1
EXHIBIT 13
FINANCIAL REVIEW
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
SELECTED STATEMENT OF INCOME DATA
(Dollars in Thousands, Except Per Share Data)
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Years Ended December 31, 1999 1998 1997 1996 1995(1)
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Revenue $917,216 $862,168 $796,458 $689,973 $655,138
Net income (loss) 75,247 59,156 47,321 20,419 (11,635)
Basic earnings (loss) per share(2) 3.51 2.59 2.10 .92 (.53)
Diluted earnings (loss) per share(2) 3.39 2.52 2.02 .91 (.53)
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SELECTED BALANCE SHEET DATA
(Dollars in Thousands)
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December 31, 1999 1998 1997 1996 1995(1)
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Cash and equivalents $196,085 $151,889 $ 98,771 $ 93,336 $ 38,389
Working capital 302,286 291,835 242,911 269,603 268,115
Total assets 493,311 469,467 420,003 449,586 421,408
Total long-term debt 100,000 100,000 100,000 189,454 207,187
Stockholders' equity 272,368 266,193 214,895 165,360 142,221
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(1) Includes a $16.0 million pre-tax restructuring charge which reduced
earnings and earnings per share by $9.9 million and $.44 diluted ($.45
basic), respectively, and a $12.1 million non-recurring pre-tax gain which
increased earnings and earnings per share by $7.5 million and $.34 diluted
($.34 basic), respectively.
(2) Prior years' earnings (loss) per share have been restated to reflect the
2-for-1 stock split in September 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discusses the Company's results of operations and liquidity and
capital resources. The discussion should be read in conjunction with "The
Year in Review" and the consolidated financial statements and related notes.
RESULTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
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Years Ended December 31, 1999 1998 1997
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Revenue $917,216 100.0% $862,168 100.0% $796,458 100.0%
Gross profit 393,102 42.9 342,839 39.8 311,921 39.2
Operating expense 276,551 30.2 248,249 28.8 228,068 28.6
Operating income 116,551 12.7 94,590 11.0 83,853 10.5
Interest expense 9,342 1.0 9,538 1.1 14,833 1.9
Net income 75,247 8.2 59,156 6.9 47,321 5.9
Basic earnings per share $ 3.51 $ 2.59 $ 2.10
Weighted-average shares
outstanding 21,448 22,849 22,561
Diluted earnings per share $ 3.39 $ 2.52 $ 2.02
Weighted-average shares
outstanding 22,178 23,517 23,475
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Prior years' earnings per share and weighted-average shares have been
restated to reflect the 2-for-1 stock split in September 1999.
Revenue increased to $917.2 million in 1999 from $862.2 million in 1998 and
$796.5 million in 1997. This represents an increase of 6.4% in 1999 and
8.3% in 1998, each compared with the prior year.
Footwear revenue was $713.4 million in 1999, $651.8 million in 1998 and
$593.0 million in 1997. This represents an increase of 9.5% in 1999 and 9.9% in
1998, each compared with the prior year. The revenue increase in 1999, compared
with 1998, was primarily due to increases in domestic and, to a lesser degree,
European unit sales, partially offset by the impact of foreign exchange. By
product, the increase was primarily attributable to growth in Boots and, to a
lesser degree, Kids', European Men's Casual and the introduction of the new
Mountain Athletics(TM) by Timberland and Timberland PROtrademark series
sub-brands. These increases in revenue were partially offset by unit volume
decreases in the
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Performance and, to lesser degree, the domestic Casual categories. The increase
in 1998, compared with 1997, was primarily due to growth in domestic wholesale,
domestic retail and European wholesale unit sales, partially offset by a decline
in average selling price. By product, the increases were primarily in the
Performance, Boots and Kids' categories. Worldwide footwear revenue represented
77.8%, 75.6% and 74.5% of total revenue in 1999, 1998 and 1997, respectively.
Revenue attributable to apparel and accessories was $189.0 million in
1999, $195.8 million in 1998 and $193.8 million in 1997. The revenue decrease
of 3.5% in 1999, compared with 1998, was primarily due to a reduction in
domestic wholesale revenue, partially offset by increases in European average
selling price and unit sales, and domestic retail unit sales. The decrease in
domestic wholesale revenue was primarily due to a $6.9 million reduction in
wholesale off-price apparel sales. The decline in off-price sales resulted
from the Company's focus on rationalizing its domestic distribution strategy and
better managing inventory levels. The 1.0% revenue increase in 1998, compared
with 1997, was primarily due to increases in domestic retail unit sales and
European wholesale average selling price and unit sales. These increases were
partially offset by a decline in domestic wholesale average selling price.
Worldwide apparel and accessories revenue represented 20.6%, 22.7% and 24.3%
of total revenue in 1999, 1998 and 1997, respectively.
Worldwide revenue from Company-owned retail and factory stores was $210.5
million in 1999, $191.7 million in 1998 and $181.1 million in 1997. This
represents an increase of 9.8% in 1999 and 5.8% in 1998, each compared with
the prior year. These increases in revenue were primarily due to increases in
footwear and apparel and accessories unit sales, resulting from, in part, new
retail locations worldwide. Worldwide retail revenue represented 22.9%, 22.2%
and 22.7% of total revenue in 1999, 1998 and 1997, respectively.
The Company has three reportable business segments: U.S. Wholesale, U.S.
Retail and International (for a more detailed description and additional
financial information regarding segments, see the "Business Segments and
Geographic Information" note (Note 10) to the Company's consolidated
financial statements). Domestic revenue, comprised of the U.S. Wholesale and
U.S. Retail segments, amounted to $662.5 million in 1999, $610.3 million in
1998 and $578.4 million in 1997, or 72.2%, 70.8% and 72.6% of total revenue
for each of the three years, respectively. The U.S. Wholesale segment revenue
increased by 8.4% in 1999, compared with 1998, and by 5.3% in 1998, compared
with 1997, both primarily due to increases in footwear unit sales. The U.S.
Retail segment revenue increased by 8.9% in 1999, compared with 1998, and by
6.1% in 1998, compared with 1997, both primarily due to increases in footwear
unit sales and, to a lesser degree, apparel and accessories unit sales.
Comparable store sales increased by 5.4% in 1999, compared with 1998, and by
4.3% in 1998, compared with 1997. International segment revenue increased by
1.1% in 1999, compared with 1998, and by 15.5% in 1998, compared with 1997.
The increase in 1999, compared with 1998 was primarily due to higher European
unit sales and apparel and accessories average selling prices. This increase
was substantially offset by the impact of foreign exchange and, to a lesser
extent, lower revenue in Asia where the Company operated through an
independent distributor. The increase in 1998, compared with 1997, was
primarily due to European footwear unit sales.
The gross profit margin was 42.9% in 1999, 39.8% in 1998 and 39.2% in
1997. The increase in margin percentage in 1999, compared with 1998, was
primarily due to improvements in manufacturing efficiencies, fewer off-price
apparel sales and the introduction of higher margin products, such as the
Mountain Athletics(TM) by Timberland sub-brand. The improvement in gross
profit margin from 1997 to 1998 was primarily due to a mix of higher margin
products, in addition to lower unit costs in footwear manufacturing and
sourcing.
Operating expense was $276.6 million, or 30.2% of revenue, in 1999,
$248.2 million, or 28.8% of revenue, in 1998 and $228.1 million, or 28.6% of
revenue, in 1997. The increase in operating expense in 1999, compared with
1998, was principally due to expenditures to support business growth,
predominately selling and marketing related. The increase in 1998, compared
with 1997, was primarily due to marketing expenditures and sales volume
related expenditures.
Operating income, which is pre-tax earnings before interest and other
expense, was $116.6 million in 1999, $94.6 million in 1998 and $83.9 million
in 1997. As a percentage of revenue, operating income was 12.7% in 1999,
11.0% in 1998 and 10.5% in 1997.
Segment operating income improved in all segments in 1999 and 1998, both
in dollars and as a percentage of revenue, compared with the respective prior
years. That improvement was due to a combination of increased revenue and
higher gross margin rates in each segment
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year over year, partially offset by the expense increase discussed previously
and, additionally, the impact of foreign exchange within the International
segment. The increase in Unallocated Corporate expense in 1999, compared with
1998, was primarily due to finance, information systems, legal and
administrative expenses incurred in the support of company-wide activities, and
United States distribution expenses. The increase in 1998, compared with 1997,
was primarily due to expanded marketing efforts.
Interest expense was $9.3 million in 1999, compared with $9.5 million in
1998 and $14.8 million in 1997. The decrease from 1998 to 1999 was due to
lower levels of short-term borrowings, while the decrease from 1997 to 1998
was due to lower levels of long-term borrowings.
The effective income tax rate was 32.0% in 1999, 32.0% in 1998 and 30.0%
in 1997. For an analysis of the effective tax rate, see the "Income Taxes"
note (Note 6) to the Company's consolidated financial statements.
The Company believes that inflation has not had a significant impact on
the Company's operations over the past three years.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations amounted to $135.2 million in 1999, $84.2
million in 1998 and $113.8 million in 1997. The Company's earnings and continued
improvements in working capital management were the principal sources of cash
generation. The reduction in inventory levels experienced in 1999 and 1998,
compared with the respective prior years, was achieved by improved forecasting
accuracy and the reduction of excess and obsolete product in the business
system. Inventory turns were 3.7 times in 1999, compared with 3.2 times in 1998
and 2.9 times in 1997. Days sales outstanding at December 31, 1999 were 26 days,
compared with 27 days at December 31, 1998 and 29 days at December 31, 1997.
Domestic wholesale days sales outstanding were 29 days, 34 days and 36 days at
the end of 1999, 1998 and 1997, respectively.
Net cash used by investing activities amounted to $23.7 million in 1999,
$21.8 million in 1998 and $25.2 million in 1997. Of the net cash used by
investing activities, capital expenditures were $20.1 million in 1999, $20.7
million in 1998 and $25.7 million in 1997. A majority of capital expenditures
during the three years ended December 31, 1999 were for manufacturing
machinery and equipment, distribution and transportation equipment, retail
store additions and improvements, and for information system enhancements.
During 1999, 1998 and 1997, net cash used in financing activities
amounted to $64.3 million, $10.1 million and $82.7 million, respectively. In
1999 and 1998, $71.7 million and $16.2 million was used to repurchase
outstanding shares of the Company's Class A Common Stock, respectively. In
1997, $89.5 million was used to repay long-term debt, including prepayments
totaling $82.0 million.
The Company uses funds from operations and unsecured revolving and
committed lines of credit as the primary sources of financing for its
seasonal and other working capital requirements. On April 30, 1998, the
Company entered into a revolving credit agreement to provide up to $80.0
million in letters of credit under an overall $100.0 million committed
facility. This agreement expires on June 19, 2001.
The Company's debt to capital ratio was 26.9% at December 31, 1999, 27.3%
at December 31, 1998 and 31.8% at December 31, 1997.
Management believes that the Company's capital requirements for 2000 will
be met through the use of its current cash balances, through its existing
credit facilities and through cash flow from operations, without the need for
additional permanent financing. However, if the need arises, the Company's
ability to obtain any additional credit facilities will depend upon
prevailing market conditions, the Company's financial condition and the terms
and conditions of such additional facilities.
NEW ACCOUNTING PRONOUNCEMENTS
A discussion of new accounting pronouncements is included in the "Summary of
Significant Accounting Policies" note (Note 1) to the Company's consolidated
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position and results of
operations of the Company are routinely subject to a variety of risks,
including market risk associated with
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interest rate movements on borrowings and investments and currency rate
movements on non-U.S. dollar denominated assets and liabilities. The Company
regularly assesses these risks and has established policies and business
practices to protect against the adverse effect of these and other potential
exposures.
The Company utilizes cash from operations and U.S. dollar denominated
borrowings to fund its working capital and investment needs. Short-term debt,
if required, is used to meet working capital requirements and long-term debt
generally is used to finance long-term investments. In addition, derivative
instruments are used by the Company in its hedging of foreign currency
transactions. These debt instruments and derivative instruments are viewed as
risk management tools and are not used for trading or speculative purposes.
Cash balances are normally invested in high-grade securities with terms under
three months.
The Company has available unsecured committed and uncommitted lines of
credit as sources of financing for its working capital requirements.
Borrowings under these credit agreements bear interest at variable rates
based on the London Interbank Offering Rate. At December 31, 1999 and 1998,
the Company had no short-term financing outstanding and one long-term debt
instrument outstanding at a fixed interest rate of 8.94% with a maturity in
December 2001.
The Company's foreign currency exposure is generated primarily from its
European operating subsidiaries. The Company seeks to minimize the impact of
these foreign currency fluctuations by hedging the related transactions with
foreign currency forward contracts. These contracts are short-term and expire
in twelve months or less. As of December 31, 1999, there were no material
foreign currency transactions that were not hedged. Based upon sensitivity
analysis as of December 31, 1999, a 10% change in foreign exchange rates
would cause the fair value of the Company's financial instruments to
increase/decrease by approximately $5.0 million.
YEAR 2000
* STATE OF READINESS. The Company's Year 2000 compliance strategy included
several overlapping phases: inventory, analysis, conversion, testing and
implementation. In 1999, the Company completed all phases for all of its
enterprise business systems and technical systems worldwide and for all
departmental applications, facilities and non-informational technology
systems identified by the Company as critical or high risk. The Company took
steps to assess the Year 2000 compliance of its external business partners
and to reduce the risks to, and the resulting impact on, the Company of their
non-compliance. Those steps included requiring such external business
partners to provide compliance certification, periodic status reports and
contingency plans to the Company.
The Company monitored the rollover of 1999 into 2000 and has not
experienced any material business disruptions as a result of Year 2000 issues
and believes that the risk for major system failure has passed. As a result,
the Company has removed its restriction on new installations and upgrades of
all operational systems.
* RISKS. The Company does not now anticipate that any future material business
disruption will occur as a result of Year 2000 issues. The Company will
continue to monitor its business systems and processes and the Year 2000
compliance of its external business partners throughout the first quarter of
2000. However, the Company will not be able to independently verify that all
of its external business partners are, in fact, Year 2000 compliant.
Therefore, there is a risk that the Company's business, financial position
and results of operations could be materially adversely affected by any Year
2000 issues which did not become apparent in the rollover from 1999 to 2000,
or during the subsequent weeks.
* CONTINGENCY PLAN. The Company completed and documented its Year 2000
contingency plans to address the risk and exposure to the Company. The
Company used the information and data received from its external business
partners to assist in its assessment of risk of non-compliance and in the
development of its contingency plans. Because the Company did not experience
any material business interruptions as a result of Year 2000 issues, it did
not put any of its contingency plans into place. The Company will continue to
update its assessments and revise its contingency plans as appropriate, based
on additional information received, and will maintain its contingency plans
during 2000 in the event that it should need to address the risks described
above.
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* COSTS. Total expenditures related to the Company's Year 2000 compliance
efforts are currently estimated not to exceed $3.0 million, of which $2.5
million has been incurred through December 31, 1999. This estimate does not
include the compensation of Company employees and other similar internal
costs, the time and costs that may be incurred by the Company as a result of
the failure of any third parties to become Year 2000 compliant, or internal
costs related to contingency plans. The estimate of total expenditures is
based on the Company's current assessment of additional Year 2000 compliance
needs and is subject to change as the Company proceeds with its Year 2000
efforts.
The Company's statements of its expectations regarding the current status,
date of completion and costs of its Year 2000 compliance programs are
forward-looking statements. These statements are management's best estimates
based on the information currently available.
EURO
Effective January 1, 1999, the European Monetary Union ("EMU") created a
single currency, the euro, for its member countries. A transition period,
from January 1, 1999 through December 31, 2001, will allow the member
countries to methodically eliminate their local currencies and to convert to
the euro. During this transition period, either the euro or a member
country's present currency will be accepted as legal tender.
In 1998, the Company formed a task force to study the requirements of
conversion to the euro and the related impact to the Company (four of the
five European subsidiaries of the Company operate in countries that are
members of the EMU). The task force reviewed technology requirements, pricing
and competitive implications, banking, the impact on hedging programs and the
timing and costs related to each of these. From this review, a conversion
program was developed and implemented in 1998.
As of December 31, 1999, the accounting and ledger systems of the
Company's European subsidiaries were euro compliant. Additionally, the
Company can invoice and manage all wholesale orders in local currency and
euros. At the subsidiaries' retail locations, all credit card readers are
euro compliant and all price tags and displays are in both local currency and
euros. The retail store registers and merchandising/inventory management
systems are currently scheduled to be euro compliant by the end of 2000.
Throughout 2000, the Company will continue to review and potentially
adjust its European subsidiaries' wholesale and retail pricing for
consistency among markets. The Company will also be working on the euro
compliance of its financial reporting and consolidation system to support all
euro process and system changes.
The Company believes that the adoption of the euro will not have a
material impact on the Company's consolidated financial statements.
FORWARD-LOOKING INFORMATION
Management is unaware of any current trends or conditions that could have a
material adverse effect on the Company's consolidated financial position,
future results of operations or capital or liquidity needs. However, as
discussed in an exhibit to the Company's Form 10-K for the year ended
December 31, 1999, entitled "Cautionary Statements for Purposes of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995,"
investors should be aware of factors that could affect the Company's actual
results and could cause such results to differ materially from those
contained in forward-looking statements made by or on behalf of the Company.
These factors include political, economic or other factors such as currency
exchange rates, conversion to the euro, Year 2000 conversions, inflation
rates, recessionary or expansive trends, taxes and regulations and laws
affecting the business in each of the Company's markets; competitive product,
advertising, promotional and pricing activity; dependence on the rate of
development and degree of acceptance of new product introductions in the
marketplace; and the difficulty of forecasting sales at certain times in
certain markets.
SUBSEQUENT EVENT
A discussion of the Company's re-acquisition of distribution rights in the
Asia Pacific region and acquisition of the stock of four of the subsidiary
countries is included in the "Subsequent Event" note (Note 15) to the
Company's consolidated financial statements.
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QUARTERLY MARKET INFORMATION AND RELATED MATTERS
The Company's Class A Common Stock is traded on the New York Stock Exchange
under the symbol TBL. There is no market for shares of the Company's Class B
Common Stock; however, shares of Class B Common Stock may be converted into
shares of Class A Common Stock on a one-for-one basis and will automatically
be converted upon any transfer (except for estate planning transfers and
transfers approved by the Board of Directors).
The following table presents the high and low closing sales prices of the
Company's Class A Common Stock for the past two years, as reported by the New
York Stock Exchange.
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1999 1998
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High Low High Low
First Quarter $32 9\32 $21 9\32 $37 23\32 $26 5\8
Second Quarter 37 29 1\16 43 7\16 34 1\2
Third Quarter 42 5\16 31 7\16 36 1\32 18 5\8
Fourth Quarter 52 7\8 35 3\4 24 7\8 14 15\32
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Quarterly stock prices have been restated to reflect the 2-for-1 stock split
in September 1999.
As of February 25, 2000, the number of record holders of the Company's
Class A Common Stock was approximately 718 and the number of record holders
of the Company's Class B Common Stock was 8. The closing sales price of the
Company's Class A Common Stock on February 25, 2000 was $383/4 per share.
The Company has never declared a dividend on either the Company's Class A
or Class B Common Stock and does not contemplate doing so in the foreseeable
future. In addition, the Company's ability to pay cash dividends is limited
pursuant to various loan agreements (see notes to the Company's consolidated
financial statements).
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CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
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(Amounts in Thousands, Except Share and Per Share Data) 1999 1998
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ASSETS
Current assets
Cash and equivalents $ 196,085 $ 151,889
Accounts receivable, net of allowance for doubtful accounts
of $4,910 in 1999 and $4,769 in 1998 78,696 79,024
Inventory 114,673 131,218
Prepaid expense 9,890 11,897
Deferred income taxes 15,297 13,538
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Total current assets 414,641 387,566
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Property, plant and equipment 130,425 131,237
Less accumulated depreciation and amortization (75,019) (74,316)
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Net property, plant and equipment 55,406 56,921
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Excess of cost over fair value of net assets acquired, net 17,533 19,217
Other assets, net 5,731 5,763
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Total assets $ 493,311 $ 469,467
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 33,247 $ 25,890
Accrued expense
Payroll and related 30,570 22,090
Interest and other 35,038 29,528
Income taxes payable 13,500 18,223
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Total current liabilities 112,355 95,731
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Long-term debt 100,000 100,000
Deferred income taxes 8,588 7,543
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- --
Class A Common Stock, $.01 par value (1 vote per share); 30,000,000 shares
authorized; 18,638,355 shares issued at December 31, 1999
and 9,177,383 shares issued at December 31, 1998 187 92
Class B Common Stock, $.01 par value (10 votes per share); convertible into
Class A shares on a one-for-one basis; 15,000,000 shares authorized;
4,675,698 shares issued at December 31, 1999 and 2,338,162 shares
issued at December 31, 1998 47 23
Additional paid-in capital 82,755 74,711
Deferred compensation (3,658) --
Retained earnings 282,209 207,077
Accumulated other comprehensive income (loss) (4,151) 626
Less treasury stock at cost; 2,671,349 shares at December 31, 1999
and 417,368 shares at December 31, 1998 (85,021) (16,336)
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Total stockholders' equity 272,368 266,193
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Total liabilities and stockholders' equity $ 493,311 $ 469,467
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Prior years' have been restated to reflect the 2-for-1 stock split in September
1999.
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997
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(Amounts in Thousands, Except Per Share Data) 1999 1998 1997
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Revenue $917,216 $862,168 $796,458
Cost of goods sold 524,114 519,329 484,537
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Gross profit 393,102 342,839 311,921
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Operating expense
Selling 219,545 195,688 174,729
General and administrative 55,321 50,876 51,654
Amortization of goodwill 1,685 1,685 1,685
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Total operating expense 276,551 248,249 228,068
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Operating income 116,551 94,590 83,853
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Other expense (income)
Interest expense 9,342 9,538 14,833
Other, net (3,449) (1,942) 1,419
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Total other expense 5,893 7,596 16,252
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Income before income taxes 110,658 86,994 67,601
Provision for income taxes 35,411 27,838 20,280
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Net income $ 75,247 $ 59,156 $ 47,321
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Basic earnings per share $ 3.51 $ 2.59 $ 2.10
Weighted-average shares outstanding 21,448 22,849 22,561
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Diluted earnings per share $ 3.39 $ 2.52 $ 2.02
Weighted-average shares outstanding 22,178 23,517 23,475
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Prior years' earnings per share and weighted-average shares have been
restated to reflect the 2-for-1 stock split in September 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
9
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
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Accumulated
Class A Class B Additional Deferred Other Compre- Consolidated
Common Common Paid-in Compens- Retained Comprehensive Treasury hensive Stockholders'
(Dollars in Thousands) Stock Stock Capital ation Earnings Income (Loss) Stock Income Equity
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Balance, January 1, 1997 $ 84 $27 $61,806 $ -- $100,600 $2,963 $ (120) $165,360
Issuance of shares under
employee stock plans 4 (1) 4,362 -- -- -- 7 4,372
Tax benefit from stock
option plans -- -- 2,400 -- -- -- -- 2,400
Comprehensive income:
Net income -- -- -- -- 47,321 -- -- $47,321 47,321
Translation adjustment -- -- -- -- -- (4,558) -- (4,558) (4,558)
-------
Comprehensive income -- -- -- -- -- -- -- $42,763 --
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Balance, December 31, 1997 88 26 68,568 -- 147,921 (1,595) (113) 214,895
Issuance of shares under
employee stock plans 4 (3) 3,843 -- -- -- -- 3,844
Repurchase of common stock -- -- -- -- -- -- (16,223) (16,223)
Tax benefit from stock
option plans -- -- 2,300 -- -- -- -- 2,300
Comprehensive income:
Net income -- -- -- -- 59,156 -- -- $59,156 59,156
Translation adjustment -- -- -- -- -- 2,221 -- 2,221 2,221
-------
Comprehensive income -- -- -- -- -- -- $61,377 --
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Balance, December 31, 1998 92 23 74,711 -- 207,077 (626) (16,336) 266,193
Issuance of shares under
employee stock plans 3 1 5,544 (3,705) -- -- 2,985 4,828
Amortization of deferred
compensation -- -- -- 47 -- -- -- 47
Repurchase of common stock -- -- -- -- -- -- 71,670 (71,670)
Tax benefit from stock
option plans -- -- 2,500 -- -- -- -- 2,500
2-for-1 stock split 92 23 -- -- (115) -- -- --
Comprehensive income:
Net income -- -- -- -- 75,247 -- -- $75,247 75,247
Translation adjustment -- -- -- -- -- (4,777) -- (4,777) (4,777)
-------
Comprehensive income -- -- -- -- -- -- -- $70,470 --
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Balance, December 31, 1999 $187 $47 $82,755 $(3,658) $282,209 $(4,151) $(85,021) $272,368
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The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
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(Dollars in Thousands) 1999 1998 1997
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Cash flows from operating activities:
Net income $ 75,247 $ 59,156 $ 47,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (714) (35) (7,478)
Depreciation and amortization 24,363 18,199 20,292
Loss on disposal of property, plant and equipment 396 1,303 1,564
Increase (decrease) in cash from changes in working capital:
Accounts receivable (2,687) (2,781) 24,799
Inventory 15,817 11,637 14,270
Prepaid expense 1,679 1,112 (3,707)
Accounts payable 10,144 5,083 (454)
Accrued expense 15,290 (9,975) 11,165
Income taxes (4,301) 459 6,001
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Net cash provided by operating activities 135,234 84,158 113,773
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Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 81 97 3,772
Additions to property, plant and equipment (20,094) (20,683) (25,704)
Other, net (3,701) (1,245) (3,250)
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Net cash used by investing activities (23,714) (21,831) (25,182)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Common stock repurchases (71,670) (16,223) --
Payments on long-term debt -- -- 89,454)
Issuance of common stock 4,875 3,844 4,372
Tax benefit from stock option plans 2,500 2,300 2,400
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (64,295) (10,079) (82,682)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3,029) 870 (474)
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 44,196 53,118 5,435
Cash and equivalents at beginning of year 151,889 98,771 93,336
- ----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 196,085 $ 151,889 $ 98,771
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 9,165 $ 9,378 $ 15,650
Income taxes paid 40,848 27,336 21,885
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of The Timberland
Company and its subsidiaries (the "Company"). All material intercompany
transactions have been eliminated in consolidation.
RECOGNITION OF REVENUE
Revenue consists of sales to customers, license fees and royalties. Sales are
recognized upon shipment of product to customers. License fees and royalties
are recognized when earned.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates financial statements denominated in foreign currencies
by translating balance sheet accounts at the end of period exchange rate and
statement of income accounts at the average exchange rate for the period.
Translation gains and losses are recorded in stockholders' equity and
reflected in other comprehensive income, and transaction gains and losses are
reflected in net income.
DERIVATIVES
The Company is exposed to foreign exchange risk when it sells goods in local
currencies through its foreign subsidiaries. It is the Company's policy to
hedge a portion of this risk through forward sales of foreign currencies,
thereby locking in the future exchange rates. Gains and losses on the
underlying contracts are accounted for using hedge accounting. Accordingly,
the change in the fair value of the contracts that hedge firm commitments is
deferred and recognized as part of the related foreign currency transaction
upon occurrence.
CASH AND EQUIVALENTS
Cash and equivalents consist of short-term, highly liquid investments that
normally have original maturities to the Company of three months or less.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets or over
the terms of the related leases, if such periods are shorter. The principal
estimated useful lives are: building and improvements, 4 to 30 years;
machinery and equipment, 3 to 12 years; lasts, patterns and dies, 3 years.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over the fair value of net assets acquired is being
amortized on a straight-line basis over periods of 10, 15 and 40 years.
Accumulated amortization amounted to $14,242 and $12,557 at December 31, 1999
and 1998, respectively.
ACCRUED INSURANCE COSTS
The Company is self-insured for workers' compensation, healthcare, dental and
short-term disability up to certain specified limits. Expenses associated
with such self-insurance programs are accrued based upon estimates of the
amounts required to cover incurred incidents.
INCOME TAXES
Income taxes are determined based on the income reported in the Company's
financial statements, regardless of when such taxes are payable. In addition,
tax assets and liabilities are adjusted to reflect the changes in U.S. and
applicable foreign income tax laws when enacted. Future tax benefits, such as
net operating loss carry-forwards, are recognized to the extent that
realization of such benefits is more likely to occur than not.
12
ACCOUNTING FOR ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make assumptions that affect
the estimates reported in these consolidated financial statements. Actual
results may differ from these estimates.
STOCK SPLIT
In 1999, the Company's Board of Directors approved a 2-for-1 stock split of
its Class A and Class B Common Stock, effective September 15, 1999. Excluding
the consolidated balance sheets, all share and per share amounts in the
accompanying consolidated financial statements and related notes have been
restated for all periods to reflect the stock split.
EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") excludes dilution and is computed by
dividing net income by the weighted-average number of common shares
outstanding for the periods presented. Diluted EPS reflects the potential
dilution that would occur if securities such as stock options were exercised.
Dilutive securities (Note 12) included in the calculation of diluted
weighted-average shares were 725,395 in 1999 and 334,323 in 1998.
LONG-LIVED ASSETS
The Company continually evaluates the carrying values and estimated useful
lives of its long-lived assets, primarily property, plant and equipment and
intangible assets. When factors indicate that such assets should be evaluated
for possible impairment, the Company uses estimates of future operating
results and cash flows to determine whether the assets are economically
recoverable.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the method prescribed
by Accounting Principles Board Opinion No. 25 and related interpretations.
COMPREHENSIVE INCOME
Comprehensive income, in the case of the Company, is the combination of
reported net income and other comprehensive income, which is comprised of
foreign currency translation adjustments. Comprehensive income has no impact
on the Company's reported net income. Comprehensive income is included in the
consolidated statements of changes in stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was not required
to be implemented by the Company until fiscal 2000. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 an
Amendment of FASB Statement No. 133." SFAS No. 137 delayed the original
implementation date of SFAS No. 133 by one year. Since the requirements of
SFAS 133 are complex and its scope far reaching, the Company has not
completed its evaluation of the impact of this standard on its consolidated
financial statements.
13
2. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following table illustrates the U.S. dollar equivalent of foreign
exchange contracts at December 31, 1999 and 1998 along with maturity dates,
net unrealized gain (loss) and net unrealized gain (loss) deferred.
Unrealized gains or losses are determined based on the difference between the
settlement and year-end foreign exchange rates. The contract amount
represents the net amount of all purchase and sale contracts of a foreign
currency. A negative amount represents a net purchase position of a foreign
currency.
- ----------------------------------------------------------------------------------------------------------------------------
Contract Net Unrealized
Amount Maturity Unrealized Unrealized Net Unrealized Gain (Loss)
(U.S. $ Equivalent) Date Gross Gain Gross (Loss) Gain (Loss) Deferred
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Pounds Sterling $16,509 2000 $ 33 $ -- $ 33 $ 31
Euros 35,004 2000 2,585 -- 2,585 2,585
- ----------------------------------------------------------------------------------------------------------------------------
Total $51,513 $2,618 $ -- $ 2,618 $ 2,616
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
Pounds Sterling $12,957 1999 $ -- $ (394) $ (394) $ (360)
Deutsche Marks 7,821 1999 -- (509) (509) (509)
French Francs (1,121) 1999 -- (398) (398) (373)
Italian Lire 8,461 1999 -- (452) (452) (452)
Spanish Pesetas 6,431 1999 4 (229) (225) (219)
Swedish Krone 6,121 1999 141 -- 141 141
- ----------------------------------------------------------------------------------------------------------------------------
Total $40,670 $ 145 $(1,982) $(1,837) $(1,772)
- ----------------------------------------------------------------------------------------------------------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high credit
quality financial institutions, thereby minimizing exposure to concentrations of
credit risk. Credit risk with respect to trade receivables is limited, due to
the large number of customers included in the Company's customer base. The
Company had an allowance for doubtful accounts receivable of $4,910 and $4,769
at December 31, 1999 and 1998, respectively.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
- ----------------------------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------------------------
Carrying Carrying
or Contract Fair or Contract Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------
Cash and equivalents(1) $196,085 $196,085 $151,889 $151,889
Long-term debt(2) 100,000 103,549 100,000 108,553
Foreign currency contracts(3) 51,513 48,895 40,670 42,507
- ----------------------------------------------------------------------------------------
1 The carrying amounts of cash and equivalents approximate their fair values.
2 The fair value of the Company's long-term debt is estimated based on current
rates available to the Company as of December 31, 1999 and 1998 for debt of
the same remaining maturities.
3 The fair value of foreign currency contracts is estimated by obtaining the
appropriate year-end rates as of December 31, 1999 and 1998, respectively.
14
4. INVENTORY
Inventory consists of the following:
- -------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------
Raw materials $ 4,493 $ 6,253
Work-in-process 2,832 3,913
Finished goods 107,348 121,052
- -------------------------------------------------------
Total $114,673 $131,218
- -------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
- -------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------
Land and improvements $ 501 $ 501
Building and improvements 30,389 30,605
Machinery and equipment 89,327 87,991
Lasts, patterns and dies 10,228 12,140
- -------------------------------------------------------
Total $130,425 $131,237
- -------------------------------------------------------
6. INCOME TAXES
The components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
Current Deferred Current Deferred Current Deferred
- --------------------------------------------------------------------------------------------------------------
Federal $24,354 $(454) $18,588 $ 26 $21,368 $(5,956)
State 6,092 (260) 5,003 (78) 3,958 (2,078)
Puerto Rico 421 -- 317 17 828 556
Foreign 5,258 -- 3,965 -- 1,604 --
- --------------------------------------------------------------------------------------------------------------
Total $36,125 $(714) $27,873 $(35) $27,758 $(7,478)
- --------------------------------------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate of 35% due to the following:
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Federal income tax at
statutory rate $38,730 35.0% $30,448 35.0% $23,660 35.0%
Federal tax exempt
operations in Puerto Rico (6,550) (5.9) (4,688) (5.4) (5,261) (7.8)
State taxes, net of
applicable federal benefit 4,274 3.9 3,324 3.8 2,294 3.4
Other, net (1,043) (1.0) (1,246) (1.4) (413) (0.6)
- --------------------------------------------------------------------------------------------------------
Total $35,411 32.0% $27,838 32.0% $20,280 30.0%
- --------------------------------------------------------------------------------------------------------
15
The tax effects of temporary differences and carry-forwards that give rise to
significant portions of deferred tax assets and liabilities at December 31,
1999 and 1998 consist of the following:
- --------------------------------------------------------------------------------------------------------------
1999 1998
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------------------------------------
Current:
Inventory $ 5,701 $ -- $ 6,158 $ --
Receivable allowances 7,288 -- 6,441 --
Intercompany profit elimination 369 -- 230 --
Other 1,939 -- 709 --
- --------------------------------------------------------------------------------------------------------------
Total current $15,297 $ -- $13,538 $ --
- --------------------------------------------------------------------------------------------------------------
Non-current:
Accelerated depreciation and amortization $ 3,808 $ -- $ 3,784 $ --
Puerto Rico tollgate taxes -- (2,470) -- (2,470)
Undistributed foreign earnings -- (9,372) -- (9,189)
Other -- (554) 332 --
Net operating loss carry-forwards 30 -- 330 --
Less-valuation allowance (30) -- (330) --
- --------------------------------------------------------------------------------------------------------------
Total non-current $ 3,808 $(12,396) $ 4,116 $(11,659)
- --------------------------------------------------------------------------------------------------------------
The Company's consolidated income before taxes included earnings from its
subsidiary in Puerto Rico, which are substantially exempt from Puerto Rico
income tax under an exemption which expires in 2012 and federal income taxes
under an exemption which becomes limited after 2001 and currently expires after
2005. Deferred tollgate taxes have been provided on all of the accumulated
earnings of the subsidiary in Puerto Rico which are subject to tollgate tax.
Deferred income taxes are also provided on the undistributed earnings of the
Company's foreign subsidiaries.
7. NOTES PAYABLE
The Company has an unsecured committed revolving credit agreement (the
"Agreement") with a group of banks. The Agreement expires on June 19, 2001
and provides for $100,000 of committed borrowings, of which up to $80,000 may
be used for letters of credit. Under the terms of the Agreement, the Company
may borrow at interest rates (6.4% at December 31, 1999) based upon the
lenders' cost of funds, plus an applicable spread. The Agreement provides
for a facility fee of 0.20% per annum on the full commitment, places
limitations on incurring additional debt, stock repurchases and on the amount
of dividends the Company may pay, and also contains certain other financial
and operating covenants.
Additionally, the Company has uncommitted lines of credit available from
certain banks totaling $24,000 at December 31, 1999. Borrowings under these
lines are at prevailing money market rates (6.5% at December 31, 1999).
These arrangements may be terminated at any time at the option of the banks
or the Company.
8. LONG-TERM DEBT
As of December 31, 1999 and 1998, the Company's long-term debt consisted of
$100,000 of 8.94% notes which mature on December 15, 2001. The 8.94% notes
place limitations on the incurrence of additional debt, stock repurchases and
on the amount of dividends the Company may pay, and also require maintenance
of certain financial and operating covenants.
16
9. LEASE COMMITMENTS
The Company leases its corporate headquarters facility, manufacturing
facilities, retail stores, showrooms, two distribution facilities and certain
equipment under non-cancelable operating leases expiring at various dates
through 2014. The approximate minimum rental commitments under all
non-cancelable leases as of December 31, 1999 are as follows:
- ----------------------------------------------------------
2000 $ 18,915
2001 18,985
2002 17,303
2003 14,962
2004 11,954
Thereafter 35,822
- ----------------------------------------------------------
Total $117,941
- ----------------------------------------------------------
Most of the leases for retail space provide for renewal options, contain
normal escalation clauses and require the Company to pay real estate taxes,
maintenance and other expenses. The aggregate base rent obligation for a
lease is expensed on a straight-line basis over the term of the lease.
Rental expense for all operating leases was $21,509, $18,483 and $18,487 for
the years ended December 31, 1999, 1998 and 1997, respectively.
10. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has five revenue generating business units with separate management
teams and financial reporting accountability. These units have been aggregated
into three reportable segments, each sharing similar product, distribution,
marketing and economic conditions. The reportable segments are U.S. Wholesale,
U.S. Retail and International. The U.S. Wholesale segment is comprised of the
worldwide product development and manufacturing/sourcing for footwear and
apparel and accessories and the sale of such products to wholesale customers in
the United States. This segment also includes royalties from licensed products
sold in the United States and the management costs and expenses associated with
the Company's worldwide licensing efforts. Beginning in 1999, a portion of
United States marketing expenses are included in the U.S. Wholesale segment
(prior years have been reclassified for comparative purposes). The U.S. Retail
segment includes the Company operated specialty and factory outlet stores in the
United States. The International segment consists of the marketing, selling and
distribution of footwear, apparel and accessories and licensed products outside
of the United States. Products are sold outside of the United States through the
Company's subsidiaries (which use wholesale and retail channels to sell footwear
and apparel and accessories), independent distributors and licensees.
The Unallocated Corporate component of segment reporting consists
primarily of the corporate finance, legal, information services and
administrative expenses incurred in support of company-wide activities,
United States distribution expenses and a majority of United States marketing
expenses. Unallocated Corporate also includes other expense (income) which is
primarily interest expense and interest income. Such expenses are not
allocated among the reported business segments.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
segment performances based on operating contribution, which represents
pre-tax income before unallocated corporate expenses, interest and other
expenses, net, and on operating cash flow measurements. Total assets are
disaggregated to the extent that assets apply specifically to a single
segment. Unallocated Corporate assets primarily consist of cash and equivalent
s, manufacturing/sourcing assets, computers and related equipment, and United
States transportation and distribution equipment.
17
U.S. U.S. Unallocated
Wholesale Retail International Corporate Consolidated
- ------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------
Revenue $488,597 $173,937 $254,682 $ -- $ 917,216
Depreciation and amortization 7,587 2,927 4,433 9,416 24,363
Operating income (loss) 150,306 22,167 38,594 (94,515) 116,552
Interest expense -- -- -- 9,342 9,342
Other, net -- -- -- (3,449) (3,449)
Income (loss) before income taxes 150,306 22,167 38,594 (100,408) 110,659
- ------------------------------------------------------------------------------------------------------------
Total assets 126,134 32,856 108,096 226,225 493,311
Expenditures for capital additions 7,965 2,457 6,685 2,987 20,094
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------
Revenue $450,543 $159,732 $251,893 $ -- $ 862,168
Depreciation and amortization 4,026 3,243 4,399 6,531 18,199
Operating income (loss) 125,016 17,728 36,363 (84,517) 94,590
Interest expense -- -- -- 9,538 9,538
Other, net -- -- -- (1,942) (1,942)
Income (loss) before income taxes 125,016 17,728 36,363 (92,113) 86,994
- ------------------------------------------------------------------------------------------------------------
Total assets 150,282 32,846 92,846 193,493 469,467
Expenditures for capital additions 5,120 1,660 3,578 10,325 20,683
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------
Revenue $427,837 $150,551 $218,070 $ -- $ 796,458
Depreciation and amortization 4,282 3,532 4,800 7,678 20,292
Operating income (loss) 116,284 12,742 25,678 (70,851) 83,853
Interest expense -- -- -- 14,833 14,833
Other, net -- -- -- 1,419 1,419
Income (loss) before income taxes 116,284 12,742 25,678 (84,265) 67,601
- ------------------------------------------------------------------------------------------------------------
Total assets 151,020 34,647 91,615 142,721 420,003
Expenditures for capital additions 4,450 3,028 5,907 12,319 25,704
- ------------------------------------------------------------------------------------------------------------
The following summarizes the Company's operations in different geographic
areas for the years ended December 31, 1999, 1998 and 1997, respectively.
United Other
States Europe Foreign Consolidated
- ------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------
Revenue $662,534 $227,618 $27,064 $917,216
Long-lived assets 55,501 17,198 5,971 78,670
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------
Revenue $610,275 $216,587 $35,306 $862,168
Long-lived assets 58,414 16,911 6,576 81,901
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------
Revenue $578,388 $184,010 $34,060 $796,458
Long-lived assets 53,885 17,294 6,818 77,997
- ------------------------------------------------------------------------------------------------------------
The U.S. Wholesale and Retail segments and Unallocated Corporate comprise the
United States geographic area. The International segment is divided into two
geographic areas, Europe and Other Foreign. Other Foreign assets primarily
consist of the Company's owned manufacturing facilities in the Caribbean, its
Chilean subsidiary and assets related to the Company's sourcing operations.
18
11. STOCKHOLDERS' EQUITY
The Company's Class A Common Stock and Class B Common Stock are identical in
all respects, except that shares of Class A Common Stock carry one vote per
share, while shares of Class B Common Stock carry ten votes per share. In
addition, holders of Class A Common Stock have the right, voting separately
as a class, to elect 25% of the directors of the Company, and vote together
with the holders of Class B Common Stock for the remaining directors. In
February 1999 and 1998, 626 and 534,540 shares of Class B Common Stock were
converted to Class A Common Stock, respectively.
On October 15, 1998, the Board of Directors authorized the repurchase of
up to 2,000,000 shares of the Company's Class A Common Stock, from time to
time, at the discretion of management, and as market and business conditions
may warrant. During 1998 and the first half of 1999, 800,000 and 1,200,000
shares were repurchased, respectively. On July 15, 1999, the Board of
Directors authorized the repurchase of up to an additional 2,000,000 shares.
As of December 31, 1999, the Company had repurchased 731,300 shares under
this authorization. The Company may use repurchased shares to offset shares
that may be issued under the Company's stock-based employee incentive plans,
or for other purposes.
12. STOCK AND EMPLOYEE BENEFIT PLANS
Under the Company's 1997 Incentive Plan (the "1997 Plan"), 2,000,000 shares
of Class A Common Stock have been reserved for issuance. In addition to stock
options, any of the following incentives may be awarded to participants under
the 1997 Plan: stock appreciation rights ("SARs"), restricted stock,
unrestricted stock, awards entitling the recipient to delivery in the future
of Class A Common Stock or other securities, securities which are convertible
into or exchangeable for shares of Class A Common Stock and cash bonuses. The
option price per share and vesting periods of stock options are determined by
the Compensation Committee of the Board of Directors.
All outstanding stock options granted under the 1997 Plan have been
granted at fair market value, become exercisable in equal installments over
four years beginning one year after the grant date, and expire ten years
after the date of grant. In addition to the 1997 Plan, the Company has, on
occasion, granted "non-qualified" stock options at fair market value to
non-employees to purchase Class A Common Stock.
Under its 1991 Stock Option Plan for Non-Employee Directors (the "1991
Plan"), the Company has reserved 200,000 shares of Class A Common Stock for
the granting of stock options to eligible non-employee directors of the
Company. Under the terms of the 1991 Plan, stock option grants are awarded
on a predetermined formula basis and no grant can be made after November 15,
2001. The exercise price of options granted under the 1991 Plan is the fair
market value of the stock on the date of the grant. Stock options granted
under the 1991 Plan become exercisable in equal installments over four years,
beginning one year after the grant date, and expire ten years after the grant
date.
Options to purchase an aggregate of 711,341, 615,534 and 566,144 shares
were exercisable under all option arrangements at December 31, 1999, 1998 and
1997, respectively. Under the existing stock option plans, there were 720,010
and 1,401,928 shares available for future grants at December 31, 1999 and
1998, respectively.
19
The following summarizes transactions under all stock option arrangements for
the years ended December 31, 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------
Number of Range of Weighted-Average
Shares Exercise Prices Exercise Price
- ------------------------------------------------------------------------------------------------------------
January 1, 1997 1,505,254 $ 3.19-41.63 $10.13
- ------------------------------------------------------------------------------------------------------------
Granted 629,000 20.31-38.81 25.13
Exercised (380,260) 3.19-20.31 9.70
Canceled (136,624) 7.50-25.06 15.46
- ------------------------------------------------------------------------------------------------------------
December 31, 1997 1,617,370 3.19-41.63 15.62
- ------------------------------------------------------------------------------------------------------------
Granted 576,700 17.50-41.47 33.54
Exercised (252,400) 3.19-25.06 11.35
Canceled (250,460) 8.69-41.63 18.03
- ------------------------------------------------------------------------------------------------------------
December 31, 1998 1,691,210 3.19-41.63 22.02
- ------------------------------------------------------------------------------------------------------------
Granted 767,900 30.38-49.25 33.32
Exercised (257,481) 3.19-41.63 14.23
Canceled (104,473) 8.75-41.03 28.33
- ------------------------------------------------------------------------------------------------------------
December 31, 1999 2,097,156 3.19-49.25 26.86
- ------------------------------------------------------------------------------------------------------------
The following summarizes information about all stock options outstanding at
December 31, 1999:
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$ 3.19-10.25 319,186 4.14 Years $ 8.74 290,621 $ 8.73
10.50-18.53 223,952 6.52 14.27 144,827 12.97
18.75-25.06 335,868 7.37 22.68 136,743 23.02
25.19-29.94 16,000 8.19 28.41 3,750 26.73
30.38 536,450 9.15 30.38 1,250 30.38
32.00-35.63 110,150 8.46 35.36 27,250 35.49
36.06 260,750 8.15 36.06 60,500 36.06
36.69-46.63 190,400 8.39 40.49 46,400 40.51
47.50 101,900 9.94 47.50 0 0
49.25 2,500 9.96 49.25 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
3.19-49.25 2,097,156 7.63 26.86 711,341 17.90
- ---------------------------------------------------------------------------------------------------------------------------------
Pursuant to the terms of its 1991 Employee Stock Purchase Plan, as amended
(the "ESPP Plan"), the Company is authorized to issue up to an aggregate of
600,000 shares of its Class A Common Stock to eligible employees electing to
participate in the ESPP Plan. Eligible employees may contribute, through
payroll withholdings, from 2% to 10% of their regular base compensation
during six month participation periods beginning January 1 and July 1 of each
year. At the end of each participation period, the accumulated deductions are
applied toward the purchase of Class A Common Stock at a price equal to 85%
of the market price at the beginning or end of the participation period,
whichever is lower. Employee purchases amounted to 42,173 shares in 1999,
37,800 shares in 1998 and 30,032 shares in 1997 at prices ranging from $16.05
to $27.26 per share. At December 31, 1999, a total of 213,301 shares were
available for future purchases. Compensation cost is recognized for the fair
value of the employee's purchase rights. The weighted-average fair values of
those purchase rights granted in 1999, 1998 and 1997 were $7.07, $9.32 and
$6.44, respectively.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock plans, and provides certain pro-forma disclosures
regarding the Company plans as required by SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for stock option grants issued under any of the Company's stock
option plans. Had compensation cost for stock option grants issued been
determined under the provisions of SFAS No. 123, the Company's net income
and diluted earnings per share in 1999, 1998 and 1997 would have been:
$69,767 and $3.15, $55,901 and $2.38 and $45,078 and $1.92, respectively. The
pro-forma effect on net income and earnings per share for 1999, 1998 and 1997
is not representative of the pro-forma effect on net income in future years
because the provisions of SFAS No. 123 do not take into consideration
pro-forma compensation expense related to grants made prior to 1995.
20
The fair value of each stock option granted in 1999, 1998 and 1997 under the
Company's plans was estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted-average assumptions were used to
value grants issued under the plans in 1999, 1998 and 1997, respectively:
expected volatility of 54.4%, 39.9% and 43.9%; risk-free interest rates of
5.4%, 5.5% and 6.2%; expected lives of 5.2, 5.5 and 4.9 years; and no
dividend payments. The weighted-average fair values per share of stock
options granted during 1999, 1998 and 1997 were $17.31, $14.67 and $11.23,
respectively.
In December 1999, the Company issued 78,000 restricted shares of Class A
Common Stock under the 1997 Plan. Those shares are subject to restrictions on
sale and transferability, a risk of forfeiture, and certain other terms and
conditions. Those restrictions lapse over a five-year period at 20% per year.
Upon issuance of this stock under the 1997 Plan, unearned compensation,
equivalent to the market value of the shares at the date of the grant, was
charged to stockholder's equity and is being amortized to expense over the
five-year vesting period.
The Company maintains a contributory 401(k) Retirement Earnings Plan (the
"401(k) Plan") for eligible salaried and hourly employees who are at least 18
years of age with six or more months of service. Under the provisions of the
401(k) Plan, employees may contribute between 2% and 16% of their base salary
up to certain limits. The 401(k) Plan provides for Company matching
contributions not to exceed 3% of the employee's compensation or, if less,
50% of the employee's contribution. Vesting of the Company contribution
begins at 25% after one year of service and increases by 25% each year until
full vesting occurs. The Company maintains two contributory 165(e)
Retirement Earnings Plans (the "165(e) Plans") for eligible salaried and
hourly employees of its manufacturing facilities and a non-contributory
profit sharing plan for eligible hourly employees not covered by the 401(k)
or 165(e) Plans. The Company's contribution expense under all retirement
plans was $1,193 in 1999, $1,081 in 1998 and $773 in 1997.
13. LITIGATION
The Company is involved in various litigation and legal matters that have
arisen in the ordinary course of business. Management believes that the
ultimate resolution of any existing matter will not have a material adverse
effect on the Company's consolidated financial statements.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the quarterly results of operations for the
years-ended December 31, 1999, 1998 and 1997, respectively:
- ---------------------------------------------------------------------------------------------------------------------
1999 Quarter Ended March 26 June 25 September 24 December 31
- ---------------------------------------------------------------------------------------------------------------------
Revenue $176,897 $152,937 $310,939 $276,442
Gross profit 73,129 61,017 134,357 124,599
Net income 7,842 2,402 35,140 29,865
Basic earnings per share .35 .11 1.67 1.44
Diluted earnings per share .35 .11 1.61 1.38
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
1998 Quarter Ended March 27 June 26 September 25 December 31
- ---------------------------------------------------------------------------------------------------------------------
Revenue $163,058 $144,741 $291,857 $262,513
Gross profit 66,945 57,431 116,309 102,153
Net income 7,365 1,901 29,095 20,795
Basic earnings per share .32 .08 1.27 .91
Diluted earnings per share .31 .08 1.24 .90
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
1997 Quarter Ended March 28 June 27 September 26 December 31
- ---------------------------------------------------------------------------------------------------------------------
Revenue $150,684 $132,180 $274,699 $238,895
Gross profit 61,614 51,855 106,641 91,811
Net income 4,296 557 24,957 17,511
Basic earnings per share .19 .02 1.10 .77
Diluted earnings per share .19 .02 1.06 .74
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share data has been restated to reflect the 2-for-1 stock split in
September 1999.
21
15. SUBSEQUENT EVENT
On February 18, 2000, the Company signed an agreement under which it will
re-acquire from Inchcape plc the exclusive distribution rights for the sale
of TimberlandRegistration Mark branded products throughout the Asia-Pacific
region. In connection with this transaction, the Company acquired the stock
of the Inchcape plc distribution subsidiaries in Japan, Hong Kong, Malaysia
and Singapore. The Company paid $1.7 million and is releasing Inchcape plc
from its obligations under the Distributorship, Supply and Retail Development
Agreement dated January 26, 1995. With respect to businesses in other
countries, the Company may terminate them, identify new distributors, or
directly distribute products in those countries. Also as part of the
transaction, the Company will participate with Inchcape plc in any net
proceeds received from the disposition of the assets in Australia, New
Zealand, Thailand and Taiwan.
The transaction will be accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired
Asia-Pacific businesses will be reflected in the Company's consolidated
financial statements beginning in the first quarter of 2000.
This transaction will result in the reporting of negative goodwill which will
be amortized on a straight-line basis over a period not to exceed 10 years.
Pro-forma data is not provided since this transaction would not have a
material impact on the Company's consolidated financial statements.
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of The Timberland Company:
We have audited the accompanying consolidated balance sheets of The
Timberland Company and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for the three years then ended. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
companies at December 31, 1999 and 1998, and the results of their operations
and their cash flows of the three years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 2, 2000
(February 18, 2000 as to Note 15)