1
THE TIMBERLAND COMPANY
Exhibit 13
Five Year Summary of Selected Financial Data
SELECTED INCOME STATEMENT DATA
(Dollars in Thousands Except Per Share Data)
Years Ended December 31,
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
Net Sales $637,545 $418,918 $291,368 $226,082 $196,319
Net Income 17,710 22,521 12,919 8,085 7,854
Earnings per Share 1.58 2.01 1.18 .75 .73
--------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA
(Dollars in Thousands)
December 31,
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
Working Capital $266,529 $155,660 $ 94,427 $ 87,610 $ 88,196
Total Assets 473,264 290,611 194,117 177,470 170,076
Long-Term Debt 206,767 90,809 41,533 44,199 46,924
Stockholders' Equity 149,090 128,363 104,600 93,412 85,664
--------------------------------------------------------------------------------
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THE TIMBERLAND COMPANY
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
Years Ended December 31,
(Amounts in Thousands Except Per Share Data) 1994 % 1993 % 1992 %
------------------------------------------------------------------------------------------------------------------------------------
Net sales $637,545 100.0% $418,918 100.0% $291,368 100.0%
Gross profit 208,843 32.8 152,707 36.5 107,858 37.0
Total operating expenses 165,779 26.0 112,315 26.8 82,016 28.1
Operating income 43,064 6.8 40,392 9.6 25,842 8.9
Interest expense 15,052 2.4 6,252 1.5 5,528 1.9
Net income 17,710 2.8 22,521 5.4 12,919 4.4%
Earnings per share $ 1.58 $ 2.01 $ 1.18
Weighted average shares outstanding 11,209 11,206 10,922
----------------------------------------------------------------------------------------------------------------------------------
Net sales increased 52.2% to $637.5 million in 1994 from $418.9 million in
1993 and $291.4 million in 1992. The increases in 1994 and 1993 were the
result of unit volume growth in both of the Company's major categories--
footwear (shoes and boots) and apparel and accessories. Net sales of footwear
were $513.5 million in 1994, $349.5 million in 1993 and $242.6 million in 1992.
This represents a 46.9% increase in 1994 compared to a 44.1% increase in 1993.
Net sales attributable to apparel and accessories were $124.0 million in 1994,
$69.4 million in 1993 and $48.8 million in 1992. This represents a 78.5%
increase in 1994 compared to a 42.2% increase in 1993. Domestic sales were up
57.7% and 62.4% in 1994 and 1993, respectively, while international sales were
up 38.7% in 1994 and 12.2% in 1993.
The gross profit margin was 32.8% in 1994, 36.5% in 1993 and 37.0% in
1992. The decreases in the margin during the last two years were primarily
attributable to the price reductions instituted in late 1993 and early 1994 on
certain core footwear to gain market share. Fourth quarter results in 1994
were adversely affected by unusually warm weather conditions which resulted in
lower than anticipated sales of first quality winter footwear and apparel,
lower margins and lower operating income.
Operating expenses were $165.8 million or 26.0% of sales in 1994, $112.3
million or 26.8% of sales in 1993 and $82.0 million or 28.1% of sales in
1992. The comparative dollar increases reflect the significant growth in
revenue recognized by the Company and its continued investment in
infrastructure.
Operating income, which is pretax earnings before interest and other
expenses, was $43.1 million in 1994, $40.4 million in 1993 and $25.8 million
in 1992. As a percent of sales, operating income declined in 1994 to 6.8%
compared to 9.6% and 8.9% in 1993 and 1992, respectively. The decline in 1994
is primarily a result of the lower gross profit margin as discussed above.
Interest expense increased to $15.1 million in 1994 from $6.3 million in
1993 and $5.5 million in 1992. The increases primarily reflect higher debt
levels attributable to business growth and to support higher than anticipated
inventory levels in 1994. The increase in 1994 also reflects higher interest
rates.
During 1994, the Company entered into interest rate protection agreements
which limited the maximum base rate used to calculate the interest rate on
certain borrowings. The interest rate protection agreements expired on
December 31, 1994. The costs of these agreements was immaterial. The Company
may enter into similar agreements in the future.
The effective income tax rate was 37.0% in 1994, 34.0% in 1993 and 32.0%
in 1992. For an analysis of the changes in the effective tax rate, see the
Income Tax Note to the financial statements.
The Company believes that inflation has not had a significant overall
impact on its operations or liquidity over the past three years.
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3
THE TIMBERLAND COMPANY
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations during 1994 totaled $88.8 million compared to $26.7
million in 1993. Net cash used by operations was adversely affected by
increased levels of trade receivables and inventories. These increases are
primarily the result of the Company's growth, and with respect to inventories,
due to higher inventory positions than anticipated resulting from sales
growing at a slower rate than the Company had expected. The increase in
inventory was also caused by misforecasting specific customer demand at the
unit product level. A majority of this inventory consists of classic
Timberland [Registered] models in oversupply that the Company expects will be
sold in the normal course of business. Inventory turns were 2.3 times in 1994
compared to 2.7 times in 1993. Days sales outstanding at December 31, 1994
were 64 days compared to 68 days at December 31, 1993. The improvement in the
days sales outstanding primarily reflects an increase in retail sales as a
percentage of total sales. Wholesale days sales were comparable at the end
of 1994 and 1993.
Net cash used in investing activities in 1994 was $45.8 million, of which
$31.5 million represented additions to property, plant and equipment. Capital
expenditures amounted to $21.6 million in 1993. A significant portion of these
expenditures in 1994 and 1993 were for manufacturing machinery and equipment
to be used in cost reduction efforts, retail store additions, and information
systems inprovements. The Company is currently in the process of evaluating its
production facilities and sourcing alternatives in order to deliver
premium-quality products more efficiently and at lower costs.
In April 1994, the Company terminated its distributorship agreement in
Italy and acquired certain assets of the distributor for a total purchase
price of $14.1 million. The purchase price exceeded the fair market value of
tangible assets acquired by $9.0 million. Operating income was adversely
affected by this transaction due primarily to start-up costs.
During 1994, cash was provided from financing activities. In April
and December 1994, the Company completed private placements of senior
unsecured notes of $65 million and $106 million, respectively. The proceeds
from these private placements were principally used to repay existing
indebtedness. The Company also entered into a new credit agreement in May 1994
which provided for revolving credit loans of up to $125 million based on a
borrowing base formula. The committed amount available under the facility was
reduced to $91.6 million due to the December 1994 private placement. The
Company amended its credit agreement in March 1995 to increase the commitment
to $125 million. As a result of the increase in overall borrowing, the
Company's debt to capital ratio rose to 61% at December 31, 1994 compared to
44% at December 31, 1993.
Management believes that the Company's capital needs for 1995 will be met
through its credit facilities and cash flow from operations without the need
for additional permanent financing.
In January 1995, the Company appointed Inchcape plc as the exclusive
distributor of Timberland [Registered] products throughout most of the
Asia/Pacific region. The agreement included Inchcape's acquisition of the
Company's Australian and New Zealand subsidiaries and future consideration
provided to Inchcape for a total sum of $24 million. The transaction resulted
in a non-recurring pretax gain of approximately $7.4 million, or $.40 per
share, in the first quarter of 1995.
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THE TIMBERLAND COMPANY
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 shall automatically
be converted upon any transfer (except for estate planning transfers and any
transfer 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.
1994 1993
High Low High Low
---------------------------------------------------------------------------------------------------------------------
First Quarter $60 1/4 $32 3/8 $34 1/2 $19 1/8
Second Quarter 43 1/4 33 7/8 38 1/4 29 5/8
Third Quarter 46 7/8 35 7/8 61 1/4 29 1/8
Fourth Quarter 36 20 1/4 85 47 3/8
---------------------------------------------------------------------------------------------------------------------
As of March 3, 1995, the number of record holders of the Company's Class
A Common Stock was approximately 909 and the number of record holders of the
Company's Class B Common Stock was eight. The closing sales price of the
Company's Class A Common Stock on March 3, 1995 was 24 5/8.
No cash dividends have ever been declared on either the Company's Class
A or Class B Common Stock and none are contemplated 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 consolidated financial statements.)
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, 1994 and 1993 and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1994. 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 financial statements referred to above present
fairly, in all material respects, the financial position of the companies at
December 31, 1994 and 1993, and the results of its operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 9, 1995
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THE TIMBERLAND COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(Dollars in Thousands)
ASSETS 1994 1993
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Current assets
Cash and equivalents $ 6,381 $ 3,281
Accounts receivable, net of allowance for doubtful accounts
of $2,704 in 1994 and $1,014 in 1993 128,435 93,226
Inventories 218,219 111,380
Prepaid expenses 13,504 7,571
Deferred and refundable income taxes 7,112 5,625
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 373,651 221,083
------------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost 110,650 79,145
Less - accumulated depreciation and amortization (42,417) (33,530)
------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 68,233 45,615
Excess of cost over fair value of net assets acquired, net 25,956 18,157
Other assets, net 5,424 5,756
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$473,264 $290,611
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Notes payable $ 22,513 $ 10,061
Current maturities of long-term obligations 8,048 682
Accounts payable 37,035 32,526
Accrued expenses
Payroll and related 6,038 8,873
Interest and other 24,459 9,609
Income taxes payable 9,029 3,672
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Total current liabilities 107,122 65,423
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Long-term obligations, less current maturities 206,767 90,809
------------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 10,285 6,016
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Commitments and contingencies
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; - -
8,221,615 shares issued in 1994 and 7,630,556 shares in 1993 82 76
Class B Common Stock, $.01 par value (10 votes per share); 15,000,000 shares authorized;
2,737,121 shares issued in 1994 and 3,237,598 shares in 1993 27 32
Additional paid-in capital 57,756 55,805
Retained earnings 91,816 74,106
Cumulative translation adjustment (471) (1,536)
Less treasury stock at cost, 18,369 shares in 1994 and 18,513 in 1993 (120) (120)
------------------------------------------------------------------------------------------------------------------------------------
149,090 128,363
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$473,264 $290,611
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The accompanying notes are an integral part of these consolidated financial
statements.
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THE TIMBERLAND COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the years Ended December 31, 1994, 1993 and 1992
(Amounts in Thousands Except Per Share Data)
1994 1993 1992
-------------------------------------------------------------------------------
Net sales $637,545 $418,918 $291,368
Cost of goods sold 428,702 266,211 183,510
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Gross profit 208,843 152,707 107,858
-------------------------------------------------------------------------------
Operating expenses
Selling 124,386 82,585 57,145
General and administrative 40,213 28,956 24,194
Amortization of goodwill 1,180 774 677
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Total operating expenses 165,779 112,315 82,016
-------------------------------------------------------------------------------
Operating income 43,064 40,392 25,842
-------------------------------------------------------------------------------
Other expense (income)
Interest expense 15,052 6,252 5,528
Other, net (100) 17 1,315
-------------------------------------------------------------------------------
Total other expense 14,952 6,269 6,843
-------------------------------------------------------------------------------
Income before income taxes 28,112 34,123 18,999
Provision for income taxes 10,402 11,602 6,080
-------------------------------------------------------------------------------
Net income $ 17,710 $ 22,521 $ 12,919
-------------------------------------------------------------------------------
Earnings per share $ 1.58 $ 2.01 $ 1.18
-------------------------------------------------------------------------------
Weighted average shares outstanding
and share equivalents 11,209 11,206 10,922
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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THE TIMBERLAND COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in Thousands)
Class A Class B Additional Cumulative Consolidated
Common Common Paid-in Retained Translation Treasury Stockholders'
Stock Stock Capital Earnings Adjustment Stock Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1992 $75 $32 $53,293 $38,666 $1,346 $ - $ 93,412
Issuance of shares under employee
stock option and stock purchase
plans and other transactions - - 465 - - - 465
Net income - - - 12,919 - - 12,919
Translation adjustment - - - - (2,196) - (2,196)
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Balance, December 31, 1992 75 32 53,758 51,585 (850) - 104,600
Issuance of shares under employee
stock option and stock purchase
plans and other transactions 1 - 980 - - (120) 861
Tax benefit from stock option plans - - 1,067 - - - 1,067
Net income - - - 22,521 - - 22,521
Translation adjustment - - - - (686) - (686)
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Balance, December 31, 1993 76 32 55,805 74,106 (1,536) (120) 128,363
Issuance of shares under employee
stock option and stock purchse
plans and other transactions 6 (5) 1,566 - - - 1,567
Tax benefit from stock option plans - - 385 - - - 385
Net income - - - 17,710 - - 17,710
Translation adjustment - - - - 1,065 - 1,065
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Balance, December 31, 1994 $82 $27 $57,756 $91,816 $ (471) $(120) $149,090
------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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THE TIMBERLAND COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in Thousands)
1994 1993 1992
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Cash flows from operating activities:
Net income $17,710 $22,521 $12,919
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Deferred income taxes 4,269 1,475 119
Depreciation and amortization 15,348 10,279 7,959
Increase (decrease) in cash from changes in working capital items,
net of effects of acquisition
Accounts receivable (36,614) (39,484) (6,210)
Inventories (101,009) (41,560) (13,892)
Prepaid expenses (4,995) (3,170) 202
Accounts payable 4,270 18,497 1,841
Accrued expenses 8,762 5,084 3,712
Income taxes 3,495 (320) (6,642)
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Net cash provided (used) by operating activities (88,764) (26,678) 8
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment, net (31,452) (21,645) (11,774)
Acquisition of Italian distributor (14,086) - -
Other, net (269) (2,234) 1,616
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Net cash used in investing activities (45,807) (23,879) (10,158)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under short-term credit facilities 12,462 3,257 6,352
Proceeds from long-term obligations 173,990 50,000 -
Payments on long-term debt and capital lease obligations (50,682) (2,643) (2,711)
Issuance of common stock 1,567 981 465
Tax benefit from stock option plans 385 1,067 -
Purchase of treasury stock - (120) -
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Net cash provided by financing activities 137,722 52,542 4,106
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Effect of exchange rate changes on cash (51) 76 (245)
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Net increase (decrease) in cash and equivalents 3,100 2,061 (6,289)
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Cash and equivalents at beginning of year 3,281 1,220 7,509
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Cash and equivalents at end of year $ 6,381 $ 3,281 $ 1,220
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 13,688 $ 6,020 $ 5,699
Income taxes paid 2,648 9,346 12,356
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The accompanying notes are an integral part of these consolidated financial statements.
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THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except 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 intercompany
transactions have been eliminated in consolidation.
RECOGNITION OF REVENUE
Revenue is recognized upon shipment of product to customers.
RECLASSIFICATIONS
Certain 1993 and 1992 amounts have been relcassified to conform with the
current year presentation.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates financial statements denominated in foreign
currency by translating balance sheet accounts at the end of period exchange
rate and income statement accounts at the average exchange rate for the
period. Translation gains and losses are recorded in stockholders' equity,
and transaction gains and losses are reflected in income.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company is exposed to foreign exchange risk when the Company sells
goods in local currencies through its foreign subsidiaries. Since the
Company's sourcing and production costs are primarily dollar based, the
Company's profit margin on these sales is exposed to exchange rate
fluctuations. 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 rate.
The following table illustrates the U.S. dollar equivalent, including
offsetting positions, of foreign exchange contracts at December 31, 1994 along
with maturity dates, net unrealized loss, and net unrealized loss deferred.
Contract Unrealized Unrealized Net Net Unrealized
Amount Maturity Gross Gross Unrealized (Loss)
($U.S. Equivalent) Date Gain (Loss) (Loss) Deferred
-----------------------------------------------------------------------------------------------------------------
Pound Sterling $15,463 1995 $ 68 $(261) $(193) $(201)
Deutsche Marks 18,141 1995 110 (379) (269) (130)
Frech Francs 15,948 1995 81 (310) (229) (198)
Italian Lire 12,126 1995 57 (198) (141) (121)
Australian $ 8,810 1995 - (31) (31) -
Spanish Peseta 8,010 1995 - (103) (103) (103)
New Zealand $ 1,596 1995 - (5) (5) -
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$80,094 $316 $(1,287) $(971) $(753)
==================================================================================================================
The unrealized net gain (loss) deferred on such contracts as of December
31, 1993 and 1992 was approximately $(178) and $495, respectively. Unrealized
gains or losses are determined based on the difference between the settlement
and year end spot rates.
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 comprising the Company's customer
base. The Company had an allowance for uncollectible accounts receivable of
$2,704 and $1,014 at December 31, 1994 and 1993, respectively.
CASH AND EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments which
have original maturities to the Company of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are 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 10 years; lasts, patterns and dies, 5 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 $5,818 and $4,639 at December 31, 1994
and 1993, respectively.
INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach for financial accounting and reporting for
income taxes. In addition, future tax benefits, such as net operating loss
carryforwards, are recognized to the extent realization of such benefits is
more likely than not. The implementation of SFAS No. 109 did not have a
material impact on the 1993 financial statements.
EARNINGS PER SHARE
Earnings per share are calculated by dividing net income for each period
by the weighted average number of common shares outstanding and equivalents
during each period. Fully diluted earnings per share are not materially
different from primary earnings per share.
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THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
2. ACQUISITION OF ITALIAN DISTRIBUTOR
In April 1994, the Company entered into a Distributorship Termination
Agreement (the "Agreement") with its Italian distributor, which terminated
all distribution rights of the distributor on May 31, 1994. In accordance
with the Agreement, the Company also acquired certain assets of the
distributor. Effective on the acquisition date, Timberland assumed the
distribution of its own products in Italy.
This transaction has been accounted for as a purchase and, accordingly,
the results of operations of the Company's Italian business have been
included in the consolidated statement of income from the acquisition date.
The results of the Italian operations are not significant to the consolidated
results of operations, and accordingly, pro forma data have been omitted. The
total purchase price of $14.1 million exceeds the fair value of net assets
acquired, consisting primarily of inventory, by $9.0 million. This excess is
being amortized on a straight line basis over 10 years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
1994 1993
------------------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
or Contract Fair or Contract Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents (1) $ 6,381 $ 6,381 $ 3,281 $ 3,281
Notes payable (1) 22,513 22,513 10,061 10,061
Long-term obligations (2) 214,815 210,543 91,491 95,724
Foreign currency contracts (3) 80,094 81,065 30,801 30,783
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The carrying amounts of cash and equivalents and notes payable approximate their fair values.
(2) The fair value of the Company's long-term obligations are estimated based on current rates available to the Company as of
December 31, 1994 and 1993, for debt of the same remaining maturities.
(3) The fair value of foreign currency contracts are estimated by obtaining the appropriate forward market rates as of
December 31, 1994 and 1993, respectively.
4. INVENTORIES
Inventories consist of the following:
December 31,
1994 1993
------------------------------------------------------------------------------------------------------------------------------------
Raw materials $ 19,806 $ 11,108
Work-in-process 13,137 13,060
Finished goods 185,276 87,212
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$218,219 $111,380
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5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
1994 1993
------------------------------------------------------------------------------------------------------------------------------------
Land and improvements $ 649 $ 649
Building and improvements 29,739 17,500
Machinery and equipment 65,252 49,337
Lasts, patterns and dies 15,010 11,659
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$110,650 $79,145
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6. INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended December 31,
1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
------------------------------------------------------------------------------------------------------------------------------------
Federal $5,713 $1,548 $6,687 $ 935 $6,356 $(2,887)
State 1,984 713 2,131 1,233 2,514 (193)
Puerto Rico 289 122 416 171 454 281
Foreign 33 - 29 - (445) -
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$8,019 $2,383 $9,263 $2,339 $8,879 $(2,799)
------------------------------------------------------------------------------------------------------------------------------------
The deferred tax provision consists of the following:
Year Ended December 31,
1994 1993 1992
------------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in reserves
not currently deductible $(1,111) $ 719 $(2,709)
Tax depreciation over (under) book
depreciation and amortization 2,624 177 (239)
Puerto Rico tollgate taxes 122 172 281
Undistributed foreign earnings 849 1,355 (47)
Other, net (101) (84) (85)
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$ 2,383 $2,339 $(2,799)
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THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 due
to the following:
Year Ended December 31,
1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Federal income tax at
statutory rate $ 9,839 35.0% $11,943 35.0% $6,460 34.0%
Federal tax exempt operations
in Puerto Rico (1,834) (6.5) (2,562) (7.5) (2,985) (15.7)
State taxes, net of applicable
federal benefit 1,753 6.2 2,187 6.4 552 2.9
Purchase accounting
adjustments 271 1.0 271 .8 230 1.2
Losses of foreign subsidiaries 450 1.6 335 1.0 2,395 12.6
Foreign sales corporation (335) (1.2) (574) (1.7) (508) (2.7)
Other, net 258 .9 2 - (64) (.3)
--------------------------------------------------------------------------------------------------------------
Total provision for
income taxes $10,402 37.0% $11,602 34.0% $6,080 32.0%
--------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities at December 31,
1994 and 1993, cconsist of the following:
1994 1993
Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------------------------------------------
Current
Inventories $1,479 $ - $1,554 $ -
Receivable allowances 2,216 - 1,229 -
Intercompany profit elimination 2,355 - 1,681 -
Other 1,062 - 762 -
--------------------------------------------------------------------------------------------------------------
7,112 - 5,226 -
--------------------------------------------------------------------------------------------------------------
Non-current
Accelerated depreciation
and amortization - (3,570) - (946)
Puerto Rico tollgate taxes - (1,351) - (1,229)
Undistributed foreign earnings - (5,364) - (3,841)
Net operating loss carry-forwards 2,718 - 2,499 -
Less valuation allowance (2,718) - (2,499) -
--------------------------------------------------------------------------------------------------------------
- (10,285) - (6,016)
--------------------------------------------------------------------------------------------------------------
$7,112 $(10,285) - $(6,016)
==============================================================================================================
The valuation allowance at December 31, 1994 of $2,718 includes $538 which
arose during the current year. The valuation allowance relates to
foreign net operating loss carryforwards that may not be realized.
Deferred and refundable income taxes includes no refundable income taxes
at December 31, 1994 and $399 at December 31, 1993.
The Company's consolidated income before taxes included earnings from its
subsidiary in Puerto Rico, which are substantially exempt from Puerto Rico
and federal income taxes under an exemption which expires in 2002. However,
if the earnings were remitted to Timberland, they would be subject to a
Puerto Rico tollgate tax not to exceed 10%. Deferred tollgate taxes have
been provided on all of the accumulated earnings of the subsidiary in Puerto
Rico. Deferred income taxes are also provided on the undistributed earnings
of Timberland's foreign subsidiaries.
Losses before income taxes from foreign operations were $(1,285),
$(835) and $(5,563) for the years ended December 31, 1994, 1993 and 1992,
respectively. At December 31, 1994, the Company had $7,766 of foreign
operating loss carryforwards available to offset future foreign taxable
income. Of these operating loss carryforwards, $1,591 will expire in 1996,
$2,020 will expire in 1997 and $234 will expire in 1998.
On August 10, 1993, the United States House and Senate Budget
Conference Committee enacted the Omnibus Budget Reconciliation Act of 1993
(the "Act"). As required under Financial Accounting Standard No. 109, the
Company recorded the effect of the Act on its deferred and currently payable
tax liabilities as of December 31, 1993. The effect of adopting the Act on
the Company's financial statements was not material either as to the
cumulative effect upon adoption or as to the full year 1993.
7. NOTES PAYABLE
On May 4, 1994, the Company entered into a new unsecured committed revolving
credit agreement (the "Agreement") with a group of banks through May 30,
1996, that currently provides for revolving credit loans of up to $91,600,
subject to a borrowing base formula. At December 31, 1994, the amount
available under this formula was approximately $49,200, of which $5,000
was outstanding at year end. Under the terms of the Agreement, the Company
may borrow at interest rates which are based upon the lender's cost of
funds (6.25% at December 31, 1994). The Agreement was amended in March
1995 to increase the commitment to $125,000 and to extend the term through
February 1997.
The Agreement provides for a facility fee of 3/8% per annum on the daily
average aggregate amount of the commitment and places limitations on the
payment of dividends (based on a long-term debt to consolidated net worth
covenant) and the incurrence of additional debt, and also contains
certain other financial and operational covenants.
twenty-three
12
THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
In addition to the above Agreement, the Company has the ability to
borrow a maximum of $18,000 for its European subsidiaries under uncommitted
lines of credit, which provide for interest based upon the lender's cost of
funds (5.38% to 8.63% at December 31, 1994). No amounts were outstanding at
December 31, 1994.
Additionally, the Company had uncommitted lines of credit available
from certain banks totaling $20,000 at December 31, 1994, of which $17,500 was
outstanding at year end. Borrowings under these lines are at prevailing money
market rates (6.39% at December 31, 1994). These arrangements may be terminated
at any time at the option of the banks or the Company.
The balance outstanding under all short-term borrowing arrangements was
$22,513 and $10,061 at December 31, 1994 and December 31, 1993, respectively.
The maximum short-term borrowings at any month-end were $119,200,
$52,679 and $33,874 during 1994, 1993 and 1992, respectively. Average
borrowings under all short-term credit arrangements were $65,790 in 1994,
$37,596 in 1993 and $16,997 in 1992. The weighted average interest rates were
5.38%, 4.16% and 5.88% in 1994, 1993 and 1992, respectively.
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
December 31,
1994 1993
----------------------------------------------------------------------------
Senior Notes - December 1994 $106,000 $ -
Senior Notes - April 1994 65,000 -
Credit agreement - November 1993 - 50,000
Senior Notes - December 1989 35,000 35,000
Industrial revenue bonds 5,345 5,345
Other 2,990 -
Capitalized lease obligations (Note 9) 480 1,146
----------------------------------------------------------------------------
214,815 91,491
Less - current maturities (8,048) (682)
----------------------------------------------------------------------------
$206,767 $90,809
----------------------------------------------------------------------------
On December 15, 1994, the Company finalized a private placement with a
group of lenders for $106,000 of senior unsecured notes (the "December Notes").
The December Notes bear interest at a fixed rate of 8.94% per annum and mature
on December 15, 2001. The proceeds were used principally to repay existing
indebtedness.
On April 15, 1994, the Company finalized a private placement with a
group of lenders for $65,000 of senior unsecured notes (the "April Notes")
maturing on April 15, 2000. The April Notes bear interest at a fixed rate of
7.16% per annum. The proceeds were used to repay existing short-term debt and
for general corporate purposes.
Both the December Notes and the April Notes place limitations on the
payment of dividends and the incurrence of additional debt, and also require
maintenance of certain operational and financial covenants.
Also on December 15, 1994, the Company terminated a $50,000 credit
agreement provided by a group of banks which would have had an expiration date
of May 15, 1999. A portion of the proceeds raised by the December Notes were
used to repay this facility in full. The Company currently has no further
obligations under this agreement.
The unsecured senior notes issued in the amount of $35,000 bear
interest at a rate of 9.70% and mature on December 1, 1999. Commencing
December 1, 1995, annual redemption payments of $7,000 are required until
maturity. The note agreement places limitations on the payment of cash
dividends and contains other financial and operational covenants.
Effective December 1, 1994, the industrial revenue bonds bear interest
at 6.20% through November 30, 1999, at which time the rate will be reset for
another five-year period. The bonds mature in 2014. According to the terms of
the agreement, at every five-year anniversary date, beginning in 1989 and
continuing through to the maturity date, the Company is required to repurchase
any bonds tendered by the bondholders at face value. The most recent
anniversary date occurred in November 1994 prior to the 1994 rate reset.
The bonds are collateralized by a mortgage on the real estate and specified
equipment at the Company's Hampton, NH distribution center and contain
financial and operational covenants and limitations similar to the credit
agreement described in Note 7. Additionally, the Company has obtained an
irrevocable standby letter of credit which secures the outstanding
principal of the bonds through 1999.
The Company's long-term obligations at December 31, 1994, excluding
capitalized lease obligations, are scheduled to become due as follows:
-----------------------------------------------------------------------------
1995 $ 7,568
1996 7,620
1997 7,659
1998 7,699
1999 7,428
Thereafter 176,361
-----------------------------------------------------------------------------
$214,335
-----------------------------------------------------------------------------
twenty-four
13
THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
9. LEASE COMMITMENTS
The Company leases its corporate headquarters facility, manufacturing
facilities, retail stores, showrooms and equipment under noncancellable
operating and capital leases expiring at various dates through 2015. The
approximate minimum rental commitments under all noncancellable leases as of
December 31, 1994, are as follows:
Capital Operating
------------------------------------------------------------------------------
1995 $499 $11,253
1996 - 10,558
1997 - 9,816
1998 - 8,967
1999 - 6,568
Thereafter - 26,274
------------------------------------------------------------------------------
Total minimum lease payments 499 $73,436
Less - amount representing interest (19) -------
--------------------------------------------------------
Present value of net minimum lease payments 480
Less - current maturities (480)
--------------------------------------------------------
$ -
--------------------------------------------------------
In 1994, the Company entered into an operating lease for its corporate
headquarters facility. The lease expires in July 1999 and has a fixed annual
rental rate of $700.
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.
Property and accumulated depreciation on equipment held under capital
leases were $3,421 and $2,718, respectively, at December 31, 1994 and $5,156
and $3,423, respectively, at December 31, 1993.
Rental expense for all operating leases was $9,726, $7,490 and $6,635
for the years ended December 31, 1994, 1993 and 1992, respectively.
10. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company operates in a single industry segment which includes the
designing, manufacturing and marketing of footwear, apparel and accessories.
The following summarizes the Company's operations in different geographical
areas for the years ended December 31, 1994, 1993 and 1992, respectively.
Adjustments
United Other and
1994 States Europe Foreign Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $504,630 $123,304 $ 9,611 $ - $637,545
Transfers between
geographical areas 78,195 - 34,530 (112,725) -
------------------------------------------------------------------------------------------------------------------------------------
$582,825 $123,304 $44,141 $(112,725) $637,545
------------------------------------------------------------------------------------------------------------------------------------
Operating income $ 41,231 $ 3,008 $ 1,615 $ (2,790) $ 43,064
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets at
December 31, 1994 $468,637 $132,199 $22,140 $(149,712) $473,264
------------------------------------------------------------------------------------------------------------------------------------
1993
------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $340,811 $ 71,927 $ 6,180 $ - $418,918
Transfers between
geographical areas 42,388 - 20,872 (63,260) -
------------------------------------------------------------------------------------------------------------------------------------
Operating income $383,199 $ 71,927 $27,052 $ (63,260) $418,918
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets at $ 35,282 $ 709 $ 1,953 $ 2,448 $ 40,392
------------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 $301,949 $ 53,888 $15,336 $ (80,562) $290,611
------------------------------------------------------------------------------------------------------------------------------------
1992
------------------------------------------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $232,748 $ 54,891 $ 3,729 $ - $291,368
Transfers between
geographical areas $ 27,441 - 11,735 (39,176) -
------------------------------------------------------------------------------------------------------------------------------------
$260,189 $ 54,891 $15,464 $ (39,176) $291,368
------------------------------------------------------------------------------------------------------------------------------------
Operating income
(loss) $ 31,465 $ (4,055) $ (788) $ (780) $ 25,842
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets at
December 31, 1992 $199,618 $ 37,612 $ 9,911 $ (53,024) $194,117
------------------------------------------------------------------------------------------------------------------------------------
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14
THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Export sales from the United States to unaffiliated customers,
principally to European distributors, amounted to 6%, 10% and 17% of
consolidated net sales for the years ended December 31, 1994, 1993 and 1992,
respectively.
11. STOCKHOLDERS' EQUITY
The Company's Class A and Class B Common Stock are identical in all
respects except that shares of Class A Common Stock carry one vote per share
while the 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. During 1994,
500,477 shares of Class B Common Stock was converted to Class A Common Stock.
12. STOCK AND EMPLOYEE BENEFIT PLANS
Under its 1987 Stock Option Plan (the "1987 Plan"), as amended in
May 1993, the Company has reserved 1,600,000 shares of Class A Common Stock
for the granting of stock options to its employees. Pursuant to the terms of
the 1987 Plan, grants may be made by the Board of Directors from time to
time, but no grant shall be made ten years after the adoption of the 1987
Plan. The option price per share shall not be less than the fair market
value of stock at the time such option is granted in the case of options
intended to qualify as "incentive" stock options under the Internal Revenue
Code of 1986, as amended, and shall not be less than 50% of such fair market
value in the case of "non-qualified" stock options for employees who are
subject to Section 16 of the Securities Exchange Act of 1934, as amended.
To date, all options have been granted at fair market value. Options which
have been granted to date under the 1987 Plan become exercisable in equal
installments over four years beginning one year after the grant date. In
addition to the 1987 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 100,000 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, option grants are awarded on a predetermined
basis, and no grant can be made after November 15, 2001. The exercise price of
options granted under the 1991 Plan shall be the fair market value of the
stock on the date of grant, and the options become exercisable in equal
installments over four years beginning one year after the grant date.
Options for 292,344 and 182,480 shares were exercisable under all option
arrangements at December 31, 1994 and 1993 respectively. Under the existing
Plans there were 253,112 and 818,616 shares available for future grants at
December 31, 1994 and 1993 respectively.
The following summarizes transactions under all stock option arrangements
for the years ended December 31, 1994, 1993 and 1992:
Number Per Share
of Shares Option Price
----------------------------------------------------------------------------------
January 1, 1992 391,435 $ 6.38 - 12.00
Granted 185,680 13.38 - 18.88
Exercised (45,196) 6.38 - 9.25
Cancelled (89,386) 6.38 - 15.25
----------------------------------------------------------------------------------
December 31, 1992 442,533 6.38 - 18.88
Granted 434,655 26.00 - 83.25
Exercised (56,113) 6.38 - 15.25
Cancelled (66,389) 6.38 - 56.00
----------------------------------------------------------------------------------
December 31, 1993 754,686 6.38 - 83.25
Granted 693,125 21.38 - 46.63
Exercised (59,551) 6.38 - 32.00
Cancelled (127,621) 6.38 - 83.25
----------------------------------------------------------------------------------
December 31, 1994 1,260,639 $ 6.38 - 83.25
==================================================================================
Pursuant to the terms of its 1991 Employee Stock Purchase Plan (the "Plan"),
the Company is authorized to issue up to an aggregate of 100,000 shares of
its common stock to eligible employees electing to participate in the 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 31,016 shares in 1994, 24,340 shares in
1993 and 17,592 shares in 1992 at prices ranging from $7.76 to $34.43. At
December 31, 1994, 18,498 shares were available for future purchases.
twenty-six
15
THE TIMBERLAND COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
The Company maintains a contributory 401(k) Retirement Earnings Plan (the
"401(k) Plan") for eligible salaried and hourly employees who are at least 21
years of age with six or more months of service. Under the provisions of the
401(k) Plan, employees may contribute between 2% and 10% of their base salary
up to certain limits. The 401(k) Plan provides for Company matching
contributions not to exceed 2% 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's contribution expense was $334 in 1994,
$252 in 1993 and $207 in 1992.
The Company maintains a non-contributory profit sharing plan for eligible
hourly employees not covered by the 401(k) Plan who are at least 21 years of
age with one or more years of service. Contributions are at the discretion of
the Company and fully vest to the employee upon completing three years of
service. The Company's contribution expense was $ 360 in 1994, $320 in 1993
and $260 in 1992.
13. LITIGATION
The Company is involved in litigation and various legal matters,
including U.S. Customs claims, which have arisen in the ordinary course of
business. Management believes that the ultimate resolution of any existing
matter will not have a material effect on the Company's consolidated financial
statements.
On June 21, 1994, the plaintiff in the stockholder lawsuit filed on
February 15, 1994 against the Company and one of its officers agreed
voluntarily to withdraw the action, and the case was dismissed.
The Company and two if its officers and directors have been named as
defendants in two actions filed in the United States District Court for the
District of New Hamphsire. The suits, which are each brought by purchasers of
the Company's Class A Common Stock, allege that the defendants violated the
federal securities laws by making material misstatements and omissions in the
Company's public filings and statements in 1994. Specifically, the complaints
allege that such statements and omissions had the effect of artificially
inflating the market price for the Company's Class A Common Stock until the
disclosure by the Company on December 9, 1994, of its expectation that results
for the fourth quarter were not likely to meet analysts' anticipated levels.
The suits seek class action status, with one complaint including all purchasers
of the Company's Class A Common Stock between October 25,1994 and December 9,
1994, and the other complaint including such purchasers between February 15,
1994 and December 9, 1994. Damages are unspecified. The plaintiffs in both
suits have filed a motion, assented to by the defendants, to consolidate the
two suits. The motion is pending before the District Court.
While each action is in its preliminary stages, based on an initial
review, and after consultation with counsel, management believes the
allegations are without merit. Accordingly, management does not expect the
outcome of such litigation to have a material adverse effect on the
consolidated financial statements. The Company intends to defend these
proceedings vigorously.
14. SUBSEQUENT EVENT
On January 26, 1995, the Company appointed Inchcape plc ("Inchcape") as
the exclusive distributor of Timberland [Registered] products throughout most
of the Asia/Pacific region. The agreement included Inchcape's acquisition of
the Company's Australian and New Zealand subsidiaries for the total sum of $24
million, which resulted in a non-recurring pretax gain of approximately $7.4
million, in the first quarter of 1995. In 1994, net sales of the Company's
Australian and New Zealand subsidiaries combined accounted for less than 2% of
total consolidated net sales.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the quarterly results of operations for
the years ended December 31, 1994 and 1993, respectively:
Quarter Ended
1994 April 1 July 1 September 30 December 31
------------------------------------------------------------------------------------------------------
Net sales $108,093 $126,944 $222,148 $180,360
Gross profit 32,491 40,149 76,480 59,723
Net income (Loss) (1,619) 145 16,329 2,855
Earnings per share (.14) .01 1.45 .26
======================================================================================================
1993 April 2 July 2 October 1 December 31
------------------------------------------------------------------------------------------------------
Net sales $ 70,606 $ 84,849 $140,261 $123,202
Gross profit 27,467 30,586 49,846 44,808
Net income 2,332 1,912 11,241 7,036
Earnings per share .21 .17 1.01 .62
======================================================================================================
twenty-seven