the supply of goods from
China, although the Company believes that it could replace such goods with items
manufactured in other countries at prices that would not materially affect its
profit margins. Accordingly, the Company believes that the expiration of China's
most favored nation status would not have a material adverse effect on the
Company's financial condition or results of operations.
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In addition to the foregoing factors, the Company's import operations
may be adversely affected by political instability, foreign governmental
regulation, fluctuations in exchange rates and changes in economic conditions in
countries in which the Company's manufacturing sources are located, any of which
could result in the disruption of trade from exporting countries. The potential
effect of these factors on the Company may be heightened as a result of the fact
that substantially all of the Company's products are manufactured in, or sourced
from, Hong Kong, over which China resumed sovereignty in 1997. The Company
cannot predict the effect, if any, this event will have on its operations in
Hong Kong and there can be no assurances that Hong Kong will not experience
political, economic or social disruption as a result of the resumption of
Chinese sovereignty.
General. The Company's sunglass products are subject to regulation by
the United States Food and Drug Administration as medical devices. The Company
does not believe that compliance with such regulations is material to its
operations. In addition, the Company is subject to various state and federal
regulations generally applicable to similar businesses.
Trademarks
The Company has registered the FOSSIL and RELIC trademarks for use on
the Company's watches, leather goods and other fashion accessories, and has
applied for registration of the FSL trademark for use on the Company's watches
and other accessories in the United States. The Company has also registered or
applied for the registration of certain other marks used by the Company in
conjunction with the sale and marketing of its products and services. In
addition, the Company has registered certain of its trademarks, including
FOSSIL, RELIC and FSL, in certain foreign countries, including a number of
countries located in Europe, the Far East, the Middle East, South America and
Central America. The Company also has certain trade dress rights in, and has
applied for registration of, the distinctive rectangular tins in which the
Company packages the majority of its Fossil watch products. The Company regards
its trademarks and trade dress as valuable assets and believes that they have
significant value in the marketing of its products. The Company intends to
protect its trademarks and trade dress rights vigorously against infringement.
Competition
There is intense competition in each of the businesses in which the Company
competes. The Company's watch business competes with a number of established
manufacturers, importers and distributors such as Guess? Anne Klein II and
Swatch. In addition, the Company's leather goods and sunglass businesses compete
with a large number of established companies that have significantly greater
experience than the Company in designing, developing, marketing and distributing
such products. In all its businesses, the Company competes with numerous
manufacturers, importers and distributors who have significantly greater
financial, distribution, advertising and marketing resources than the Company.
The Company's competitors include distributors that import watches and
accessories from abroad, domestic companies that have established foreign
manufacturing relationships and companies that produce accessories domestically.
The Company competes primarily on the basis of style, price, value,
quality, brand name, advertising, marketing and distribution. In addition, the
Company believes that its ability to identify and respond to changing fashion
trends and consumer preferences, to maintain existing relationships and develop
new relationships with manufacturing sources, to deliver quality merchandise in
a timely manner and to manage the retail sales process are important factors in
its ability to compete.
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The Company considers that the risk of significant new competitors is
mitigated to some extent by barriers to entry such as high startup costs and the
development of long-term relationships with customers and manufacturing sources.
During the past few years, it has been the Company's experience that better
department stores and other major retailers have been increasingly unwilling to
source products from suppliers who are not well capitalized or do not have a
demonstrated ability to deliver quality merchandise in a timely manner. There
can be no assurance, however, that significant new competitors will not emerge
in the future.
Employees
As the end of fiscal year 1997, the Company (excluding the Company's
foreign subsidiaries) had 472 full-time employees, including 65 in executive or
managerial positions, and the balance in design, advertising, sales, quality
control, distribution, clerical and other office positions. Also included in
this amount are 62 full-time employees of Fossil Stores I, Inc. and 15 full-time
employees of Fossil Stores II, Inc. As the end of fiscal year 1997, Fossil East
had 55 full-time employees, including 12 in managerial positions and the balance
in sampling, quality control, clerical and other office positions. As the end of
fiscal year 1997, Fossil GmbH had 132 full time-employees, including 5 in
managerial positions and the balance in sampling, quality control, clerical and
other office positions. As the end of fiscal year 1997, Fossil Japan had 26 full
time-employees, including 3 in managerial positions and the balance in sampling,
quality control, clerical and other office positions. As the end of fiscal year
1997, Fossil Italy had 29 full-time employees, Fossil France had one full-time
employee and Fossil Spain had seven full-time employees.
The Company has not entered into any collective bargaining agreements
with its employees. The Company believes that its relations with its employees
are generally good.
Item 2. Properties
In July 1994, the Company completed construction of its new corporate
headquarters located in a 150,000 square foot facility in Richardson, Texas. In
July 1997, the Company completed construction of a new 138,000 square foot
distribution center located on land immediately adjacent to its headquarters.
These facilities contain the general office, warehousing and distribution
functions of the Company and are located on approximately 20 acres of land. The
Company owns both facilities and the land on which each is located.
As the end of fiscal year 1997, the Company had entered into six lease
agreements for retail space at prime locations in the United States for the sale
of its full assortment of products. The leases, including renewal options,
expire at various times from 2005 to 2010 and provide for minimum annual rentals
above specified net sales amounts and for the payment of additional rent based
on a percentage of sales ranging from 6% to 8%. The Company is also required to
pay its pro rata share of the common area maintenance costs at each retail mall,
including, real estate taxes, insurance, maintenance expenses and utilities.
The Company also leases retail space at selected outlet centers throughout
the United States for the sale of its products. As the end of fiscal year 1997,
the Company had entered into 27 such leases. The leases, including renewal
options, expire at various times from 2005 to 2010, and provide
for minimum annual rentals and for the payment of additional rent
based on a percentage of sales above
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specified net sales amounts ranging from 4% to 6%. The Company is also
required to pay its pro rata share of the common area maintenance costs at each
outlet center, including, real estate taxes, insurance, maintenance expenses and
utilities. The Company also leases showrooms in Atlanta, Chicago, Los Angeles
and New York City, which are used to display the Company's products to its
retail customers.
Fossil East leases approximately 37,600 square feet of office,
warehouse and assembly space in Hong Kong pursuant to a lease agreement that
expires in December 1999. Fossil GmbH leases approximately 12,000 square feet of
office and warehouse space in Erlstatt, Germany pursuant to a lease
agreement that expires in 2002. Fossil Italy leases approximately 2,800 square
feet of office space in Vicenza, Italy and an additional 3,100 square feet of
warehouse and storage space. Fossil Japan also leases warehouse and office space
in Tokyo, Japan. The Company believes that its existing facilities are well
maintained, in good operating condition and adequate for its current needs.
Item 3. Legal Proceedings
There are no legal proceedings to which the Company is a party or to
which its properties are subject, other than routine litigation incident to the
Company's business which is not material to the Company's consolidated financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year 1997.
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PART II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the Nasdaq National Market
System under the symbol "FOSL." Quotation of the Company's Common Stock began on
the Nasdaq National Market on April 8, 1993.
The following table sets forth the range of quarterly high and low
sales prices per share of the Company's Common Stock on the Nasdaq National
Market for the fiscal years ended January 3, 1998 and December 31, 1996 as
adjusted to reflect a three for two stock split (the "3 for 2 Stock Dividend")
of the Company's Common Stock effected as a fifty percent (50%) stock dividend
declared on March 4, 1998, payable on April 8, 1998 to all stockholders of
record on March 25, 1998. Such adjusted prices have been rounded to the nearest
trading fraction on the Nasdaq National Market.
High Low
Fiscal year beginning January 1, 1997:
First Quarter $ 9 3/4 $ 7
Second Quarter 11 7/8 8 1/4
Third Quarter 15 1/2 11
Fourth Quarter 17 7/8 11
Fiscal year beginning January 1, 1996:
First Quarter $ 7 1/2 $ 4 1/2
Second Quarter 10 7/8 6 1/2
Third Quarter 9 3/4 4 7/8
Fourth Quarter 10 1/2 7 5/8
As of March, 31, 1998, the Company estimates that there were
approximately 1,800 beneficial owners of the Company's Common Stock,
represented by approximately 120 holders of record.
Dividend Policy. The Company expects that it will retain all available
earnings generated by its operations for the development and growth of its
business and does not anticipate paying any cash dividends in the foreseeable
future. Any future determination as to dividend policy will be made in the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including the future earnings, capital requirements, financial
condition and future prospects of the Company and such other factors as the
Board of Directors may deem relevant.
The Company declared the 3 for 2 Stock Dividend on March 4, 1998,
effected as a fifty percent (50%) stock dividend payable on April 8, 1998 to all
stockholders of record on March 25, 1998.
During fiscal year 1995, the Company made principal payments in the amount
of $1,000,000 under promissory notes (the "Notes") in the principal amount of
$10,910,000 issued prior to the date of the Offering to Messrs. Tom
Kartsotis, Kosta Kartsotis and Alan D. Moore, a former director of the
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Company. The Company used a portion of the proceeds of the Offering to
repay $8,910,000 principal amount of the Notes. The Company did not make any
other such payments or distributions in fiscal years 1997 and 1996.
Recent Sales of Unregistered Securities. Effective as of February 1,
1997, Fossil B.V. entered into an agreement to purchase all of the issued and
outstanding common stock of Fossil Italia from the minority stockholders in
exchange for the issuance of 128,109 shares of Common Stock of the Company,
without giving effect to the 3 for 2 Stock Dividend. Such securities were not
registered under the Securities Act of 1933, as amended, in reliance on the
exemption from registration provided under Section 4(2) thereof.
Item 6. Selected Financial Data
The information appearing under "Selected Consolidated Financial
Highlights" in the Fossil, Inc. 1997 Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information appearing under "Management's Discussion" in the
Fossil, Inc. 1997 Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information appearing under "Management's Discussion" in the
Fossil, Inc. 1997 Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplemental Data
The information appearing under "Financial Information" in the Fossil,
Inc. 1997 Annual Report is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
The Company has had no disagreements with its accountants to report
under this item.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
Item 11. Executive Compensation
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
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PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Documents filed as part of Report.
1. Financial Statements:
The Financial Statements appearing under "Financial Information" in
the Fossil, Inc. 1997 Annual Report are incorporated herein by reference.
2. Financial Statement Schedule:
The following Financial Statement Schedule and related Auditor's Report
are contained herein on pages S-1 and S-2 of this Report.
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
3.1 Amended and Restated Certificate of Incorporation of
Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, registration
no. 33-45357, filed with the Securities and Exchange
Commission).
3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, registration no. 33-45357, filed
with the Securities and Exchange Commission).
3.3 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Fossil, Inc. (incorporated
by reference to Exhibit 3.1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.1 (2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement of Form S-1, registration
no. 33-45357, filed with the Securities and Exchange
Commission).
10.2 (2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.2 of the Company's
Registration Statement of Form S-1, registration no.
33-45357, filed with the Securities and Exchange Commission).
10.3 (2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated
herein by reference to Exhibit 10.3 of the Company's
Registration Statement of Form S-1, registration no. 33-45357,
filed with the Securities and Exchange Commission).
10.4 (2) Description of Bonus Program (incorporated herein by
reference to Exhibit 10.4 of the Company's Registration
Statement of Form S-1, registration no. 33-45357, filed
with the Securities and Exchange Commission).
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10.5 Non-Competition Agreement dated December 31, 1992 between
Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by
reference to Exhibit 10.12 of the Company's Registration
Statement of Form S-1, registration no. 33-45357, filed with
the Securities and Exchange Commission).
10.6 Amended and Restated Buying Agent Agreement dated
March 21, 1992 between Fossil, Inc. and Fossil East Ltd.
(incorporated by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993).
10.7 Amended and Restated Loan Agreement dated August 31, 1994, by
and between First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. and
Fossil Trust (without exhibits) (incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.8 First Amendment to Amended and Restated Loan Agreement
dated September 30, 1994, by and between First Interstate
Bank of Texas, N.A., Fossil Partners, L.P., Fossil, Inc.,
Fossil Intermediate, Inc., Fossil Trust and Fossil New York,
Inc. (without exhibits) (incorporated by reference to Exhibit
10.3 of the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1994).
10.9 Second Amendment to Amended and Restated Loan Agreement dated
February 13, 1995, by and between First Interstate Bank of
Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and
Fossil Stores I, Inc.(without exhibits) (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.10 Commercial/Real Estate Note dated as of August 31, 1994, in
the principal amount of $5,000,000 executed by Fossil
Partners, L.P. and payable to the order of First Interstate
Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6
of the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1994).
10.11 Subordination Agreement of Fossil Trust for the benefit of
First Interstate Bank of Texas, N.A. dated as of August 31,
1994 (incorporated by reference to Exhibit 10.7 of the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.12 Indemnity Agreement dated as of August 31, 1994 from Fossil
Partners, L.P. and Fossil, Inc. to First Interstate Bank
of Texas, N.A.(incorporated by reference to Exhibit 10.8
of the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1994).
10.13 Master Licensing Agreement dated as of August 30, 1994, by
and between Fossil, Inc. and Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.12 of the Company's
Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.14 Agreement of Limited Partnership of Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.13 of the Company's
Report on Form 10-Q for the quarterly period ended
September 30, 1994).
22
<PAGE>
10.15 Overhead Allocation Agreement by and between Fossil Partners,
L.P. and Fossil New York, Inc. dated October 1, 1994
(incorporated by reference to Exhibit 10.33 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.16 Services and Operations Agreement by and between Fossil
Partners, L.P. and Fossil New York,Inc. dated October 1, 1994
(incorporated by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.17 Overhead Allocation Agreement by and between Fossil Partners,
L.P. and Fossil Stores I, Inc. dated December 1, 1994
(incorporated by reference to Exhibit 10.35 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.18 Second Amended and Restated Loan Agreement entered into on
May 2, 1995 by and between First Interstate Bank of Texas,
N.A., Fossil Partners,L.P., Fossil, Inc., Fossil Intermediate,
Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I,
Inc. (without exhibits) (incorporated by reference to Exhibit
10.1 of the Company's Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.19 Third Amended and Restated Master Revolving Credit Note dated
April 30, 1995, in the stated principal amount of $25,000,000
executed by Fossil Partners, L.P. and payable to the order of
First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1995).
10.20 Stock Pledge Agreement entered into on May 2, 1995 by and
between Fossil, Inc. and First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.3 of the Company's
Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.21 Joint Development Agreement entered into on December 25, 1995
by and between Fossil, Inc., Seiko Instruments, Inc, and
Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.22 First Amendment to Second Amended and Restated Loan Agreement
by and between First Interstate Bank of Texas, N.A. and Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc.
dated as of March 27, 1996 (incorporated by reference
to Exhibit 10.2 of the Company's Report on Form 10-Q
for the quarterly period ended March 31, 1996).
10.23 Second Amendment to Second Amended and Restated Loan Agreement
by and between First Interstate Bank of Texas, N.A. and Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc.
and Fossil Stores II, Inc. dated as of May 3, 1996
(incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 10-Q for the quarterly period ended
June 30, 1996).
10.24 Stock Purchase Agreement by and between Franz Scheurl and
Fossil, Inc. dated October 1, 1996.
10.25 (2) Letter Agreement dated October 4, 1995 between Fossil, Inc.
and Mark D. Quick.
23
<PAGE>
10.26 (1) Third Amendment to Second Amended and Restated Loan Agreement
dated September 11, 1996, by and among Wells Fargo Bank
(Texas), National Association, a national banking association
formerly known as First Interstate Bank of Texas, N.A.,
Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate,
Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I,
Inc., and Fossil Stores II, Inc. (without exhibits).
10.27 Stock Purchase Agreement dated February 1, 1997, by and
between Bluewhale Holding S.a., and Fossil Europe B.V.
(incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 10-Q for the transition period from
January 1, 1997 to April 5, 1997).
10.28 Fourth Amendment to Second Amended and Restated Loan Agreement
dated April 2, 1997, by and among Wells Fargo Bank (Texas),
National Association, a national banking association formerly
known as First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc.,
and Fossil Stores II, Inc. (without exhibits)(incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
for the transition period from January 1, 1997 to
April 5, 1997).
10.29 Fifth Amendment to Second Amended and Restated Loan Agreement
dated June 1997, by and among Wells Fargo Bank (Texas),
National Association, a national banking association formerly
known as First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc.,
and Fossil Stores II, Inc. (without exhibits) (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q
for the quarterly period ended July 5, 1997).
13(1) Fossil, Inc. 1997 Annual Report to Stockholders.
21.1(1) Subsidiaries of Fossil, Inc.
23.1(1) Consent of Independent Auditors.
27(1) Financial Data Schedule.
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the last quarter
of the period covered by this Report.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Richardson, State of Texas, on April 1 , 1998.
FOSSIL, INC.
/s/ Tom Kartsotis
----------------------------------------------
Tom Kartsotis, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Tom Kartsotis
- --------------------------- Chairman of the Board, April 1 , 1998
Tom Kartsotis Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Kosta N. Kartsotis President and Chief Operating April 1 , 1998
- --------------------------- Officer and Director
Kosta N. Kartsotis
/s/ Randy S. Kercho Executive Vice President, April 1 , 1998
- --------------------------- Chief Financial Officer and
Randy S. Kercho Treasurer
(Principal Financial and
Accounting Officer)
/s/ Michael W. Barnes Executive Vice President April 1 , 1998
- --------------------------- and Director
Michael W. Barnes
/s/ Jal S. Shroff Director April 1 , 1998
- ---------------------------
Jal S. Shroff
/s/ Kenneth W. Anderson Director April 1 , 1998
- ---------------------------
Kenneth W. Anderson
/s/ Alan J. Gold Director April 1 , 1998
- ---------------------------
Alan J. Gold
/s/ Donald J. Stone Director April 1 , 1998
- ---------------------------
Donald J. Stone
25
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors of Fossil, Inc.:
We have audited the consolidated financial statements of Fossil, Inc. and
subsidiaries as of January 3, 1998 and December 31, 1996 and for each of the
three years in the period ended January 3, 1998 and have issued our report
thereon dated February 19, 1998 (except for the first paragraph of Note 10 which
is as of March 4, 1998), which report expressed an unqualified opinion; such
consolidated financial statements and report are included in your 1997 Annual
Report to Stockholders and are incorporated herein by reference. Our audit also
included the consolidated financial statement schedule of Fossil, Inc. and
subsidiaries listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 19, 1998
S-1
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
FOSSIL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Fiscal Years 1995, 1996, and 1997
Additions
Charged
Balance at (Credited) to Deductions Actual
Beginning of Costs and Returns or Balance at End of
Classification Period Expenses Writeoffs Period
- -------------- ------------ -------------- ------------------ -----------------
Fiscal Year 1995:
Accounts receivable allowances:
<S> <C> <C> <C> <C>
Sales returns 8,137,195 14,536,232 (13,639,303) 9,034,124
Bad debts 2,050,886 1,389,980 (584,800) 2,856,066
Cash discounts 85,232 115,507 (94,621) 106,118
Inventory in transit for
estimated customer (4,277,578) (8,074,296) 7,524,874 (4,827,000)
returns
Fiscal Year 1996:
Accounts receivable allowances:
Sales returns 9,034,124 12,524,626 (12,704,297) 8,854,453
Bad debts 2,856,066 2,103,499 (667,419) 4,292,146
Cash discounts 106,118 218,500 (110,747) 213,871
Inventory in transit for
estimated customer (4,827,000) (6,330,967) 6,694,021 (4,463,946)
returns
Fiscal Year 1997:
Accounts receivable allowances:
Sales returns 8,854,453 17,399,057 (15,677,328) 10,576,181
Bad debts 4,292,146 2,024,647 (1,616,962) 4,699,831
Cash discounts 213,871 204,448 (229,722) 188,597
Inventory in transit for
estimated customer (4,463,946) (9,715,573) 8,484,687 (5,694,831)
returns
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of Fossil,
Inc. (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, registration
no. 33-45357, filed with the Securities and Exchange
Commission).
3.2 Amended and Restated Bylaws of Fossil, Inc.(incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, registration no. 33-45357,
filed with the Securities and Exchange Commission).
3.3 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Fossil, Inc. (incorporated
by reference to Exhibit 3.1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1995).
10.1 (2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 of the
Company's Registration Statement of Form S-1, registration
no. 33-45357, filed with the Securities and Exchange
Commission).
10.2 (2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.2 of the Company's
Registration Statement of Form S-1, registration no.
33-45357, filed with the Securities and Exchange Commission).
10.3 (2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated
herein by reference to Exhibit 10.3 of the Company's
Registration Statement of Form S-1, registration no. 33-45357,
filed with the Securities and Exchange Commission).
10.4 (2) Description of Bonus Program (incorporated herein by reference
to Exhibit 10.4 of the Company's Registration Statement of
Form S-1, registration no. 33-45357, filed with the
Securities and Exchange Commission).
10.5 Non-Competition Agreement dated December 31, 1992 between
Fossil, Inc. and Mr. Jal S. Shroff (incorporated herein by
reference to Exhibit 10.12 of the Company's Registration
Statement of Form S-1, registration no. 33-45357, filed with
the Securities and Exchange Commission).
10.6 Amended and Restated Buying Agent Agreement dated
March 21, 1992 between Fossil, Inc. and Fossil East Ltd.
(incorporated by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1993).
10.7 Amended and Restated Loan Agreement dated August 31, 1994, by
and between First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. and
Fossil Trust (without exhibits) (incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.8 First Amendment to Amended and Restated Loan Agreement
dated September 30, 1994, by and between First Interstate Bank
of Texas, N.A., Fossil Partners, L.P., Fossil, Inc.,
<PAGE>
Fossil Intermediate, Inc., Fossil Trust and Fossil New York,
Inc. (without exhibits) (incorporated by reference to Exhibit
10.3 of the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1994).
10.9 Second Amendment to Amended and Restated Loan Agreement dated
February 13, 1995, by and between First Interstate Bank of
Texas, N.A., Fossil Partners, L.P., Fossil, Inc., Fossil
Intermediate, Inc., Fossil Trust, Fossil New York, Inc. and
Fossil Stores I, Inc.(without exhibits) (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.10 Commercial/Real Estate Note dated as of August 31, 1994, in
the principal amount of $5,000,000 executed by Fossil
Partners, L.P. and payable to the order of First Interstate
Bank of Texas, N.A. (incorporated by reference to Exhibit 10.6
of the Company's Report on Form 10-Q for the quarterly period
ended September 30, 1994).
10.11 Subordination Agreement of Fossil Trust for the benefit of
First Interstate Bank of Texas, N.A. dated as of August 31,
1994 (incorporated by reference to Exhibit 10.7 of the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.12 Indemnity Agreement dated as of August 31, 1994 from Fossil
Partners, L.P. and Fossil, Inc. to First Interstate Bank
of Texas, N.A. (incorporated by reference to Exhibit
10.8 of the Company's Report on Form 10-Q for the quarterly
period ended September 30, 1994).
10.13 Master Licensing Agreement dated as of August 30, 1994, by
and between Fossil, Inc. and Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.12 of the Company's
Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.14 Agreement of Limited Partnership of Fossil Partners, L.P.
(incorporated by reference to Exhibit 10.13 of the Company's
Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.15 Overhead Allocation Agreement by and between Fossil Partners,
L.P. and Fossil New York, Inc. dated October 1, 1994
(incorporated by reference to Exhibit 10.33 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.16 Services and Operations Agreement by and between Fossil
Partners, L.P. and Fossil New York,Inc. dated October 1, 1994
(incorporated by reference to Exhibit 10.34 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.17 Overhead Allocation Agreement by and between Fossil Partners,
L.P. and Fossil Stores I, Inc. dated December 1, 1994
(incorporated by reference to Exhibit 10.35 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
<PAGE>
10.18 Second Amended and Restated Loan Agreement entered into on
May 2,1995 by and between First Interstate Bank of Texas,N.A.,
Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate,
Inc., Fossil Trust, Fossil New York, Inc. and Fossil Stores I,
Inc. (without exhibits) (incorporated by reference to Exhibit
10.1 of the Company's Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.19 Third Amended and Restated Master Revolving Credit Note dated
April 30, 1995, in the stated principal amount of $25,000,000
executed by Fossil Partners, L.P. and payable to the order of
First Interstate Bank of Texas, N.A. (incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1995).
10.20 Stock Pledge Agreement entered into on May 2, 1995 by and
between Fossil, Inc. and First Interstate Bank of Texas, N.A.
(incorporated by reference to Exhibit 10.3 of the Company's
Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.21 Joint Development Agreement entered into on December 25, 1995
by and between Fossil, Inc., Seiko Instruments, Inc, and
Time Tech, Inc. (incorporated by reference to Exhibit 10.43 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.22 First Amendment to Second Amended and Restated Loan Agreement
by and between First Interstate Bank of Texas, N.A. and
Fossil Partners, L.P., Fossil,Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc. and Fossil Stores I, Inc.
dated as of March 27, 1996 (incorporated by reference
to Exhibit 10.2 of the Company's Report on Form 10-Q
for the quarterly period ended March 31, 1996).
10.23 Second Amendment to Second Amended and Restated Loan Agreement
by and between First Interstate Bank of Texas, N.A. and Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc. and
Fossil Stores II, Inc. dated as of May 3, 1996 (incorporated
by reference to Exhibit 10.1 of the Company's Report on
Form 10-Q for the quarterly period ended June 30, 1996).
10.24 Stock Purchase Agreement by and between Franz Scheurl and
Fossil, Inc. dated October 1, 1996.
10.25 (2) Letter Agreement dated October 4, 1995 between Fossil, Inc.
and Mark D. Quick.
10.26 (1) Third Amendment to Second Amended and Restated Loan Agreement
dated September 11, 1996, by and among Wells Fargo Bank
(Texas), National Association, a national banking
association formerly known as First Interstate Bank of Texas,
N.A., Fossil Partners, L.P., Fossil,Inc., Fossil Intermediate,
Inc., Fossil Trust, Fossil New York, Inc., Fossil Stores I,
Inc., and Fossil Stores II, Inc. (without exhibits).
<PAGE>
10.27 Stock Purchase Agreement dated February 1, 1997, by and
between Bluewhale Holding S.a., and Fossil Europe B.V.
(incorporated by reference to Exhibit 10.1 of the Company's
Report on Form 10-Q for the transition period from
January 1, 1997 to April 5, 1997).
10.28 Fourth Amendment to Second Amended and Restated Loan Agreement
dated April 2, 1997, by and among Wells Fargo Bank (Texas),
National Association, a national banking association formerly
known as First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc.,
and Fossil Stores II, Inc. (without exhibits) (incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
for the transition period from January 1, 1997 to April 5,
1997).
10.29 Fifth Amendment to Second Amended and Restated Loan Agreement
dated June 1997, by and among Wells Fargo Bank (Texas),
National Association, a national banking association formerly
known as First Interstate Bank of Texas, N.A., Fossil
Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc.,
Fossil Trust, Fossil New York, Inc., Fossil Stores I, Inc.,
and Fossil Stores II, Inc. (without exhibits) (incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q
for the quarterly period ended July 5, 1997).
13(1) Fossil, Inc. 1997 Annual Report to Stockholders.
21.1(1) Subsidiaries of Fossil, Inc.
23.1(1) Consent of Independent Auditors.
27(1) Financial Data Schedule.
Exhibit 10.26
THIRD AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
-----------------------------------
THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (this
"Amendment") is made and entered into this 11th day of September, 1996, by and
among WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, a national banking
association formerly known as First Interstate Bank of Texas, N.A. (the "Bank"),
Fossil Partners, L.P. (the "Borrower"), Fossil, Inc. (the "Company"), Fossil
Intermediate, Inc. ("Fossil Intermediate"), Fossil Trust ("Fossil Trust"),
Fossil New York, Inc. ("Fossil New York"), Fossil Stores I, Inc. ("Fossil I")
and Fossil Stores II, Inc. ("Fossil II").
RECITALS
A. The Bank, the Borrower, the Company, Fossil Intermediate, Fossil
Trust, Fossil New York and Fossil I are parties to that certain Second Amended
and Restated Loan Agreement, dated effective April 30, 1995, as amended by (i)
that certain First Amendment to Second Amended and Restated Loan Agreement,
dated effective March 27, 1996, by and among the Bank, the Borrower, the
Company, Fossil Intermediate, Fossil Trust, Fossil New York and Fossil I, and
(ii) that certain Second Amendment to Second Amended and Restated Loan
Agreement, dated effective May 3, 1996, by and among the Bank, the Borrower, the
Company, Fossil Intermediate, Fossil Trust, Fossil New York, Fossil I and Fossil
II (as amended, the "Loan Agreement");
B. The Bank and the Borrower desire to amend the Loan Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
Definitions
-----------
1.01 Capitalized terms used in this Amendment are defined in the Loan
Agreement, as amended hereby, unless otherwise stated.
ARTICLE II
Amendments
----------
2.01 Amendment to Section 1. Effective as of the date hereof, Section 1
of the Loan Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
"1. The Line of Credit. Subject to, and upon the terms,
conditions, covenants and agreements contained herein, the Bank agrees
to loan the Borrower, at any time, and from time to time prior to the
maturity of the Borrower's promissory note executed in conjunction with
this Agreement such amounts as the Borrower may request up to, but not
exceeding, an aggregate principal sum at any time outstanding equal to
$30,000,000.00 (provided, however, that, notwithstanding the foregoing,
during the period from September 1, 1996 through October 31, 1996, the
Borrower may request an amount up to, but not exceeding,
$37,000,000.00)(the 'Line of Credit'); within such limits and during
such period, the Borrower may borrow, repay, and re-borrow hereunder.
All loans under the Line of Credit shall be evidenced by the Borrower's
Sixth Amended and Restated Master Revolving Credit Note (the 'Revolving
Note'), substantially in form and substance satisfactory to the Bank,
payable to the order of the Bank, and bearing interest upon the terms
provided therein (but in no event to exceed the maximum non-usurious
interest rate permitted by law). The principal of and interest on the
Revolving Note shall be due and payable as set forth on the face of the
Revolving Note. Notation by the Bank on its records shall constitute
prima facie evidence of the amount and date of any payment or borrowing
thereunder.
(a) Renewals and Extensions. All renewals,
extensions, modifications and rearrangements of the Revolving
Note, if any, shall be deemed to be made pursuant to this
Agreement, and accordingly, shall be subject to the terms and
provisions hereof, and the Borrower shall be deemed to have
ratified, as of such renewal, extension, modification or
rearrangement date, all of the representations, covenants and
agreements herein set forth.
(b) Letters of Credit. Advances under the Line of
Credit may also be made to fund Documentary or Stand-by
Letters of Credit (as hereinafter defined) that are issued
under the Revolving Note and are drawn upon, provided, the
Bank may, in its own discretion, advance funds under the Line
of Credit to fund such Documentary or Stand-by Letters of
Credit (as hereinafter defined) when the Borrower does not
reimburse the Bank for such funding. All such advances shall
be added to the principal amount of the Revolving Note."
2.02 Amendment to Section 2. Effective as of the date hereof, Section 2
of the Loan Agreement is hereby deleted in its entirety and the following
substituted in lieu thereof:
"2. Documentary and Stand-by Letters of Credit. Subject to the
conditions herein, the Bank shall (a) from time to time, at the request
of the Borrower, issue documentary or stand-by letters of credit to
Borrower's vendors for the acquisition of inventory for the Borrower
(the 'Inventory Acquisition Letters of Credit') and (b) at the request
of the Borrower, issue a stand-by letter of credit in an aggregate
amount up to (Y)600,000,000.00 in favor of any Japanese domestic bank
for the account of the Borrower (the 'JDB Letter of Credit')(the
Inventory Acquisition Letters of Credit and the JDB Letter of Credit
are hereinafter collectively referred to as the 'Documentary or
Stand-by Letters of Credit'). The fees for such issuance shall be in
accordance with the Bank's schedule of fees for issuance of letters of
credit existing as of the time of issuance. Immediately upon issuance,
such Documentary and Stand-by Letters of Credit shall be considered in
computing the amount of funds available to the Borrower, as provided in
Section 6 herein. The Bank shall not be obligated: (x)(i) during the
period from September 1, 1996 through October 31, 1996, to issue
Documentary or Stand-by Letters of Credit if the issuance of same would
cause the Outstanding Revolving Credit (as hereinafter defined) to
exceed the sum of (A) the Borrowing Base (as hereinafter defined) and
(B) $7,000,000.00, and (ii) at any time after October 31, 1996, to
issue Documentary or Stand-by Letters of Credit if the issuance of same
would cause the Outstanding Revolving Credit to exceed the Borrowing
Base; (y) to issue such Letters of Credit with an expiration date more
than one hundred eighty (180) days after the maturity date of the
Revolving Note; and (z) to extend the expiration date of such Letters
of Credit to a date more than one hundred eighty (180) days after the
maturity date of the Revolving Note."
2.03 Amendment to Section 6(a). Effective as of the date hereof,
Section 6(a) of the Loan Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
"(a) Revolving Note. The aggregate principal amount at any
time outstanding under the Revolving Note for loans made in a currency
other than in lawful money of Japan ('Yen'), plus one hundred twenty
percent (120%) of the aggregate principal amount at any time
outstanding under the Revolving Note for loans made in Yen (calculated
by reference to the amount of United States of America dollars into
which Bank determines it could, in accordance with its practice from
time to time in the interbank foreign exchange market, convert such
amount of Yen at its spot rate of exchange in effect at approximately
8:00 a.m. (Dallas, Texas time) on the day on which such loan is made),
plus, one hundred twenty percent (120%) of the face amount of the JDB
Letter of Credit (calculated by reference to the amount of United
States of America dollars into which Bank determines it could, in
accordance with its practice from time to time in the interbank foreign
exchange market, convert such amount of Yen at its spot rate of
exchange in effect at approximately 8:00 a.m. (Dallas, Texas time) on
the date of determination), plus the face amount of all outstanding
Documentary and Stand-by Letters of Credit (other than the JDB Letter
of Credit) issued for the account of the Borrower, plus twenty percent
(20%) of the aggregate amount of all foreign currency future contracts
issued by the Bank for the account of the Borrower (said sum being
herein referred to as the 'Outstanding Revolving Credit') shall not at
any time exceed the lesser of (a) $30,000,000.00, or (b) the Borrowing
Base (as hereinafter defined); provided, however, that, notwithstanding
the foregoing, during the period from September 1, 1996 through October
31, 1996, the Outstanding Revolving Credit shall not at any time exceed
the lesser of (a) $37,000,000.00, or (b) the sum of (i) the Borrowing
Base and (ii) $7,000,000.00."
2.04 Amendment to Section 6(c). Effective as of the date hereof,
Section 6(c) of the Loan Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
"(c) Borrowing Base Compliance. In the event the Outstanding
Revolving Credit at any time exceeds the Borrowing Base then, upon
notice from the Bank, the Borrower shall immediately make such payments
to the Bank necessary to reduce the Outstanding Revolving Credit to an
amount such that the Outstanding Revolving Credit is less than or equal
to the amount of the Borrowing Base; provided, however, that,
notwithstanding the foregoing, during the period from September 1, 1996
through October 31, 1996, the term 'Borrowing Base' as used in this
Section 6(c) shall be replaced by the phrase 'sum of (i) the Borrowing
Base and (ii) $7,000,000.00.'"
2.05 Amendment to Section 16(a). Effective as of the date hereof,
Section 16(a) of the Loan Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
"(a) Debt. Create, incur, assume or suffer to exist any debt
for borrowed money, whether by way of loan, or the issuance or sale of
bonds, debentures, notes or securities, including deferred debt for the
purchase price of assets, except (i) the loans described herein, (ii)
revolving credit loans in an aggregate principal amount of up to
(Y)600,000,000.00 from any Japanese domestic bank; provided, that the
only security for such revolving credit loans shall be the JDB Letter
of Credit, (iii) loans from one or more Guarantors to the Borrower or
another Guarantor, so long as the indebtedness in respect of such loans
is unsecured and fully subordinated to the indebtedness owing to the
Bank pursuant to a written subordination agreement in form and
substance satisfactory to the Bank, and (iv) current accounts payable
and other current obligations (other than for borrowed money) arising
out of transactions in the ordinary course of business."
2.06 Amendment to Section 19. Effective as of the date hereof, Section
19 of the Loan Agreement is hereby amended by deleting the reference therein to
"First Interstate Bank of Texas, N.A." and substituting in lieu thereof "Wells
Fargo Bank (Texas), National Association".
ARTICLE III
Conditions Precedent
--------------------
3.01 Conditions to Effectiveness. The effectiveness of this Amendment
is subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by the Bank:
(a) The Bank shall have received the following documents, each in form
and substance satisfactory to the Bank and its counsel:
(i) This Amendment, duly executed by the Borrower, the
Company, Fossil Intermediate, Fossil Trust, Fossil New York, Fossil I
and Fossil II;
(ii) A Revolving Note in the form of Exhibit A to this
Amendment, duly executed by Borrower; and
(iii) A company general certificate (hereinafter referred
to as the "Company General Certificate")for the Company, certified by
its Secretary or Assistant Secretary, acknowledging (A) that its
Board of Directors has met and has adopted, approved, consented to
and ratified resolutions which authorize the execution, delivery and
performance of this Amendment, the Revolving Note and all other Loan
Documents to which it is or is to be a party, and (B) the names of
the officers authorized to sign this Amendment, the Revolving Note
and each of the other Loan Documents to which it is or is to be a
party (including the certificates contemplated herein) together with
specimen signatures of such officers. The Company General Certificate
shall conform to the Company General Certificate which is attached
hereto as Exhibit B and incorporated herein for all purposes;
(b) There shall have been no material adverse change in the
financial condition of the Borrower or any Guarantor;
(c) There shall be no material adverse litigation, either pending or
threatened, against the Borrower or any Guarantor that could reasonably be
expected to have a material adverse effect on the Borrower or such Guarantor;
(d) The representations and warranties contained herein and in the Loan
Agreement and the other Loan Documents, as each is amended hereby, shall be true
and correct as of the date hereof, as if made on the date hereof;
(e) No default or Event of Default shall have occurred and be
continuing, unless such default or Event of Default has been specifically waived
in writing by the Bank;
(f) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to the Bank and its legal
counsel; and
(g) The Bank shall have received from the Borrower a closing fee in
the amount of Five Thousand and No/100 Dollars ($5,000.00)(the "Closing Fee"),
payable on the date hereof. The Closing Fee shall reimburse the Bank for its
costs and expenses incurred in connection with the negotiation, execution and
delivery of this Amendment, including the Bank's attorney's fees.
ARTICLE IV
Limited Waiver and Consent
--------------------------
4.01 By execution of this Agreement and upon satisfaction of the
conditions precedent set forth in Article III of this Amendment, the Bank hereby
(a) consents to the Borrower guaranteeing certain loans made by one or more
financial institutions to the Borrower's officers and employees (provided, that
the aggregate principal amount of such loans shall not exceed $50,000.00)(the
"Officer Guarantees"), and (b) waives any default or Event of Default arising
under the Loan Agreement solely by reason of the Borrower's violation of Section
16(b) of the Loan Agreement resulting from the Borrower entering into the
Officer Guarantees. Except as specifically provided in this Article IV, nothing
contained herein shall be construed as a waiver by the Bank of any covenant or
provision of the Loan Agreement, the other Loan Documents, this Amendment, or of
any other contract or instrument between the Borrower or the Guarantors and the
Bank, and the failure of the Bank at any time or times hereafter to require
strict performance by the Borrower or any Guarantor of any provision thereof
shall not waive, affect or diminish any right of the Bank to thereafter demand
strict compliance therewith. The Bank hereby reserves all rights granted under
the Loan Agreement, the other Loan Documents, this Amendment and any other
contract or instrument between the Borrower, the Guarantors and the Bank.
ARTICLE V
Ratifications, Representations and Warranties
---------------------------------------------
5.01 Ratifications. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement and the other Loan Documents, and, except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Loan Agreement and the other Loan Documents are ratified and confirmed and
shall continue in full force and effect. The parties hereto agree that the Loan
Agreement and the other Loan Documents, as amended hereby, shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
5.02 Representations and Warranties. The Borrower, the Company, Fossil
Intermediate, Fossil Trust, Fossil New York, Fossil I and Fossil II hereby
represent and warrant to the Bank that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been duly authorized by all
requisite corporate, partnership or trust proceedings, as appropriate, and will
not contravene, or constitute a default under, any provision of applicable law
or regulation or of the Agreement of Limited Partnership, Articles of
Incorporation, By-Laws or Trust Agreement, as applicable, of the Borrower or any
Guarantor, or of any mortgage, indenture, contract, agreement or other
instrument, or any judgment, order or decree, binding upon the Borrower or any
Guarantor; (b) the representations and warranties contained in the Loan
Agreement, as amended hereby, and the other Loan Documents are true and correct
on and as of the date hereof and on and as of the date of execution hereof as
though made on and as of each such date; (c) no default or Event of Default
under the Loan Agreement, as amended hereby, has occurred and is continuing,
unless such default or Event of Default has been specifically waived in writing
by the Bank; and (d) the Borrower and the Guarantors are in full compliance with
all covenants and agreements contained in the Loan Agreement and the other Loan
Documents, as amended hereby.
ARTICLE VI
Miscellaneous Provisions
------------------------
6.01 Survival of Representations and Warranties. All representations
and warranties made in the Loan Agreement or any other Loan Documents,
including, without limitation, any document furnished in connection with this
Amendment, shall survive the execution and delivery of this Amendment and the
other Loan Documents, and no investigation by the Bank or any closing shall
affect the representations and warranties or the right of the Bank to rely upon
them.
6.02 Reference to Loan Agreement. Each of the Loan Agreement and the
other Loan Documents, and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Loan Agreement, as amended hereby, are hereby amended so
that any reference in the Loan Agreement and such other Loan Documents to the
Loan Agreement shall mean a reference to the Loan Agreement, as amended hereby.
6.03 Expenses of the Bank. As provided in the Loan Agreement, the
Borrower agrees to pay on demand all reasonable costs and expenses incurred by
the Bank in connection with the preparation, negotiation, and execution of this
Amendment and the other Loan Documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including, without
limitation, the costs and fees of the Bank's legal counsel, and all costs and
expenses incurred by the Bank in connection with the enforcement or preservation
of any rights under the Loan Agreement, as amended hereby, or any other Loan
Documents, including, without, limitation, the costs and fees of the Bank's
legal counsel.
6.04 Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6.05 Successors and Assigns. This Amendment is binding upon and shall
inure to the benefit of the Borrower, the Guarantors and the Bank and their
respective successors and assigns.
6.06 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
6.07 Effect of Waiver. No consent or waiver, express or implied, by the
Bank to or for any breach of or deviation from any covenant or condition by the
Borrower or any Guarantor shall be deemed a consent to or waiver of any other
breach of the same or any other covenant, condition or duty.
6.08 Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.09 Applicable Law. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE lAWS OF THE STATE OF
TEXAS.
6.10 Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS,
EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE
LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWER,
THE GUARANTORS AND THE BANK.
6.11 Release. THE BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE "INDEBTEDNESS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES
OF ANY KIND OR NATURE FROM THE BANK. THE BORROWER AND THE GUARANTORS HEREBY
VOLUNTARILY AND KNOWINGLY RELEASE AND FOREVER DISCHARGE THE BANK, ITS
PREDECESSORS, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS,
FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS,
EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR
UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT
LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS
AMENDMENT IS EXECUTED, WHICH THE BORROWER OR THE GUARANTORS MAY NOW OR HEREAFTER
HAVE AGAINST THE BANK, ITS PREDECESSORS, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES,
SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS
ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND
ARISING FROM ANY LOANS OR EXTENSIONS OF CREDIT FROM THE BANK TO THE BORROWER
UNDER THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS, INCLUDING, WITHOUT
LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR
RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE
OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER LOAN DOCUMENTS, AND
NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
6.12 Agreement for Binding Arbitration. Each party to this Amendment
hereby acknowledges that it has agreed to be bound by the terms and provisions
of the Bank's current Arbitration Program, which is incorporated by reference
herein and is acknowledged as received by the parties pursuant to which any and
all disputes shall be resolved by mandatory binding arbitration upon the request
of any party.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed and is effective
as of the date first above-written.
"BANK"
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION,
By:___________________________________________
Jeffrey S.A. Cook
Vice President
"BORROWER"
FOSSIL PARTNERS, L.P.
By: Fossil, Inc., its general partner
By:__________________________________________
Randy S. Kercho, Executive Vice President
and Chief Financial Officer
"GUARANTORS"
FOSSIL, INC.
By:___________________________________________
Randy S. Kercho, Executive Vice President
and Chief Financial Officer
FOSSIL INTERMEDIATE, INC.
By:___________________________________________
Kosta N. Kartsotis, President
FOSSIL TRUST
By:___________________________________________
Randy S. Kercho, Trustee
FOSSIL NEW YORK, INC.
By:___________________________________________
Kosta N. Kartsotis, Chief Executive Officer
FOSSIL STORES I, INC.
By:___________________________________________
Randy S. Kercho, Treasurer
FOSSIL STORES II, INC.
By:___________________________________________
Randy S. Kercho, Treasurer
Exhibits:
A - Form of Revolving Note
B - Form of Company General Certificate
<PAGE>
EXHIBIT A
----------
FORM OF REVOLVING NOTE
(See Attached)
<PAGE>
EXHIBIT B
---------
FORM OF COMPANY GENERAL CERTIFICATE
(See Attached)
1997
FOSSIL
ANNUAL REPORT
<PAGE>
Company Profile ........................................................... 2
Financial Highlights ...................................................... 3
Letter to Stockholders .................................................... 4
Company Overview .......................................................... 6
Management Discussion ..................................................... 10
Financial Information ..................................................... 23
Corporate Information ..................................................... 40
1
<PAGE>
COMPANY PROFILE
FOSSIL is a design and marketing company that specializes in consumer products
predicated on fashion and value. The Company's flagship product, FOSSIL brand
watches, is sold in department stores and other upscale retailers in over
seventy countries around the world. Complementary lines of accessories such as
leather goods and sunglasses also capitalize on the increasing awareness of the
FOSSIL brand.
The wholesome brand image of 1950s Americana is targeted to today's
value-driven, back-to-basics consumer. Designs for the distinctive tin
packaging, advertising materials, and point-of-purchase displays are conceived
in an in-house creative services department.
Products are planned and developed using a series of design, manufacturing and
marketing systems which are flexible and efficient. The Company's strategy is to
capture an increasing market share of a growing number of markets by providing
customers with high quality, value-driven products which are marketed in a
unique manner.
The Company also develops products under the RELIC and FSL brand names as well
as creates private label products for some of the most distinguished companies
in the world.
[Graphic presentation of Net Sales, Operating Income, Net Income and
Stockholders' equity for fiscal years 1997, 1996, 1995, 1994 and 1993.]
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales $244,798 $205,899 $181,114 $161,883 $105,089
Gross profit 117,528 98,038 82,900 71,880 45,343
Operating income 34,610 24,373 20,463 26,217 16,576
Income before taxes 32,151 23,040 20,142 24,923 16,718
Net income (1) 18,942 13,591 12,057 15,345 11,485
Basic earnings per share (1)(2) 0.94 0.69 0.61 0.78 0.61
Diluted earnings per share (1)(2) $ 0.91 0.68 0.60 0.77 0.60
Weighted average common and common
equivalent shares outstanding:
Basic (1)(2) 20,136 19,783 19,761 19,720 18,765
Diluted (1)(2) 20,833 20,068 19,940 19,956 18,993
Working capital $ 70,603 $ 59,861 $ 49,251 $ 41,434 $ 27,692
Total assets 139,570 118,978 96,994 80,420 46,539
Long-term debt -- 4,350 4,811 4,750 1,000
Stockholders' equity 95,263 74,568 61,269 48,906 33,025
<FN>
(1) 1993 amounts and prior are pro forma
(2) All weighted average share and per share data and 1997 actual share data has
been adjusted to reflect a three-for-two stock split effected in the form of a
stock dividend payable on April 8, 1998.
</FN>
</TABLE>
STOCK INFORMATION
FOSSIL'S common stock prices are published daily in The Wall Street Journal and
other publications under the Nasdaq National Market Listing. The stock is traded
under the ticker symbol "FOSL." The following are the high and low sale prices
of the Company's stock per the Nasdaq National Market. All per share data has
been adjusted to reflect a three-for-two stock split effected in the form of a
stock dividend payable on April 8, 1998 to all stockholders of record on March
25, 1998. Stock prices have been adjusted to the nearest traded amount.
<TABLE>
<CAPTION>
1997 1996
High Low High Low
<S> <C> <C> <C> <C>
First quarter $ 9 3/4 $ 7 $ 7 1/2 $4 1/2
Second quarter 11 7/8 8 1/4 10 7/8 6 1/2
Third quarter 15 1/2 11 9 3/4 4 7/8
Fourth quarter 17 5/8 11 10 1/2 7 5/8
</TABLE>
3
<PAGE>
LETTER TO STOCKHOLDERS
To our stockholders:
We are pleased with our progress in 1997.
o FOSSIL recaptured its position as the leading supplier of fashion watches
to department stores in the United States.
o Other FOSSIL branded accessories continued to show dramatic growth
domestically.
o Our retail stores continued to enhance our brand and served as a showcase
for our diverse products. Our outlet stores allowed us to cleanse our
inventory in a profitable manner.
o Our international subsidiaries each made significant strides in terms of
improving our presence in important foreign markets as well as improving
profitability.
o Our non-FOSSIL watch businesses continued to grow in size and profitability
and expanded into new segments of the industry.
o Our product development teams and manufacturing operations in the Far East
continued to exceed our expectations in terms of expanding our creative and
manufacturing capabilities in a profitable manner.
4
<PAGE>
All in all, 1997 was our best year ever. While we believe we are positioned for
continued success in 1998, we are approaching our immediate future with cautious
aggression. "After victory, tighten your chinstrap" is an old Japanese adage
which appropriately describes the current mind set at Fossil. We are focused on
improving our creative capabilities, our cost efficiencies and our competitive
position within all markets in which we compete.
The opportunities presented through the evolution of FOSSIL as a lifestyle brand
are tremendous. Our brand is diverse in that it appeals to both male and female
consumers and can apply to a number of product categories that are only limited
by one's imagination. Also, the FOSSIL brand easily crosses international
borders. This is evidenced by the fact that almost one third of our revenues in
1997 came from international sources. We are continually evaluating new
opportunities to expand our product offerings and our global retail presence via
licensing relationships and other partnerships with world class companies.
Product development teams continue to aggressively develop exciting new watch
products and programs which enable us to seek bigger percentages of business
within the watch assortments of existing customers. At the same time, we are
systematically developing our distribution capabilities in order to enter new
distribution channels, worldwide. We believe that over the next several years we
can achieve significant growth by competing in new layers of our existing
businesses with relatively little increase in our present infrastructure.
We are proud of our financial performance in 1997 and we are excited about the
diversity and growth potential in untapped segments of our business. The power
of the FOSSIL brand is rapidly opening doors to new opportunities and we are
navigating those opportunities with the long term as our focus. We believe the
FOSSIL brand will rapidly become prominent within a multitude of product
categories in a number of markets.
Our five year anniversary as a publicly traded company is upon us. We have
weathered numerous storms and, through it all, believe that we have continually
learned how to be a better public company. We will do our best to continue the
learning process. We appreciate everyone who continues to play a hand in our
growth... especially our dedicated employees, customers, suppliers and, most
importantly, our consumers.
Sincerely,
/s/ Tom Kartsotis
- ---------------------
Tom Kartsotis
Chairman of the Board
/s/ Kosta Kartsotis
- ---------------------
Kosta Kartsotis
President
5
<PAGE>
COMPANY OVERVIEW
The Company's primary objective is to create value by building the FOSSIL brand
name. A strong brand identity encourages retailers to increase the visibility of
the FOSSIL brand within their assortments and thus increase sales. A strong
brand also provides opportunities to expand into new product categories. The
FOSSIL brand continued to be one of the leading fashion watch brands in 1997,
while continuing to gain momentum in sales on non-watch products and increasing
its brand presence globally.
Watches: The FOSSIL line continued its leadership position in department stores
with the highly successful second quarter launch of FOSSIL Steel, featuring
solid stainless steel bracelets and casebacks for both men and women. FOSSIL
BLUE, a line of water resistant sport watches introduced in 1996, has become the
dominant product category in the Fossil line. Contributing to the dominance of
Fossil Blue was the introduction of Blue Teq, a group of chronograph look
watches in late 1997.
6
<PAGE>
Leathers: The leather division continued to exhibit strong sales and earnings
growth. Handbags, introduced in 1996, continued to increase market share and
enhance the visibility and sales of the Company's other leather categories,
including men's and women's small leather goods and belts. During 1998, a line
of FOSSIL nylon handbags will be introduced in addition to a group of bags with
a sport feel and look under the Company's FSL brand. Strong growth should
continue in the leather product category during 1998 as key basic collections
continue to increase in sales and new lines of more classic, less ornamented
styles provide a fresh and exciting product assortment.
Sunglasses: The sunglass market presented a challenge for the Company in 1997,
as a number of competitors entered the market pushing supply above apparent
consumer demand. While the majority of sunglass companies, including FOSSIL,
recorded fewer sales in this category during 1997, the Company was able to
maintain a strong presence in its department store distribution channel as well
as optical stores such as LensCrafters. The eyewear division ended 1997 on a
strong note as a new collection of more popularly priced sunglasses tested
successfully and continued the rollout of products into an increasing number of
Sunglass Hut locations. FOSSIL sunwear complements the quality and value of the
FOSSIL brand perfectly by providing 100% UV protection, optical quality
materials and the unique tin box with its assortment.
International: Aside from the Company's expanding presence in Europe and the Far
East through Company owned sales and distribution locations, an increasing
number of distributors joined the Company in 1997. New distributors covering
Canada, the United Kingdom, Venezuela, Columbia/Ecuador, Lebanon and New Zealand
were added throughout the year. In addition to selling the Company's products to
retailers, our distributors often open FOSSIL stores or kiosks within their
assigned territories to enhance the brand's image. Currently there are over 40
FOSSIL stores or kiosks outside the U.S. owned and operated by our distributors.
RELIC: RELIC continued its strong presence in national and regional chain
department stores and specialty stores during 1997. This past year saw the RELIC
brand expand into two new categories of watches that paralleled the success
7
<PAGE>
of FOSSIL BLUE and Adjust-o-matic categories. The RELIC WET category of
performance sport watches features stainless steel bracelets and are water
resistant to 165 ft. The new Adjust-a- link watches for women, which enable the
retail store to quickly shorten the length of a bracelet without tools, have
been an instant success. The RELIC brand continued to expand its brand statement
with the successful introduction of small leather goods. This RELIC brand
expansion should continue in 1998.
Emporio Armani: In 1997, the Company entered into a worldwide, multi-year
licensing agreement with Giorgio Armani for Emporio Armani Orologi, a new line
of watches.
8
<PAGE>
This collection was launched in October in Milan. The Armani line features
distinctive interpretations of retro and modern design. Throughout the
collection, the Emporio Armani name and Eagle logo are used as a background
element on the dials, etched into the casings, or incorporated more subtly into
the band design. These watches are being sold in Emporio Armani Boutiques,
better department stores, specialty stores, and select jewelry stores worldwide.
Licensing: The Company continues to broaden the product reach of the brand
through strategic licensing agreements. In 1997, Itochu Fashion Systems
initiated development of a full casual apparel line for the Japanese market.
These products will be tested in select Japanese department stores beginning in
the spring of 1998. Domestically, FOSSIL brand men's underwear was introduced in
the fourth quarter of 1997. The Company has also signed an agreement for
outerwear with London Fog, the world leader in this category. These products are
scheduled to launch in the fall of 1999. The Company will continue to pursue
licensed opportunities as growing brand awareness allows the Company to attract
strong market leaders in targeted product categories.
Private Label: In addition to building its own brand, the Company also designs
and manufactures private label products for some of the most prestigious
companies in the world including national retailers, entertainment companies and
theme restaurants. The Company continues to expand its core private label
business as well as integrate other product categories such as leather goods and
eyewear. The Company's premium/incentive division featured substantial gains in
1997 utilizing its sourcing, design and development systems to translate many
corporate themes, events or promotions into a comprehensive custom program.
FOSSIL General Stores: The Company was operating six mall-based FOSSIL stores at
the end of 1997 having added three new locations during the year. New stores
were opened in Houston, Texas (the Galleria), Minneapolis, Minnesota (The Mall
of America) and Columbus, Ohio (Tuttle Crossing). These stores continue to
provide an excellent as well as profitable format to display the Company's
increasing product assortments and convey the FOSSIL brand image. The Company
also operates twenty-seven outlet stores, coast to coast, allowing the Company
to properly control the liquidation of discontinued styles while maintaining the
integrity of the FOSSIL brand image.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
Since the Company's origination in 1984, sales growth has been principally
attributable to increased sales of FOSSIL brand watches both domestically and in
a growing number of international markets. Adding to the Company's sales growth
has been the addition of FOSSIL brand leather goods and sunglasses, the
diversification into FOSSIL outlet and retail stores and the introduction of
accessories and watches under other owned brands (RELIC and FSL). Increased
sales volume has also been generated through leveraging the Company's
infrastructure of sourcing, design and developmental systems for the production
of its products for premium and corporate gift programs as well as under the
names of internationally recognized designers, specialty retailers,
entertainment companies and theme restaurants. The Company's products are
marketed internationally mainly though major department stores and specialty
retailers. The Company maintains sales and distribution offices in the United
States, Germany, Italy, Japan, Spain and Hong Kong. In addition to sales through
the Company's offices, the Company also currently distributes its products to
over 60 additional countries through licensed distributors.
1997 HIGHLIGHTS
o Sales volume of FOSSIL Blue, a line of mainly metal-bracelet, water
resistant sport watches first introduced in mid-1996, accounted for nearly
half of the Company's FOSSIL brand watch business domestically.
10
<PAGE>
o A line of stainless steel watches, FOSSIL Steel, and chronograph look
watches, BLUE TEQ, were introduced under the FOSSIL brand in mid- and
late-1997, respectively. Both of these introductions were well received by
the consumer and positively impacted sales volumes.
o The newly designed line of FOSSIL handbags, first shipped in mid-1996,
continued to be a success in the retail marketplace. Aside from increased
sales volumes, their success at retail also has raised the awareness and
credibility of the Company's other leather products, positively impacting
sales volumes as well.
o Sunglass sales were negatively impacted as a multitude of competitors
entered the marketplace driving supply above apparent consumer demand. The
Company quickly reacted to the market conditions, by producing a new
sunglass line with a wider breadth of price points and design.
o The Company opened three additional FOSSIL retail stores in high traffic,
international destination type malls bringing the total number of
mall-based retail stores to six at the end of the year.
o Several multi-year licensing agreements were awarded to companies for the
use of the FOSSIL brand name on their products. These included FOSSIL brand
underwear and lounge wear for the domestic market introduced in late 1997,
FOSSIL brand apparel in Japan to be introduced during 1998 and FOSSIL brand
outerwear to be introduced domestically during 1999.
o The Company entered into a worldwide, multi-year licensing agreement with
Giorgio Armani for the rights to design, produce and market a line of
Emporio Armani watches. Distribution began in September 1997.
o The Company acquired the remaining 40% of the capital stock of its
distribution company covering Italy and the remaining 35% of the capital
stock of one of the Company's four main watch assembly factories.
11
<PAGE>
[Graphic depiction of Fossil sunglasses]
12
<PAGE>
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.
<TABLE>
<CAPTION>
percentage percentage
change change
from year from year
Fiscal year ended 1997 1996 1996 1995 1995
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 18.9% 100.0% 13.7% 100.0%
Cost of sales (52.0) 18.0 (52.4) 9.8 (54.2)
-----------------------------------------------
Gross profit 48.0 19.9 47.6 18.3 45.8
Operating expenses (33.9) 12.6 (35.8) 18.0 (34.5)
-----------------------------------------------
Operating income 14.1 42.0 11.8 19.1 11.3
Interest expense (0.4) (20.7) (0.6) 7.9 (0.6)
Other income (expense) (0.6) (1077.6) -- (116.0) 0.4
-----------------------------------------------
Income before income taxes 13.1 39.5 11.2 14.4 11.1
-----------------------------------------------
Income taxes:
Federal, State, Foreign (5.4) 39.8 (4.6) 16.9 (4.4)
-----------------------------------------------
Net income 7.7% 39.4% 6.6% 12.7% 6.7%
</TABLE>
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 years indicated (in millions, except percentage data):
<TABLE>
<CAPTION>
Fiscal year ended 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
International:
Europe $ 45.2 $ 45.9 $ 40.0 18.4% 22.3% 22.1%
Other 30.8 15.2 18.7 12.6 7.4 10.3
-----------------------------------------------------
Total International 76.0 61.1 58.7 31.0 29.7 32.4
-----------------------------------------------------
Domestic:
Watch products 101.2 86.4 89.4 41.3 41.9 49.4
Other products 47.6 44.5 25.7 19.5 21.6 14.2
-----------------------------------------------------
Total 148.8 130.9 115.1 60.8 63.5 63.6
Stores 20.0 13.9 7.3 8.2 6.8 4.0
-----------------------------------------------------
Total Domestic 168.8 144.8 122.4 69.0 70.3 67.6
-----------------------------------------------------
Total Net Sales $ 244.8 $ 205.9 $ 181.1 100.0% 100.0% 100.0%
-----------------------------------------------------
</TABLE>
13
<PAGE>
Net Sales. Worldwide sales volume of FOSSIL branded watches showed strong gains
in the later half of 1996 and throughout 1997 due primarily to the increase of
metal bracelet watches in the Company's sales mix and the popularity of two
FOSSIL watch lines, FOSSIL Blue and FOSSIL Steel. Metal bracelet watches have
increased significantly as a percentage of the Company's watch mix in response
to a dramatic shift in consumer preference away from leather strap watches
during 1995. Sales of non-branded watches used for premium incentives and
watches sold under certain licensing agreements also positively impacted net
sales during 1997. Leather and sunglass product sales, that comprise the
majority of the domestic: Other Products sales line in the above table, both
contributed significantly to overall sales increases in 1996. While the Company
continued to increase its market share in leather goods during 1997, sunglass
sales declined. Sales increases in the sunglass line improved dramatically,
however, in the fourth quarter of 1997, increasing approximately 20% over the
prior year same period. The Company entered into owned retail operations in
early 1995. At the end of 1997, the Company had 27 outlet store locations and 6
mall-based locations throughout the U.S. Growth in the number of store
locations, as well as increases in same store sales, have added to sales growth
in 1996 and 1997. Management anticipates that sales volumes will continue to
increase in 1998 at approximately the 1997 rate with the exception of the second
quarter which will likely fall below the average 1997 growth rate. During the
second quarter of 1997, the Company had a one-time international-based sale
amounting to approximately $6 million of non-branded watches used as a premium
incentive. Sales increases during 1998 will likely stem from continued sales
momentum across the Company's product lines and geographic regions.
14
<PAGE>
Gross Profit. Gross profit margins increased over the past two years from 45.8%
in 1995, to 47.6% in 1996, to 48.0% in 1997. The increases in gross profit
margin are primarily attributable to an increase in the amount of the Company's
watch products supplied by its majority-owned assembly facilities and increases
in sales through the Company-owned retail locations. Additionally, during 1996
and 1997, the Company's purchase cost of certain watch components decreased due
to the strength of the U.S. dollar over the Japanese Yen. Management believes
that the Company's gross profit margins in 1998 will approximate 1997 levels.
Operating Expenses. Total selling, general and administrative expenses as a
percentage of net sales were 33.9% in 1997 compared to 35.8% in 1996 and 34.5%
in 1995. The aggregate increases in operating expenses were due primarily to
costs necessary to support increased sales volumes and operating costs of both
new ventures and from the Company's increasing outlet and retail store
locations. Operating expense ratios were positively impacted in 1997 by
leveraging expenses against higher sales volumes and as a result of the
reduction in operating expenses incurred in France and the United Kingdom, where
the Company has curtailed its owned operations in favor of sales through
independent distributors. Management believes the operating expense ratio for
1998 will marginally improve as a result of leveraging fixed costs on higher
sales volumes and layering on sales of certain licensed brand name watches with
only minimal infrastructure increases.
Other Income (Expense). Other income (expense) typically reflects the minority
interests in the profit (loss) of the Company's majority-owned operations. Other
income (expense) has moved from an income item in 1995 to an expense item in
1997. The fluctuation in this income statement line item has generally been
impacted by unusual charges. Other income in 1995 was positively impacted by the
income recognition of approximately $1.6 million, recorded from non-recurring
consulting services performed and from insurance proceeds related to a fire at
one of the Company's operations. During 1996, income derived from refunds from
certain prior year duty payments in addition to interest income substantially
offset minority interest expense. In 1997, the net expense was primarily a
result of legal settlements of approximately $700,000 as well as increased
foreign currency losses due primarily to the strength of the U.S. dollar.
Provision for Income Taxes. In 1997 and 1996, the Company's effective tax rate
was approximately 41.0% compared to 40.1% in 1995. The 1996 increase resulted
primarily from losses incurred in countries where the Company had commenced
operations in 1996 and late 1995. The Company will not recognize any tax
benefits in these countries until realization is assured. Effective tax rates
have also risen as the Company accrued taxes at U.S. tax rates in certain lower
tax jurisdictions in anticipation of possible repatriation of earnings.
Management believes that the effective tax rate during 1998 will approximate
1997 levels.
15
<PAGE>
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact on results
of operations for the periods presented. Substantial increases in costs,
however, could have an impact on the Company and the industry. Management
believes that, to the extent inflation affects its costs in the future, the
Company could generally offset inflation by increasing prices if competitive
conditions permit.
YEAR 2000 COMPLIANCE
Computer programs that were written using two digits rather than four digits to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000. This result is commonly referred to as the "Year
2000" problem. The Year 2000 problem could result in information system failures
or miscalculations. Beginning in 1997, the Company initiated a program to
evaluate whether internally developed and/or purchased computer programs that
utilize embedded date codes could experience
16
<PAGE>
operational problems when the year 2000 is reached. The scope of this effort
addressed internal computer systems and supplier capabilities. The Company is
completing an extensive review of its businesses to determine whether or not
purchased and internally developed computer programs are Year 2000 compliant, as
well as the remedial action and related costs associated with any required
modifications or replacements. A significant amount of information has been
collected and analyzed as part of this review; however, the process will not be
completed until the end of fiscal year 1998. The Company plans to complete all
remediation efforts for its critical systems prior to the year 2000. Based upon
its evaluation to date, management currently believes that, while the Company
will incur internal and external costs to address the Year 2000 problem, such
costs will not have a material impact on the operations, cash flows or financial
condition of the Company in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's general business operations historically have not required
significant capital expenditures. The Company built out 29 store locations
during 1996 and 1995, totaling $3.9 million in leasehold improvement
expenditures. During 1997, four additional store locations were added in
addition to the construction of a 138,000 sq. ft. warehouse and distribution
facility. The construction costs of the new facility were approximately $4.4
million. Long-term financing of $5.0 million was obtained in 1994 to cover
building projects of which $4.4 million was outstanding at year-end. During
January 1998, the Company paid this long-term credit facility in full with
available cash. Short-term credit facilities totaling approximately $43.0
million are available to the Company for general working capital needs of which
$3.5 million was outstanding at the end of 1997. Management believes the
Company's financial position remains extremely strong. Working capital of $70.6
million and net cash balances (defined as cash and cash equivalents less current
notes payable) of $13.2 million existed at the end of fiscal 1997 compared to
working capital of $59.9 million and net cash balances of $1.5 million as of
17
<PAGE>
December 31, 1996. Management believes that cash flow from operations and
existing credit facilities will be sufficient to satisfy its working capital
expenditure requirements for at least twelve months.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued four new standards during 1997
that require additional financial reporting disclosures. See Note 1 to the
Consolidated
18
<PAGE>
Financial Statements of the Company for a discussion of the new standards. The
Company does not expect the adoption of these standards to have a material
impact on its financial condition or results of operations.
FORWARD LOOKING STATEMENTS
Included within management's discussion of the Company's operating results and
this annual report, forward- looking statements were made regarding expectations
for 1998. The actual results may differ materially from those expressed by these
forward-looking statements. Significant factors that could cause the Company's
1998 operating results to differ materially from management's current
expectations include, among other items, significant changes in consumer
spending patterns or preferences, competition in the Company's product areas,
international in comparison to domestic sales mix, changes in foreign currency
valuations in relation to the United States Dollar, principally the German Mark,
Italian Lira and Japanese Yen, an inability of management to control operating
expenses in relation to net sales without damaging the long-term direction of
the Company and the risks and uncertainties set forth in the Company's report on
Form 8-K dated March 31, 1997.
SELECTED QUARTERLY FINANCIAL DATA
The table on page 19 sets forth selected quarterly financial information. The
information is derived from unaudited consolidated financial statements of the
Company and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of results
for such periods. The operating results for any quarter are not necessarily
indicative of results for any future period.
19
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 1997 (dollars in thousands, 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
except per share amount)
<S> <C> <C> <C> <C>
Net sales $47,449 $56,932 $61,013 $79,404
Gross profit 23,195 26,305 29,690 38,338
Operating expenses 17,735 19,527 19,875 25,781
Operating income 5,460 6,778 9,815 12,557
Income before income taxes 5,041 6,137 9,303 11,670
Provision for income taxes 2,067 2,503 3,793 4,846
Net income 2,974 3,634 5,510 6,824
Basic earnings per share 0.15 0.18 0.27 0.34
Diluted earnings per share 0.15 0.18 0.26 0.32
Gross profit as a percentage of net sales 48.9% 46.2% 48.7% 48.3%
Operating expenses as a percentage of net sales 37.4% 34.3% 32.6% 32.5%
Operating income as a percentage of net sales 11.5% 11.9% 16.1% 15.8%
Fiscal Year 1996 (dollars in thousands, 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
except per share amount)
Net sales $42,909 $45,238 $52,821 $64,931
Gross profit 19,036 22,463 25,756 30,783
Operating expenses 14,787 17,862 18,478 22,538
Operating income 4,249 4,601 7,278 8,245
Income before income taxes 3,902 4,464 6,491 8,183
Provision for income taxes 1,562 1,880 2,661 3,346
Net income 2,340 2,584 3,830 4,837
Basic earnings per share 0.12 0.13 0.19 0.24
Diluted earnings per share 0.12 0.13 0.19 0.24
Gross profit as a percentage of net sales 44.4% 49.7% 48.8% 47.4%
Operating expenses as a percentage of net sales 34.5% 39.5% 35.0% 34.7%
Operating income as a percentage of net sales 9.9% 10.2% 13.8% 12.7%
</TABLE>
While the majority of the Company's products are not seasonal in nature, a
significant portion of the Company's net sales and operating income are
generally derived in the second half of the year. The Company's fourth quarter,
which includes the Christmas season, typically generates
20
<PAGE>
in excess of 30% of the Company's annual operating income, while the first
quarter generally accounts for less than 20% of the annual operating income. The
amount of net sales and operating income generated during the first quarter is
affected by the levels of inventory held by retailers at the end of Christmas
season, as well as general economic conditions and other factors beyond the
Company's control. In general, high levels of inventory at the end of the
Christmas season may have an adverse effect on net sales and operating income in
the first quarter as a result of lower levels of restocking orders placed by
retailers. Management currently believes that the Company's inventory levels at
its major customers as of the end of 1997 were not substantially above or below
targeted levels and therefore should not significantly impact retailers
restocking orders in the first quarter of 1998. As the Company increases the
amount of owned outlet and retail stores, it would generally amplify the
Company's seasonality by decreasing the Company's operating income in the first
quarter and increasing the operating income in the fourth quarter. The results
of operations for a particular quarter may also vary due to a number of factors,
including retail, economic and monetary conditions, timing of orders or holidays
and the mix of the products sold by the Company. During the 1997 second quarter
gross profit margins decreased principally as a result of the low gross profit
margin realized on the significant sale of the non-branded premium watches.
21
<PAGE>
FINANCIAL INFORMATON
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of Fossil, Inc.:
We have audited the accompanying consolidated balance sheets of Fossil,
Inc. and subsidiaries as of January 3, 1998 and December 31, 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Fossil, Inc. and subsidiaries
at January 3, 1998 and December 31, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended January 3,
1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 19, 1998
(except for the first paragraph of Note 10
which is as of March 4, 1998)
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and other information
contained in this Annual Report have been prepared by management. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include amounts that are based upon our best estimates and
judgements.
To help assure that financial information is reliable and that assets are
safeguarded, management maintains a system of internal controls and procedures
which it believes is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The consolidated financial statements and related notes thereto have been
audited by Deloitte & Touche LLP, independent auditors. The accompanying
auditors' report expresses an independent professional opinion on the fairness
of presentation of management's financial statements.
The Audit Committee of the Board of Directors is composed of the Company's
outside directors, and is responsible for selecting the independent auditing
firm to be retained for the coming year. The Audit Committee meets periodically
with the independent auditors, as well as with management, to review internal
accounting controls and financial reporting matters. The independent auditors
also meet privately on occasion with the Audit Committee, to discuss the scope
and results of their audits and any recommendations regarding the system of
internal accounting controls.
/s/ Tom Kartsotis /s/ Randy S. Kercho
- --------------------------- --------------------------
Tom Kartsotis Randy S. Kercho
Chairman of the Board and Executive Vice President
Chief Executive Officer and Chief Financial Officer
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR END 1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21,103,581 $ 11,981,246
Accounts receivable-net 34,237,526 30,252,964
Inventories 51,382,160 49,782,555
Deferred income tax benefits 4,503,749 3,666,344
Prepaid expenses and other current assets 2,432,282 1,942,791
------------------------------
Total current assets 113,659,298 97,625,900
Property, plant and equipment - net 21,073,333 16,718,976
Intangible and other assets 4,837,259 4,633,193
------------------------------
$ 139,569,890 $ 118,978,069
------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable:
Banks $ 7,862,145 $ 9,505,400
Affiliates -- 1,000,744
Accounts payable 9,609,805 7,476,324
Accrued expenses:
Co-op advertising 8,700,696 7,857,196
Compensation 2,665,485 2,154,996
Other 8,714,067 7,931,693
Income taxes payable 5,504,304 1,838,656
------------------------------
Total current liabilities 43,056,502 37,765,009
------------------------------
Long-term debt -- 4,350,000
Commitments (Note 9)
Minority interest in subsidiaries 1,250,405 2,295,026
Stockholders' equity:
Common stock, shares issued and
outstanding -20,308,503 and 13,242,994,
respectively 203,085 132,430
Additional paid-in capital 26,021,255 22,766,468
Retained earnings 71,257,176 52,315,069
Cumulative translation adjustment (2,218,533) (645,933)
------------------------------
Total stockholders' equity 95,262,983 74,568,034
------------------------------
$139,569,890 $ 118,978,069
------------------------------
See notes to consolidated financial statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR 1997 1996 1995
<S> <C> <C> <C>
Net sales $ 244,797,532 $ 205,899,262 $ 181,114,447
Cost of sales 127,269,749 107,861,291 98,214,748
-----------------------------------------------
Gross profit 117,527,783 98,037,971 82,899,699
Operating expenses:
Selling and distribution 58,065,138 50,638,117 42,581,303
General and administrative 24,852,550 23,026,895 19,854,943
-----------------------------------------------
Total operating expenses 82,917,688 73,665,012 62,436,246
-----------------------------------------------
Operating income 34,610,095 24,372,959 20,463,453
Interest expense (956,182) (1,205,233) (1,116,883)
Other income (expense) - net (1,502,806) (127,619) 795,894
-----------------------------------------------
Income before income taxes 32,151,107 23,040,107 20,142,464
Provision for income taxes 13,209,000 9,449,000 8,085,000
-----------------------------------------------
Net income $ 18,942,107 $ 13,591,107 $ 12,057,464
-----------------------------------------------
Basic earnings per share $ 0.94 $ 0.69 $ 0.61
-----------------------------------------------
Diluted earnings per share $ 0.91 $ 0.68 $ 0.60
-----------------------------------------------
Weighted average common and
common equivalent shares outstanding:
Basic 20,135,540 19,783,172 19,760,693
Diluted 20,833,431 20,067,653 19,939,560
See notes to consolidated financial statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
common stock
additional cumulative total
paid-in retained translation stockholder's
shares par value capital earnings adjustment equity
<S> <C> <C> <C> <C> <C> <C>
Balance, Fiscal
Year End 1994 13,162,924 $ 131,629 $ 22,022,755 $ 26,666,498 $ 84,863 $ 48,905,745
Common Stock issued
upon exercise of stock
options 19,409 194 196,937 -- -- 197,131
Net Income -- -- -- 12,057,464 -- 12,057,464
Foreign currency
translation adjustment -- -- -- -- 109,118 109,118
-----------------------------------------------------------------------------------------
Balance, Fiscal
Year End 1995 13,182,333 131,823 22,219,692 38,723,962 193,981 61,269,458
Common stock issued
upon exercise of stock
options 10,661 107 106,651 -- -- 106,758
Common stock issued for
purchase of certain
minority interests 50,000 500 440,125 -- -- 440,625
Net income -- -- -- 13,591,107 -- 13,591,107
Foreign currency
translation adjustment -- -- -- -- (839,914) (839,914)
-----------------------------------------------------------------------------------------
Balance, Fiscal
Year End 1996 13,242,994 132,430 22,766,468 52,315,069 (645,933) 74,568,034
Common stock issued upon
exercise of stock
options 167,899 1,679 1,622,711 -- -- 1,624,390
Tax benefit derived from
exercise of stock
options -- -- 464,000 -- -- 464,000
Common stock issued for
purchase of certain
minority interests 128,109 1,281 1,235,771 -- -- 1,237,052
Three-for-two
stock split 6,769,501 67,695 (67,695) -- -- --
Net income -- -- -- 18,942,107 -- 18,942,107
Foreign currency
translation adjustment -- -- -- -- (1,572,600) (1,572,600)
-----------------------------------------------------------------------------------------
Balance, Fiscal
Year End 1997 $ 20,308,503 $ 203,085 $ 26,021,255 $ 71,257,176 $ (2,218,533) $ 95,262,983
-----------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $ 18,942,107 $ 13,591,107 $ 12,057,464
Noncash items affecting net income:
Minority interest in subsidiaries 343,879 362,084 685,055
Depreciation and amortization 3,047,329 3,125,598 2,481,649
Increase in allowance for doubtful
accounts 407,686 1,424,243 911,298
Increase in allowance for returns -
net of related inventory in transit 784,300 183,382 347,508
Deferred income tax benefits (837,405) (375,925) (504,236)
Cash from (used for) changes in
assets and liabilities:
Accounts receivable (6,113,976) (5,384,069) 1,526,055
Inventories (662,178) (6,353,919) (9,611,015)
Prepaid expenses and other current
assets (489,491) 82,839 (655,458)
Accounts payable 1,392,915 1,574,382 1,267,585
Accrued expenses 2,136,362 3,989,332 2,314,422
Income taxes payable 4,129,648 (992,803) 806,227
--------------------------------------------
Net cash from operations 23,081,177 11,226,251 11,626,554
Investing Activities:
Net assets acquired in business
combination/consolidation, net of
cash received (384,614) (634,734) --
Additions to property, plant and
equipment (7,363,440) (4,260,546) (6,177,791)
Increase (decrease) in intangible
and other assets 272,002 (391,669) (1,179,619)
--------------------------------------------
Net cash used in investing
activities (7,476,052) (5,286,949) (7,357,410)
Financing Activities:
Issuance of common stock 1,624,390 547,383 197,131
Distribution of Minority interest earnings (498,784) (83,774) (368,714)
Issuance of notes
payable - affiliates -- -- 1,128,574
Repayment of notes
payable - affiliates (1,000,744) (127,830) (1,000,000)
Repayments in notes
payable - banks (5,993,255) (62,396) (659,240)
--------------------------------------------
Net cash (used in) from
financing activities (5,868,393) 273,383 (702,249)
Effect of exchange rate changes
and cash equivalents (614,397) (211,974) 96,818
--------------------------------------------
Net increase in cash and cash equivalents 9,122,335 6,000,711 3,663,713
Cash and cash equivalents:
Beginning of year 11,981,246 5,980,535 2,316,822
--------------------------------------------
End of year $ 21,103,581 $ 11,981,246 $ 5,980,535
--------------------------------------------
See notes to consolidated financial statement
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements include the accounts of Fossil, Inc., a
Delaware corporation, and its subsidiaries (the "Company"). Significant
intercompany balances and transactions are eliminated in consolidation. The
organizational structure of the Company's U.S.-based operations was changed in
August 1994 by transferring substantially all of its assets and liabilities,
except those connected with investments in subsidiaries, trademarks, or similar
intangible assets, to Fossil Partners, L.P., a Texas limited partnership.
Fossil, Inc. is the sole managing general partner of Fossil Partners, L.P. The
Company is primarily engaged in the design, development and distribution of
fashion watches and other accessories, principally under the "fossil", "fsl",
and "relic" brand names. The Company's products are sold primarily through
department stores and other major retailers, both domestically and
internationally.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Beginning January 1, 1997, the Company changed its fiscal year to reflect
the retail-based calendar (containing 4-4-5 week calendar quarters). Due to this
change, the First Quarter contained an additional one-half week for the
transition period. This change had an immaterial impact on comparability to the
prior fiscal year.
Cash Equivalents are considered all highly liquid investments with original
maturities of three months or less.
Accounts Receivable are stated net of allowances of $10,576,181 and
$8,854,453 for estimated customer returns and $4,699,831 and $4,292,145 for
doubtful accounts at the close of fiscal year 1997 and 1996, respectively.
Inventories are stated at the lower of average cost, including any applicable
duty and freight charges, or market.
Property, Plant and Equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets of three to ten years for
equipment and thirty years for buildings. Leasehold improvements are amortized
over the shorter of the lease term or the asset's useful life.
Intangible and Other Assets include the cost in excess of tangible assets
acquired, noncompete agreements and trademarks, which are amortized using the
straight-line method over the estimated useful lives of generally twenty, three
and five years, respectively.
Cumulative Translation Adjustment in stockholders' equity reflects the
unrealized adjustments resulting from translating the financial statements of
foreign subsidiaries. The functional currency of the Company's foreign
subsidiaries is the local currency of the country. Accordingly, assets and
liabilities of the foreign subsidiaries are translated to U.S. dollars at
year-end exchange rates. Income and expense items are translated at the average
rates prevailing during the year. Changes in exchange rates which affect cash
flows and the related receivables or payables are recognized as transaction
gains and losses in the determination of net income. The Company incurred net
foreign currency losses of approximately $733,000, $308,000 and $151,000 for
fiscal years 1997, 1996 and 1995, respectively, which have been included in
other income (expense).
Forward Contracts are entered into by the Company principally to hedge the
payment of intercompany inventory transactions with its non-U.S. subsidiaries.
Currency exchange gains or losses resulting from the translation of the related
accounts, along with the offsetting gains or losses from the hedge, are deferred
until the inventory is sold or the forward contract is completed. At January 3,
1998, the Company had hedge contracts to sell 22,900,000 German Marks for
approximately $13.2 million, expiring through November 1998 and 221,100,000
Japanese Yen for approximately $1.8 million, expiring through May 1998.
Revenues are recognized as sales when merchandise is shipped. Company
permits the return of damaged or defective products and accepts limited amounts
of product returns in certain other instances. Accordingly, the Company provides
allowances for the estimated amounts of these returns at the time of revenue
recognition.
28
<PAGE>
Advertising costs for in-store and media advertising as well as co-op
advertising and promotional allowances are expensed as incurred. Advertising
expenses for fiscal years 1997, 1996 and 1995 were approximately $14,255,000,
$14,919,000 and $14,254,000, respectively.
New Accounting Standards. The FASB issued in February 1997 Statement of
Financial Accounting Standards ("SFAS") No. 129 "Disclosure of Information About
Capital Structure" which establishes standards for disclosing information about
an entity's capital structure, and is effective for financial statements for
periods ending after December 15, 1997.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which was also issued in
June 1997, establishes standards for the way public companies disclose
information. These pronouncements will require such disclosures in financial
statements for periods beginning after December 15, 1997.
Earnings Per Share is based on the weighted average number of common and
common equivalent shares outstanding during each period. During 1997, the
Company adopted SFAS No. 128, "Earnings per Share". As a result of the adoption
of SFAS No. 128, all earnings per share ("EPS") amounts have to be restated to
the basic and diluted presentations required by this pronouncement.
Deferred Income Taxes are provided for under the asset and liability method
for temporary differences in the recognition of certain revenues and expenses
for tax and financial reporting purposes.
Fair Value of Financial Instruments are estimated to approximate the
related book values, unless otherwise indicated, based on market information
available to the Company.
2. ACQUISITIONS
Effective April 1997, Fossil (East) Limited acquired the remaining 35% of
capital stock of Amazing Time, Ltd. from its minority stockholder in exchange
for approximately $380,000 in cash. The acquisition of this Hong Kong-based
watch assembly factory has been accounted for as a purchase and, in connection
therewith the Company recorded goodwill of approximately $210,000.
Effective April 1996, the Company invested approximately $700,000 in cash
for an 81% interest in Kabushiki Kaisha Fossil Japan, a Japanese corporation
("Fossil Japan"). Fossil Japan is the sole distributor of Fossil products within
Japan and was previously 100% owned by a foreign-based entity. The acquisition
has been accounted for as a purchase, and in connection therewith, the Company
recorded goodwill of approximately $300,000.
In May 1993, the Company formed Fossil Europe b.v., a Netherlands holding
company ("Fossil b.v."). The Company contributed $1.43 million to the joint
venture for 70% of Fossil b.v.'s outstanding common stock. In July 1995, the
Company acquired an additional 18% of Fossil b.v.'s outstanding common stock
from its minority stockholders for approximately $1.68 million, of which
approximately $1.32 million was recorded as goodwill. Effective October 1, 1996,
the Company acquired the remaining 12% of Fossil b.v.'s outstanding common stock
from its minority stockholders for $1.0 million in cash, 50,000 shares of the
Company's $0.01 par value common stock ("Common Stock") and the issuance of
options to acquire 20,000 shares of Common Stock, of which approximately $1.0
million was recorded as goodwill. Fossil b.v.'s initial purpose was to form and
purchase through Fossil Europe GmbH ("Fossil GmbH") certain inventory and fixed
assets from the Company's prior distributor in Germany. During 1994, Fossil b.v.
formed an Italian subsidiary, Fossil Italia, S.r.l., ("Fossil Italy") and
invested approximately $7,500 for a 60% equity interest in the Italian
subsidiary.
Effective February 1997, Fossil B.V. acquired the remaining 40% of Fossil
Italy's outstanding common stock from it's minority stockholders for 128,109 of
the Company's Common Stock, of which approximately $300,000 was recorded as
goodwill. Fossil b.v. also formed a wholly owned subsidiary in Spain, during
1996.
Each of these subsidiaries is generally responsible for sales and
operations within their respective countries with the exception of Fossil GmbH,
which acts as the Company's main marketing and distribution point in Europe The
balance sheets and results of operations of these subsidiaries and affiliates
are included in the accompanying consolidated financial statements since the
dates of their formation or acquisition.
29
<PAGE>
3. INVENTORIES
Inventories consist of the following:
FISCAL YEAR END 1997 1996
Components and parts $ 2,751,719 $ 2,294,750
Work-in-process 2,064,623 657,125
Finished merchandise on hand 35,707,813 38,404,535
Merchandise at Company's stores 5,484,479 3,962,199
Merchandise in-transit from
customer returns 5,373,526 4,463,946
--------------------------
$ 51,382,160 $449,782,555
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
FISCAL YEAR END 1997 1996
Land $ 2,535,361 $ 2,535,361
Building 9,209,315 4,982,164
Furniture and fixtures 6,720,046 5,960,469
Equipment 4,905,291 4,446,863
Computer software 1,382,537 1,203,440
Leasehold improvements 6,790,409 5,260,858
---------------------------
31,542,959 24,389,155
Less accumulated
depreciation and
amortization 10,469,626 7,670,179
---------------------------
$21,073,333 $16,718,976
5. INTANGIBLE AND OTHER ASSETS
Intangibles and other assets consist of the following:
FISCAL YEAR END 1997 1996
Costs in excess of tangible
net assets acquired $4,545,098 $4,031,643
Noncompete agreement 475,000 475,000
Trademarks 547,573 528,132
Deposits 430,503 453,213
Other 203,174 253,411
-----------------------
6,201,348 5,741,399
Less accumulated amortization 1,364,089 1,108,206
-----------------------
$4,837,259 $4,633,193
30
<PAGE>
6. DEBT
Bank: U.S.-based. In August 1994, the Company signed a $5.0 million
financing agreement with its primary bank ("Long-term revolver") to partially
finance the Company's facilities construction costs and for other general
corporate purposes. The financing agreement was for a ten-year revolving term
loan with quarterly payments equal to 1% of the stated principal amount of the
facility. The interest rate was the lender's prime rate (8.50% at January 3,
1998) and was payable quarterly with an unused fee of 0.5% per annum. The
financing agreement additionally allowed for interest to be calculated at the
London Interbank Offered Rate ("LIBOR") (5.82 % at January 3, 1998), plus 1.25%.
The amount outstanding under this facility was $4.35 million and $4.55 million
at the end of fiscal year 1997 and 1996, respectively. The Company paid the
Long-term revolver in full in January 1998 from available cash on hand,
therefore the funds outstanding under the facility were classified as short-term
debt as of January 3, 1998. In May 1997, the Company extended the maturity date
of its short-term revolving credit facility with its primary bank ("U.S.
short-term revolver"). In June 1997, the Company renewed the U.S. short-term
revolver and amended it to increase the funds available under the facility to
$40 million, an increase of $10 million over the previous facility size, not
subject to any borrowing base calculation. The facility was also amended to
eliminate Japanese Yen currency borrowings and replace them with a stand-by
letter of credit for 540 million Yen (approximately $4.1 million) as collateral
for Company borrowings from any Japan-based bank. All borrowings under the U.S.
short-term revolver accrues interest at the bank's prime rate less 0.5% or LIBOR
plus 1.25% and is collateralized by substantially all the Company's assets and
requires the maintenance of specific levels of net worth, quarterly income,
working capital and financial ratios. There were no borrowings under the U.S.
short-term revolver as of fiscal year end 1997. Borrowings under the U.S.
short-term revolver were $6,500,000 and $3,000,000 as of fiscal year-end 1996
and 1995, respectively. Interest expense under these credit facilities was
$835,275, $1,077,713 and $855,631 for fiscal years 1997, 1996 and 1995,
respectively.
At fiscal year-end 1997, 1996 and 1995, the Company had outstanding letters
of credit of approximately $1,225,250, $2,695,000 and $592,000, respectively, to
vendors for the purchase of merchandise.
Banks: Foreign-based. During 1995, Pulse Time purchased its office
facilities in Hong Kong and signed a financing agreement with its primary Hong
Kong-based bank for approximately $350,000 ("Term Loan") to partially finance
the approximate $650,000 cost of the facility. The financing agreement was for a
seven-year term loan with monthly payments of approximately 1.2% of the stated
principal amount plus interest, calculated at bank prime rate in the United
States plus 1.5%. The entire note balance was paid in full in 1996. Fossil GmbH
has short-term credit facilities with two Germany-based banks with combined
borrowing capacity of 5,000,000 deutsche marks (approximately $2.8 million as of
fiscal year-end 1997). No borrowings were outstanding under the combined credit
facilities at the end of fiscal 1997 or 1996, with outstanding borrowings, in
U.S. dollars, of $2.8 million at December 31, 1995. Outstanding borrowings under
the facilities bore interest at approximately 6% and are collateralized by
substantially all of Fossil GmbH's assets. During August 1997, Fossil Japan
restructured its short-term credit facility with a Japan-based bank allowing
borrowings of up to 540 million Yen. All outstanding borrowings under the
facility bore interest at the Euroyen rate (1.03% at January 3, 1998) plus 1.8%.
In connection with the financing agreement, Fossil Japan agreed to pay an
origination fee equal to 0.12% of the amount available under the facility and an
unused fee of 0.5% per annum. The facility is collateralized by a standby letter
of credit issued by the Company's primary U.S. bank. Japan-based borrowings, in
U.S. dollars, under the facilities were approximately $3.5 million and $2.8
million as of fiscal year-end 1997 and 1996, respectively. Interest expense
under these credit facilities was $21,188 and $27,427 for fiscal years 1997 and
1996, respectively.
Affiliates. In connection with the Company's initial public offering in
April 1993, the Company issued notes payable to stockholders of $10,910,000. The
remaining $1,000,000 due under these notes and $20,000 in interest was paid to
stockholders during 1995.
Prior to Fossil Italy being a wholly owned subsidiary of the Company, the
minority stockholders of Fossil Italy were required to provide a portion of any
short-term financing necessary for that entity. The minority stockholders were
required to provide short-term financing of approximately $1.1 million.
31
<PAGE>
7. OTHER INCOME (EXPENSE) - NET
Other income (expense) - net consists of the following:
FISCAL YEAR 1997 1996 1995
Consulting fees $ - $ - $ 1,000,000
Insurance proceeds above
book value, - 101,814 579,673
Minority income (expense) (561,929) (840,084) (685,055)
Legal settlements (661,365) 50,000 (251,000)
Duty drawback, - 321,836 -
Interest income 335,528 235,098 91,896
Currency loss (732,614) (308,249) (151,087)
Royalty income 106,100 - -
Other income (expense) 11,474 311,966 211,467
------------------------------------------
$(1,502,806) $ (127,619) $ 795,894
8. INCOME TAXES
Deferred income tax benefits reflect the net tax effects of deductible
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
tax effects of significant items comprising the Company's net deferred tax
benefits, consist of the following:
FISCAL YEAR 1997 1996
Deferred tax assets:
Bad debt allowance $ 1,514,158 $ 1,146,268
Returns allowance 3,359,383 2,835,344
263(A) capitalization of inventory 418,355 555,135
Miscellaneous tax asset items 1,033,373 655,514
Deferred tax liabilities:
In-transit returns inventory (1,821,520) (1,525,917)
--------------------------
Net current deferred tax benefits $ 4,503,749 $ 3,666,344
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 1997 1996 1995
Current expense:
United States $ 9,026,405 $ 6,776,925 $ 5,932,384
Foreign 5,020,000 3,048,000 2,656,852
Deferred benefit -
United States (837,405) (375,925) (504,236)
--------------------------------------------
Provision for
income taxes $ 13,209,000 $ 9,449,000 $ 8,085,000
32
<PAGE>
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 1997 1996 1995
Tax at statutory rate $11,252,887 $ 8,064,037 $ 7,049,862
State, net of federal
tax benefit 378,005 194,312 288,073
Other 1,578,108 1,190,651 747,065
---------------------------------------
Provision for income taxes $13,209,000 $ 9,449,000 $ 8,085,000
Deferred U.S. federal income taxes are not provided on certain undistributed
earnings of foreign subsidiaries as management plans to continue reinvesting
these earnings outside the United States. Determination of such tax amounts is
not practical because potential offset by U.S. foreign tax credits would be
available under various assumptions involving the tax calculation.
9. COMMITMENTS
License Agreements. The Company has various license agreements to market
watches bearing certain trademarks owned by various entities. In accordance with
these agreements, the Company incurred royalty expense of $1,374,190, $1,703,245
and $1,299,976 in fiscal years 1997, 1996, and 1995, 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 1997 which expire on
various dates from March 1998 and require the Company to pay royalties ranging
from 5% to 15.5% of defined net sales. Future minimum royalty commitments under
such license agreements at the close of fiscal year 1997 are as follows:
ROYALTIES
----------
1998 $1,400,000
1999 2,014,000
2000 --
2001 10,000
----------
$3,424,000
Leases. The Company leases its retail and outlet store facilities as well
as certain of its office facilities and equipment under non-cancelable operating
leases. Most of the retail store leases provide for contingent rental based on
operating results and require the payment of taxes, insurance and other costs
applicable to the property. Generally, these leases include renewal options for
various periods at stipulated rates. Rent expense under these agreements was
$4,387,821, $3,698,981 and $2,288,677 for fiscal years 1997, 1996 and 1995,
respectively. Future minimum rental commitments under such leases at the close
of fiscal year 1997, are as follows:
33
<PAGE>
LEASES
-----------
1998 $ 3,892,412
1999 3,822,805
2000 2,904,990
2001 2,210,417
2002 1,752,918
Thereafter 3,399,624
-----------
$17,983,166
10. STOCKHOLDERS EQUITY AND BENEFIT PLANS
On March 4, 1998, the Board of Directors declared a three-for-two stock
split of the Company's $0.01-par-value common stock ("Common Stock") to be
effected in the form of a stock dividend payable on April 8,1998 to stockholders
of record on March 25,1998. Retroactive effect has been given to the stock split
in stockholders' equity accounts as of fiscal year end 1997, and in all share
and per share data in the accompanying financial statements.
The Company has 50,000,000 shares of authorized Common Stock, with
20,308,503 and 13,242,994 shares issued and outstanding at the close of fiscal
year end, 1997 and 1996, respectively. The Company has 1,000,000 shares of
authorized $0.01-par-value preferred stock with none issued or outstanding. The
following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS:
Fiscal Year End 1997 1996 1995
Basic EPS computation:
Numerator:
Net income $18,942,107 $13,591,107 $12,057,464
Denominator:
Weighted average
common shares
outstanding 13,423,693 13,188,781 13,173,795
Three-for-two stock
split paid April 1998 6,711,847 6,594,391 6,586,89
---------------------------------------
20,135,540 19,783,172 19,760,693
Basic EPS $ 0.94 $ 0.69 $ 0.61
Diluted EPS computation:
Numerator:
Net income $18,942,107 $13,591,107 $12,057,464
Denominator:
Weighted average
common shares
outstanding 13,423,693 13,188,781 13,173,795
Stock option
conversion 465,261 189,654 119,245
Three-for-two
stock split paid
April 1998 6,944,477 6,689,218 6,646,520
----------------------------------------
20,833,431 20,067,653 19,939,560
Diluted EPS $ 0.91 $ 0.68 $ 0.60
34
<PAGE>
Savings Plan. The Company has a savings plan in the form of a defined
contribution plan (the "401(k) plan") established in July 1992 for substantially
all full-time employees of the Company. Employees are eligible to participate in
the 401(k) plan after one year of service. The Company matches 50% of employee
contributions up to 3% of their compensation and 25% of the employee
contributions between 3% and 6% of their compensation. The Company also has the
right to make certain additional matching contributions not to exceed 15% of
employee compensation. The Company's Common Stock is one of several investment
alternatives available under the 401(k) plan. Matching contributions made by the
Company to the 401(k) plan totaled $156,575, $129,035 and $97,808, for fiscal
years 1997, 1996 and 1995, respectively.
Long-Term Incentive Plan. An aggregate of 1,725,000 shares of Common Stock
were reserved for issuance pursuant to the 1993 Fossil Long-Term Incentive Plan
("Incentive Plan"), adopted April 1993. An additional 900,000 shares were
reserved in 1995 for issuance under the Incentive Plan. Designated employees of
the Company, including officers and directors, are eligible to receive (i) stock
options, (ii) stock appreciation rights, (iii) restricted or nonrestricted
stock awards, (iv) cash awards or (v) any combination of the foregoing.
The Incentive Plan is administered by the Compensation Committee of the
Company's Board of Directors (the "Compensation Committee"). Each option issued
under the Incentive Plan terminates at the time designated by the Compensation
Committee, not to exceed ten years. The current options outstanding
predominately vest over a three-year period and were priced at not less than
estimated fair market value of the Company's Common Stock at the date of grant.
Effective January 10, 1996, the Company offered the participants under the
Incentive Plan the opportunity to exchange any outstanding stock option grants
with an exercise price of $10.33 or above for a pro-rata number of options at a
$6.67 exercise price. The pro-rata number of options offered in exchange was
equivalent to the total number of options outstanding for each grant exchanged
multiplied by the percentage figure calculated by dividing $6.67 by the
optionees's previous exercise price. A total of 366,487 options with exercise
prices ranging from $10.33 to $19.00 were canceled in exchange for 196,191
options with an exercise price of $6.67. The weighted average fair value of the
stock options granted during fiscal years 1997, 1996 and 1995 were $5.36, $3.29,
and $5.04, respectively.
Nonemployee Director Stock Option Plan. An aggregate of 150,000 shares of
Common Stock were reserved for issuance pursuant to this nonqualified stock
option plan, adopted April 1993. During the first year an individual is elected
as a nonemployee director of the Company, they receive a grant of 7,500
nonqualified stock options. In addition, on the first day of each subsequent
calendar year, each nonemployee director will automatically receive a grant of
an additional 4,500 nonqualified stock options, so 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 1997, 1996 and 1995 were
$7.95, $3.45 and $5.79, respectively.
The fair value of options granted under the Company's stock option plans
during fiscal years 1997, 1996 and 1995 were estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of approximately 65%,
risk free interest rate of 5.5 to 6.11%, and expected life of 5 to 5.5 years.
The following tables summarize the Company's stock option activity:
35
<PAGE>
<TABLE>
<CAPTION>
INCENTIVE PLAN
weighted weighted
average average
exercise exercise
exercise price price price available
per share per share outstanding per share exercise for grant
<S> <C> <C> <C> <C> <C> <C>
Balance Fiscal, 1994 $5.00 - $19.00 $ 9.770 685,650 $5.473 103,387 983,213
Shares designated
for grant through
the Incentive Plan - - - - - 900,000
Granted $5.92 - $17.00 $ 8.367 489,300 - - (489,300)
Exercised $5.00 - $13.00 $ 6.771 (29,113) - - -
Canceled $5.00 - $17.83 $ 7.363 (50,925) - - 50,925
Exercisable - - - - 250,094 -
-------------------------------------------------------------------------------
Balance Fiscal, 1995 $5.00 - $19.00 $ 9.262 1,094,912 $9.475 353,481 1,444,838
Granted $4.417 - $10.583 $ 5.323 828,291 - - (828,291)
Exercised $5.00 - $ 9.083 $ 6.676 (15,992) - - -
Canceled $4.417 - $19.00 $11.594 (450,311) - - 450,311
Exercisable - - - - 264,900 -
-------------------------------------------------------------------------------
Balance Fiscal, 1996 $4.417 - $17.167 $ 6.521 1,456,900 $6.953 618,381 1,066,858
Granted $8.334 - $16.792 $ 8.651 506,588 - - (506,588)
Exercised $4.417 - $11.917 $ 6.344 (243,971) - - -
Canceled $4.417 - $14.75 $ 7.842 (54,758) - - 54,758
Exercisable $4.417 - $19.00 - - - 257,799 -
-------------------------------------------------------------------------------
Balance Fiscal, 1997 $4.417 - $19.00 $ 7.173 1,664,759 $6.975 876,180 615,028
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NONEMPLOYEE DIRECTOR PLAN
weighted weighted
average average
exercise exercise
exercise price price price available
per share per share outstanding per share exercise for grant
<S> <C> <C> <C> <C> <C> <C>
Balance Fiscal, 1994 $5.00 - $12.667 $ 7.875 36,000 $ 5.000 11,250 114,000
Granted $8.083 - $11.417 $ 9.703 21,000 - - (21,000)
Exercisable $5.00 - $12.667 - - - 12,375 -
---------------------------------------------------------------------------
Balance Fiscal, 1995 $5.00 - $12.667 $ 8.548 57,000 $ 7.191 23,625 93,000
Granted $5.583 $ 5.583 18,000 - - (18,000)
Exercisable $5.00 - $12.667 - - - 19,500 -
---------------------------------------------------------------------------
Balance Fiscal, 1996 $5.00 - $12.667 $ 7.837 75,000 $ 7.94 43,125 75,000
Granted $9.00 - $16.667 $ 12.833 27,000 - - 27,000)
Exercised $5.583 - $11.417 $ 9.750 (7,875) - - -
Canceled $5.583 - $11.417 $ 8.235 (4,125) - - 4,125
Exercisable $5.00 - $12.667 - - - 23,250 -
---------------------------------------------------------------------------
Balance Fiscal, 1997 $5.00 - $16.667 $ 9.10 90,000 $ 7.81 66,375 52,125
</TABLE>
Additional weighted average information for options outstanding and exercisable
as for fiscal year end 1997:
<TABLE>
<CAPTION>
options outstanding options excercisable
------------------- --------------------
weighted weighted weighted
average average average
exercise remaining exercise
range or exercise number of price contractual number of price per
prices shares per share life shares share
<S> <C> <C> <C> <C> <C> <C>
Long-Term
Incentive Plan: $ 4.4177 - $8.66 1,290,138 $ 6.511 8.2 years 567,112 $ 5.801
$ 8.67 - $19.00 374,621 $ 9.452 7.4 years 309,068 $ 9.130
Nonemployee
Director Plan: 5.00 - $8.66 36,000 $ 5.219 6.3 years 32,625 $ 5.180
$ 8.67 - $16.667 54,000 $11.771 8.0 years 33,750 $10.367
</TABLE>
The Company applies Accounting Principles Board Opinion No.25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost (generally measured as the excess, if any, of the quoted
market price of the Common Stock at the date of the grant over the amount an
employee must pay to acquire the Common Stock) has been recognized for the
Company's stock option plans. SFAS No. 123, "Accounting for Stock-Based
Compensation," issued by the Financial Accounting Standards Board in 1995,
prescribed a method to record compensation cost for stock-based employee
compensation plans at fair value. Pro forma disclosures as if the Company had
adopted the cost recognition requirements under sfas 123 in fiscal years 1997
and 1996 are presented below. Because the sfas 123 method of accounting has not
been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that expected in future
years.
37
<PAGE>
FISCAL YEAR 1997 1996
Net income:
As reported $18,942,107 $13,591,107
Pro forma $17,177,727 $12,254,598
Basic earnings per share:
As reported $0.91 $0.69
Pro Forma $0.85 $0.62
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows:
FISCAL YEAR 1997 1996 1995
Cash paid during the year for:
Interest $ 923,635 $ 1,117,107 $ 1,073,248
Income taxes $10,641,735 $11,614,532 $ 7,424,463
Acquisition of minority
interest in subsid-
iary in exchange for
common stock $ 1,235,771 - -
Reduction in income tax
payable resulting
from exercise of
stock options $ 464,000 - -
12. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
Customers of the Company consist principally of major department stores and
specialty retailers located throughout the United States. The most significant
customers, individually or considered as a group under common ownership, which
accounted for over 10% of net sales for the periods presented, were as follows:
FISCAL YEAR 1997 1996 1995
Customer A 11% 11% 12%
Customer B 9% 10% -
38
<PAGE>
The Company operates in a single industry, as a designer, developer, marketer
and distributor of fashion watches and other accessories. Information about the
Company's operations in the United States and international markets in fiscal
years 1997, 1996 and 1995 is presented below. Intercompany sales of products
between geographic areas are referred to as intergeographic items. These
intercompany sales primarily consist of product sales from the Far East into the
U.S. and European operations which are priced at cost plus a 5%-8% trade agent
commission.
<TABLE>
<CAPTION>
FISCAL YEAR END 1997 Net Sales Operating Income Assets
<S> <C> <C> <C>
United States $189,590,607 $20,402,118 $ 95,757,491
Europe 46,032,760 2,552,650 24,743,975
Far East 89,214,060 12,369,973 14,333,258
Japan 9,613,533 (714,646) 4,735,166
Intergeographic items (89,653,428) - -
--------------------------------------------------
Consolidated $244,797,532 $34,610,095 $139,569,890
FISCAL YEAR END 1996 Net Sales Operating Income Assets
United States $158,159,270 $17,741,711 $ 78,302,341
Europe 45,926,815 1,781,220 27,842,878
Far East 66,270,186 5,008,243 8,335,684
Japan 6,266,671 (158,215) 4,497,166
Intergeographic items (70,723,680) - -
--------------------------------------------------
Consolidated $205,899,262 $24,372,959 $118,978,069
FISCAL YEAR END 1995 Net Sales Operating Income Assets
United States $134,747,319 $14,293,470 $ 64,772,200
Europe 40,053,692 4,468,898 24,795,443
Far East 69,430,240 1,701,085 7,425,884
Intergeographic items (63,116,804) - -
--------------------------------------------------
Consolidated $181,114,447 $20,463,453 $ 96,993,527
</TABLE>
39
<PAGE>
CORPORATE INFORMATION
EXECUTIVE OFFICERS AND DIRECTORS
Tom Kartsotis Randy S. Kercho Kenneth W. Anderson
Chairman of the Board and Executive Vice President Director
Chief Executive Officer and Chief Financial Officer
Kosta N. Kartsotis Mark D. Quick Alan J. Gold
President, Executive Vice President Director
Chief Operating Officer
and Director
Michael W. Barnes T.R.Tunnell Donald J. Stone
Executive Vice President Senior Vice President, Director
Development
Chief Legal Officer and
Secretary
Richard H. Gundy Jal S. Shroff
Executive Vice President Managing Director-
Fossil East and Director
CORPORATE INFORMATION
Transfer Agent and Registrar
ChaseMellon Shareholder Independent Auditors Corporate Counsel
Services LLC Deloitte & Touche LLP Jenkens & Gilchrist
Overpeck Centre 2200 Ross Avenue 1445 Ross Avenue
85 Challenger Road Dallas, TX 75201 Dallas, TX 75202
Ridgefield Park, NJ 07760
INTERNET WEB SITE
The Company maintains a web site at the worldwide internet address of
www.fossil.com. Certain product, event, press release and collector club
information concerning the Company is available at the site.
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held on Wednesday, May 27, 1998, 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.
40
<TABLE>
<CAPTION>
Subsidiaries of Fossil, Inc.
as of January 3, 1998
Place Percent
Name of Subsidiary of Incorporation Parent Company Ownership
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Fossil Intermediate, Inc. Delaware Fossil, Inc. 100
Fossil Stores I, Inc. Delaware Fossil, Inc. 100
Fossil New York, Inc. Delaware Fossil, Inc. 100
Arrow Merchandising, Inc. Texas Fossil, Inc. 100
Fossil East Limited Hong Kong Fossil, Inc. 100
Fossil Europe B.V. The Netherlands Fossil, Inc. 100
Fossil Japan, K.K. Japan Fossil, Inc. 81
Fossil Trust Delaware Fossil Intermediate, Inc. 100
Fossil Stores II, Inc. Delaware Fossil Stores I, Inc. 100
Newtime, Ltd. Hong Kong Fossil East, Ltd. 100
Pulse Time Center Company, Ltd. Hong Kong Fossil East, Ltd. 60
Amazing Time, Ltd. Hong Kong Fossil East, Ltd. 100
Fossil Trading, Ltd. Hong Kong Fossil East, Ltd. 100
Trylink International, Ltd. Hong Kong Fossil East, Ltd. 51
Fossil Europe GmbH Germany Fossil Europe B.V. 100
Fossil Italia, S.r.l. Italy Fossil Europe B.V. 100
Fossil France Eurl, S.a.r.l. France Fossil Europe B.V. 100
Fossil (U.K.) Ltd. England Fossil Europe B.V. 100
Fossil Spain, S.A. Spain Fossil Europe B.V. 100
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-65980 and Post-Effective Amendment No. 1 to Registration Statement No.
33-77526 on Form S-8 of our reports dated February 19, 1998 (except for the
first paragraph of Note 10 which is as of March 4, 1998), appearing in and
incorporated by reference in the Annual Report on Form 10-K of Fossil, Inc. for
the fiscal year ended January 3, 1998.
Deloitte & Touche LLP
Dallas, Texas
April 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Part II Item 8 Financial Statements of Fossil, Inc. and Subsidiaries as of
and for the Fifty-Two and One-Half Weeks Ended January 3, 1998 Filed on
Form 10-K.
</LEGEND>
<CIK> 0000883569
<NAME> Fossil, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-03-1998
<EXCHANGE-RATE> 1
<CASH> 21,103,581
<SECURITIES> 0
<RECEIVABLES> 38,937,357
<ALLOWANCES> 4,699,831
<INVENTORY> 51,382,160
<CURRENT-ASSETS> 113,659,298
<PP&E> 31,542,959
<DEPRECIATION> 10,469,626
<TOTAL-ASSETS> 139,569,890
<CURRENT-LIABILITIES> 43,056,502
<BONDS> 0
0
0
<COMMON> 203,085
<OTHER-SE> 95,059,898
<TOTAL-LIABILITY-AND-EQUITY> 139,569,890
<SALES> 244,797,532
<TOTAL-REVENUES> 244,797,532
<CGS> 127,269,749
<TOTAL-COSTS> 210,187,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 407,686
<INTEREST-EXPENSE> 956,182
<INCOME-PRETAX> 32,151,107
<INCOME-TAX> 13,209,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,942,107
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.91
</TABLE>
